401(k) Fees...Variable Annuities....all are not created equal !

[Guest andoniangh]

This is in some defense of the life insurance 401(k) product which is based upon a group variable annuity. Now I am somewhat biased since I represent one of the top insurance companies in the country with a strong market share in the small to micro market (i.e. $500,000 to $3M assets with 300 or less participants)but I sell solely thru FULL DISLCOSURE

Article after article in regard to plan fees tend to state that the variable annuity is NOT the way to go due to high fees (i.e. mortality and expense, commissions )and I have no clue where some of these supposed fees that are stated come from.

I just want to set the record straight:

1) not all group annuity products are created equal...meaning that not all have a mortality and expense fee.

2) the typical group variable annuity will look like this in terms of fees:

(based on $2M in assets with 150 ee's)

a) .90-1% annual asset base charge (which reduces based on plan assets)

(this can typically be dialed up or down based on the service required by client)

b) offer multi-family plan (i.e. 20+ "name brand" families and their funds which the trustees can pick from based on plan objectives whether it be asset mix or lowest internal fees)(i.e Janus,Fidelity, Alliance, Putnam with fund expense ratio's from .39 (large cap class) to 1.6 (internation emerging mkt.class) or somewhere in between based on asset class. These expense ratio's are highly reduced against their "mirror fund" of their fund family (i.e. institutional fund vs. retail). The asset base charge (a) is added to the fund expense ratio (B) for total internal costs.

(example:

mutual fund 401(k) plan might have a growth fund expense ratio for a particular fund of 1.49....that same fund in a group variable annuity may have a fund expense ratio of .65 but you then need to add the asset base charge to it for a possible differential of .15)

c) participant administrative charge of $3.75/qtr.

d) $25 loan set-up with $6/qtr admin.fee

e) plan administrative fees for ADP/ACP testing, 5500 filing, SPD etc (typically using local TPA):

$1200/base + $10 per participant

$500 charge for standard prototype and adoption agreement creation

$500 charge for takeover of assets (i.e. moving from bucket A to bucket B

f) Contingent Withdrawal Charge (Back end hit): does not apply to plan participant but a plan level charge which normally is a 3% 3yr. declining charge

g) Guaranteed Interest Account

As far as services provided which focus on the communication/education of the plan participant the following is what we provide (and I assume is fairly typical):

a) monthly statements mailed to paricipants home

b) 800# VRU for daily val and changes

c) Web access

d) Quarterly on-site Q&A sessions

e) Quarterly trustee meetings

f) One-on-one enrollment for all newly eligible

g) Annual plan recap meeting

It is a fact that a variable annuity 401(k) will typically cost more internally than a mutual fund based 401(k) and should be placed on a grid for side-by-side comparison. But after all is said and done are the monthly statements, guaranteed interest account,multi-family plan,quarterly on-site meetings, one-on-one enrollments etc. worth it for the small,micro employer (which is truly the marketplace that tends to need external education/communication services since they do not have the manpower inhouse to provide it) to enhance participation/deferrals from their non-highly comped employees?

[This message has been edited by andoniangh (edited 03-07-99).]

[Guest TYounkin]

I applaud your rule of "full disclosure." I think most articles writing about high fees some annuities charge in retirement plans are being written mainly because there wasn't a full disclosure of fees. Sometimes it is even hard for an employee to find out just what those fees are. It is when the employee discovers fees total 2% or more when action is taken or articles are written.

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[Guest Craig Hoogstra]

As long as the full disclosure to the plan participant shows the total cost which is impacting the return to his/her account. I see a lot of costs disclosed to the plan sponsor but often plan participants are given gross returns on their investments, before costs...and this is mutual fund-based 401(k)plans. How many plan participants know how much the education/communication/VRU is reducing their rate of return and how much more would be in their accounts without 24 hour access, auto-switching, etc?...assuming the plan sponsor is allowing the participants to foot all the bills.