401(k) Brokers

[Guest samc6782]

Hi,

I was wondering about the advantages and disadvantages of 401(k) brokers who don't have Series 6 and 63 licenses. In my state, fixed annuity 401(k)s can be sold with just a Life license. Is there some tangible advantage to having a broker who has Series 6 and 63 licensing, and of variable annuity products in general?

Thanks!

[K2retire]

Generally the licenses you mention are required to sell securities. I am not aware of any licensing requirements to sell plans.

[austin3515]

In general insurance products are a lot more expensive... Personally, I'm a fan of the Registered Investment Advisor approach because their fee is say 50 bps, and that's it. Their not allowed to take commissions, etc. so you know what your're paying. The same cannot be said for insurance products where there is high likelihood revenue sharing, and undisclosed commissions (OK, the savvy plan sponsor MIGHT look at the schedule A, but then again...)

[Guest samc6782]

Thanks for the responses!

I think you need Series 6 and 63 in Illinois, but am not positive. In any case, what with compliance and lawsuits an ever-growing concern, the movement seems to be in that direction.

The RIA route does seem the way to go. That said, insurance products, while sometimes costly to set up, usually have very low annual costs, and commissions drop dramatically after the first year for the broker.

I'm just worried that having a broker with only a life license might in some sense limit what can be offered to employees, which could raise compliance issues as well as lawsuits.

[austin3515]

That said, insurance products, while sometimes costly to set up, usually have very low annual costs, and commissions drop dramatically after the first year for the broker.

I should hope they would drop after the first year - they can be downright obnoxious in year 1... I've seen 6 figure commissions on big plans...

[Bird]

To the original question - when you say "fixed annuity 401(k)s," do you mean that the plan only offers fixed options, or that it's called a fixed annuity 401(k) but it does offer mutual funds or other options that are truly "variable?" If it only offers fixed options, then clearly, it is a very limited platform. If it offers variable options but is still called fixed, then it probably doesn't matter.

To the rest of the discussion - my two cents:

-I agree that insurance/annuity products are typically more expensive, given similar features and broker comp. I find insurance companies to be inefficient and otherwise bloated and it's reflected in their pricing.

-While commissions on an insurance/annuity based product may be higher in the first year, actual costs to the plan are typically level, as a percentage of assets. (Unless we're talking about actual whole life insurance and not annuities.) So I have to disagree with the two statements made about higher first year costs.

-Having said that, I think more and more platforms use level (i.e. asset based or trail-only) compensation with no up-front commissions, including insurance/annuity products.

-An insurance/annuity product can be made to be less expensive than an alternative simply by reducing broker comp. But all things being equal, I think the insurance company product will typically be more expensive; see above.

-Mutual fund companies offer platforms with commissions that vary by share class, and should be competitive with RIA-type pricing if the comp is similar.

FWIW