Teachers: Is the Death Benefit Killing Your Retirement Plan?
How One Fee Might Be Draining Your Nest Egg
As a teacher, knowing facts is part of the job. But when it comes to 403(b) plans, many teachers and educational administrators will readily admit that they don’t have all the facts. As a financial advisor, it’s my job to present facts to clients so they can make informed decisions. Over the past few years I’ve discovered that many of my 403(b) clients were paying for insurance benefits to protect their retirement savings and getting charged exorbitantly for it. The goal of this article is to shed some light on Variable Annuities and one fee that can take a significant chunk out of your savings. One of the most important things to know if you participate in a 403(b) retirement account is that you have the choice to invest in either Annuities or Mutual Funds. If you aren’t sure what the difference is yet, we highly recommend you first read our Teacher’s 5-step 403b Shopping Guide. If you have been sold a Variable Annuity, it’s imperative to find out which fees you are being charged for and if they can be avoided. There are many additional insurance related fees associated with Variable Annuities that are not found in Mutual funds. These fees pay for insurance guarantees that are automatically included in the annuity, and the selling and administrative expenses of the contract. The one that often goes unnoticed is known as the Mortality and Expense Charge (aka the M&E fee or the Death Benefit). The death benefit is one of the highest fees incurred in association with insurance-based retirement accounts, and statistics show that almost nobody “benefits” from its presence, except for the insurance company charging you for it.
Death Benefit 101
The death benefit feature is found in variable annuity products that are sold by many insurance companies.
The death benefit guarantees that if you die, your beneficiaries will receive the greater of two values: The current value or the total amount you contributed over the lifetime of the account. This feature is being sold to prospective buyers as an attractive benefit. They assert that it will protect the money that you contributed to your account, should the market cause the annuity to lose money at the time of your death. This might seem like a comforting safety feature to have, but let’s weigh the costs and see if they are worth it.
Know Your Odds
So what are the statistical probabilities of this death benefit paying off? A class action lawsuit brought against Hartford Life on behalf of about 24,000 municipal employees in San Diego County and Los Angeles CA illustrates the probabilities: The plaintiff’s lawyers asked Hartford Life during the discovery process how much in death benefits the company had paid in the 17 years that both the San Diego and Los Angeles plans had existed. Hartford claimed it had paid only a single death benefit totaling just $119 in San Diego and no death benefits in Los Angeles.¹
HOW MUCH IS THIS COSTING YOU? Now that you know the odds of receiving this “benefit”, it’s time to figure out how much it is costing you. Death benefit fees on average are usually 1.25% of the total value of the account per year ². This may not seem like a lot, but as the years go by, it becomes much more significant. Imagine what you pay in this fee alone over 30 years as your investment grows. I can tell you that it will probably be much more than the amount your beneficiary could lose on your contributions, were you to die young, unexpectedly, and in a time of a market low.
WHAT'S THE SOLUTION? If you participate in a 403(b) plan, you have the choice to either invest in annuities or mutual funds. Mutual funds don’t carry the insurance based fees that annuity companies charge for. Both Mutual Funds and Variable Annuities have investment related fees. These fees can range from high to low and you can choose to invest in lower fee investment choices in order to keep your expenses low. You want to make sure that you are getting good value for every dollar of investment expenses you pay. This is because every dollar you save from fees & expenses (i.e. the death benefit fee) is one more dollar that has the potential to grow in your 403(b) account.
NEXT STEPS: Get the Facts on Your Current Investments… Hopefully after reading this article you will look at your own investment product and answer these questions:
Is my 403(b) invested in annuities or mutual funds?
Do I currently pay a fee for the Mortality and Expense (M&E) Charge (aka death benefit)?
How much am I paying in total fees and can some of these be avoided?
Is my current 403(b) vendor competitive with the other options available at your school district? If you need help finding answers to the questions, please contact us. One phone call could have big impact on how you save for your future!¹ "Can Annuities Pass Muster?. "The Free Library. 2000 A.M. Best Company, Inc. 20 Apr. 2018² Morningstar M&E Risk, 2018. Investing involves risk including loss of principal. Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value. All illustrations are hypothetical and are not representative of any specific situation. Your results will vary. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.