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Author: xnocturnal One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Expensive annuity in 403 (b) Date: 12/2/1999 2:19 PM
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Greetings,

I have been lurking on this boards for couple of months and learning a lot.

At present I am struggling with the following dilemma.
My employer is using variable annuity as an investing vehicle for the 403(b) plan. They (American United Life
Insurance Company) seem to have some decent choices but the EXPENSES ARE HIGH !!!! 1.25% added on top of
the mutual fund-like subaccount expense. So some of the subaccount choices end up costing whopping 2.45% and S@P 500-like subaccount 1.53%. There is also $30 annual fee. How about 8% surrender charge?!!!. Funny that none of the company reps mentions any of that when you sign up for this thing. Another thing, there is no matching from employer.
Considering all of the above, would I be "foolish" to just stick with my Roth IRA - up 38% this year, and taxable account- up 35% this year, and not bother with this annuity thing???? Or should I chip in some small amount in to this expensive tax deferral ???
My next question - since this is "before taxes" annuity will I have to pay tax on the whole thing (contributions and earnings) at retirement. I am 44 years old, 28% tax bracket.
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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15844 of 76418
Subject: Re: Expensive annuity in 403 (b) Date: 12/2/1999 3:08 PM
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xnocturnal asks,

At present I am struggling with the following dilemma.
My employer is using variable annuity as an investing vehicle for the 403(b) plan. They (American United Life
Insurance Company) seem to have some decent choices but the EXPENSES ARE HIGH !!!! 1.25% added on top of
the mutual fund-like subaccount expense. So some of the subaccount choices end up costing whopping 2.45% and S@P 500-like subaccount
1.53%. There is also $30 annual fee. How about 8% surrender charge?!!!. Funny that none of the company reps mentions any of that when you
sign up for this thing. Another thing, there is no matching from employer.

Considering all of the above, would I be "foolish" to just stick with my Roth IRA - up 38% this year, and taxable account- up 35% this year, and
not bother with this annuity thing???? Or should I chip in some small amount in to this expensive tax deferral ???
My next question - since this is "before taxes" annuity will I have to pay tax on the whole thing (contributions and earnings) at retirement. I am 44
years old, 28% tax bracket.


I'd max out your Roth IRA before putting anything in the 403(b) plan.

With expenses that high and no company match it's likely that you'd be better off investing a in taxable account with a low-fee tax-managed index fund. If you still have money to invest after funding your Roth, check out something like the Vanguard Tax- Managed Index Fund.

There's an Excel spreadsheet you can use to determine if your 401k (or 403(b)) plan is a good deal. It's the "401(k) Shaft Detector." You can download a copy free at the following link:

http://www.geocities.com/WallStreet/8257/shaft2.html

The spreadsheet link is near the bottom of the page.

And, yes, if all your contributions are "pre-tax", everything you withdraw from the annuity is taxed as ordinary income.

intercst

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15846 of 76418
Subject: Re: Expensive annuity in 403 (b) Date: 12/2/1999 3:27 PM
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Greetings, Xnocturnal, and welcome. You wrote:

<<I have been lurking on this boards for couple of months and learning a lot.

At present I am struggling with the following dilemma.
My employer is using variable annuity as an investing vehicle for the 403(b) plan. They (American United Life
Insurance Company) seem to have some decent choices but the EXPENSES ARE HIGH !!!! 1.25% added on top of
the mutual fund-like subaccount expense. So some of the subaccount choices end up costing whopping 2.45% and S@P 500-like subaccount 1.53%. There is also $30 annual fee. How about 8% surrender charge?!!!. Funny that none of the company reps mentions any of that when you sign up for this thing. Another thing, there is no matching from employer.
Considering all of the above, would I be "foolish" to just stick with my Roth IRA - up 38% this year, and taxable account- up 35% this year, and not bother with this annuity thing???? Or should I chip in some small amount in to this expensive tax deferral ??? >>


Your employer makes no contribution to your 403b plan. Therefore, you should be able to go outside your employer's recommended provider and instead make your contributions to a 403b(7) account with a mutual fund that accepts such accounts. Both Vanguard and Fidelity do, and they offer a wide selection of funds that can do better than the annuity choices you now have. That may be a better route for you to take.

<<My next question - since this is "before taxes" annuity will I have to pay tax on the whole thing (contributions and earnings) at retirement. I am 44 years old, 28% tax bracket.>>

Yes, you will pay taxes on all that comes out of the 403b plan when you begin withdrawals in retirement.

In your case use of the 403b plan in the absence of an employer match may not be the best route to go. To see, you must do a tax-equivalent analysis of the plan's investment options versus those you could make in a taxable account and/or a Roth IRA. I suggest one way of doing that in Step 4 of my 13 Steps to Foolish Retirement Planning at http://www.fool.com/Retirement/Retirement.htm. Look that over, see what's involved, and then do a similar number crunching drill for yourself. IMHO the first $2K of your money should go into a Roth IRA to gain the tax-free withdrawals in retirement. After that, look at a taxable account versus the 403b. However, you still have to run some numbers to see what's best for you.

Regards..Pixy

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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15847 of 76418
Subject: Re: Expensive annuity in 403 (b) Date: 12/2/1999 4:27 PM
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Xnocturnal,

You're received a couple of very good suggestions from intercst and TMFPixy which I feel you should look into.

That is to first look into whether or not your employer will allow/help you go outside and set up an account using mutual funds instead. You're employer has to be willing to set up the payroll deductions . . . .just be aware too that they may not even know that they can do this outside of the annuity program.



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Author: tmackfool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15848 of 76418
Subject: Re: Expensive annuity in 403 (b) Date: 12/2/1999 10:56 PM
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I did pretty much what TMF Pixy said. I moved out of Aetna (most of the subaccounts had expenses around around 3.2%-3.5%) and into a 403(b)7 with Fidelity (Spartan US Equity Index - expense ratio 0.19%). Ask your human resources people for a complete list of 403(b) providers - sometimes they don't advertise very much within an organization that there is more than one provider. I had no problems with Aetna other than expenses, and have been glad I made the move.

Also, start the Roth IRA! I did that for the tax-free returns and because I don't get a company match. Investing in a Roth through a discount broker will let you hold stocks of individual companies (although many do offer mutual funds if you want) and you can do such things as the Foolish Four, Rule Makers, Rule Breakers, or various stock screen approaches.

Although I don't get any matching funds, I like the automatic discipline of having the money taken out without me ever seeing it. Once you are used to it you never miss it. I may cut back in years to come when, but right now I'm making up for lost time I spent in grad school without any kind of retirement savings.

Good luck on getting out of the annuity! Hope it works out ok.

Taylor

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Author: xnocturnal One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 15854 of 76418
Subject: Re: Expensive annuity in 403 (b) Date: 12/3/1999 5:11 PM
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Pixy,intercst, TTRobersts, tmackfoot,

thanks for sharing your Foolish wisdom.
I will look into 403-b(7) option.

Regards...xnocturnal.



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