Equitable EQUI-VEST® Series 201 Variable Annuity Review
How will this annuity product review help you?
If you are an employee of a K-12 school district and you contribute to a 403 (b) retirement account, there is a good chance you may be invested in this annuity product or a similar annuity product (link)
You may have been told that contributing to a 403(b)-plan it is a good way to fill the gap between your current salary and your future pension income.
Many of you probably signed up with a sales rep or agent that came to visit your school. Maybe they bought you lunch in the teacher’s lounge and gave a short presentation about the basics of the 403(b) plan. You listened and absorbed as much as you could, but there is a chance that some of the facts were not fully understood during the sales process.
Equitable Life pays its agents to sell the Equi-Vest variable annuity to school district employees participating in 403(b) retirement accounts. The agents are incentivized to promote this annuity as a way to invest in the stock and bond markets while also receiving a guaranteed death benefit and the option for a personal income benefit through an additional rider. However, it is important to note that these benefits come at a cost and may negatively impact the potential returns on the investment.
This review will help shine a light on some of the details that you might not have been told about.
Equitable Life Insurance Company
The EQUI-VEST® 201 series for 403(b) plans are deferred annuity contracts that are designed for school district employees.
Equitable Life Insurance Company is the #1 provider of 403(b) retirement plans for public school employees, serving more than 1.4 million participants according to a recent SEC settlement.
Equitable is a New York company with its principal place of business in New York, New York. It is an insurance company that enters into variable annuity contracts with investors. Prior to June 2020, Equitable was named AXA Equitable Life Insurance Company
Investment Type: Variable Annuity
Investment Options: Equitable EQUI-VEST variable annuity offers a wide range of investment options inside this contract. Investors have access to over 80 investment fund options including numerous equity and fixed-income portfolios as well as various asset allocation and target date portfolios.
Summary of Fees
If you are not familiar with variable annuity products and how they work, fees can be confusing to decipher. With a variable annuity, in order to get the investment selection combined with the income options, you pay two types of fees:
Fees for the insurance benefits.
Fees associated with the investment funds used in the contract
This is something you want to look very closely at if you are still working and making contributions to your retirement plan. For someone trying to save for retirement, fees are an important consideration. Let’s examine a detailed list of all fees and the benefits they provide
Administration Charge:
This fee is used to cover the cost of administering the annuity. This fee will be the lower of either 2% or $30 of your account value. They will not charge you the $30 fee if your account value is $25,000 or more. This fee is standard for annuity contracts of this nature.
Mortality & Expense charge:
The Mortality & Expense charge also referred to as the M&E expense fee, is a fee associated with the Equitable Variable Annuity. You are charged an annual fee of 0.95%, with an additional 0.25% added to the total, bringing it to 1.20%. This fee is deducted from your account each year for the duration of the investment regardless of the performance of your investments. It is important to keep in mind that this fee can have a significant impact on your overall returns and should be taken into consideration when evaluating the costs and potential returns of the investment. Although 1.20% may not seem like a significant amount, it can have a substantial effect on the value of your portfolio when you retire.
Investment Fund Fees:
The underlying portfolio operating expenses of the investment funds in the Equitable EQUI-VEST variable annuity are ongoing costs associated with the investments in the annuity. The internal expenses of the sub-accounts range from 0.56% to 1.47%, with an average of 1.03%. These fees can affect the value of your portfolio over time and should be carefully reviewed in the prospectus before making an investment decision.
Personal Income Benefit Charge:
The Equitable EQUI-VEST® Series 201 variable annuity includes an optional fee called the Personal Income Benefit charge. This charge is used to cover the cost of providing an income guarantee, known as the “Personal Income Benefit.” This fee is assessed at a rate of 1% annually, based on the value of the Personal Income Benefit account. In my opinion, for younger investors in their 40s or 50s, paying the additional 1% for an income guarantee may not be a cost-effective decision, especially since the fee will be charged for the duration of the policy.
Withdrawal Charges:
The Equitable Equi-Vest variable annuity also has a withdrawal charge, also known as a surrender fee, which is applied to withdrawals made before a certain date. This fee is typically a penalty of 5% on the amount withdrawn beyond the free withdrawal amount. It is important to note that this fee restarts every time a contribution is made. According to the annuity prospectus, the fee is calculated as 5% of any contribution withdrawn within the current and previous five contract years, as of the date of the withdrawal.
FEATURES & BENEFITS
The Guaranteed Death Benefit Feature
The EQUITABLE Equi-Vest variable annuity offers a Guaranteed Death Benefit Feature. This means that even if the market goes down and your contract loses money, your beneficiaries will receive your total contributions as a death benefit. However, it’s important to keep in mind that this benefit only applies if you pass away, and it comes at a cost through the Mortality and Expense (M&E) fee.
The death benefit is often presented as a way to guarantee that even if the market goes down and your contract loses money, a death benefit would still be paid to your beneficiaries upon your death. In this case, the EQUITABLE annuity contract’s death benefit would pay out your total contributions to your beneficiary even if your account takes a terrible market hit.
Here are 3 things to keep in mind:
First, the death benefit is only pays out if you die. It does not guarantee that your account will not lose money while you are alive.
Second, this benefit does not come for free. You are paying for it with the M&E fee we talked about earlier. Death Benefit article.
Income Rider Benefits: Personal Income Benefit
The Personal Income BenefitSM is a “pension-like” plan benefit, available through the Retirement Gateway® group annuity, which the company says provides guaranteed withdrawal payments and helps employees be more confident about retirement. The Personal Income Benefit investment option is available to plan participants between the ages of 45 and 85.
Annual fee: 1% of the participant’s Personal Income Benefit account value.
Features: The amount of your income withdrawals under this feature will never decrease—unless of course, you make early or excessive withdrawals as specified by the contract.
Benefits: Once your Personal Income Benefit withdrawals start, they continue for as long as you (or you and your spouse) live, even if your Personal Income Benefit account value drops to zero
These are pretty standard features that typically come with most income riders sold on annuities, and you can get them for less cost. What’s different about this annuity is that you remain invested in the stock market even while you are taking income withdrawals, which is why you have those additional fees. Does that mean you get to earn higher returns?
The one rider I analyzed had a 1% fee and it locked in returns at the high-water mark. Some annuities that offer this fee add a guaranteed income base growth rate that typically range from 4.5-5.5% on top of the locked-in watermark. This annuity does not offer that. It locks in your account value at the high-water mark, which is a crediting method based on the highest level attained by the reference index over a given period of time. Says EQUITABLE:
“The percentage varies depending on the type of contribution (e.g., payroll, rollover, or direct transfer) and the date of the contribution or transfer. The percentage can be as high as 7% and never less than 2.5%.”
For the investor who is age 65 and near the time of retirement, this might give you a layer of protection, but keep in mind that with this type of annuity, you’ll be paying over 1.0% annually just to get this benefit, and these fees negatively impact your return potential.
And speaking of return potential, selecting the income benefit rider will restrict your investment options. Once a contract owner selects a Personal Income BenefitSM, they will be limited to one of five allocation models
HOW IS EQUIVEST PAYING THE AGENT?
Equitable pays its agents to sell this variable annuity. The compensation structure is an important consideration when deciding to invest in a variable annuity offered by Equitable. Most agents are not paid an annual salary. Agents typically receive an upfront commission when selling this annuity, and ongoing commissions based on the contributions made by the investor. This provides a steady source of income for the broker.
Conclusions on the Equitable Equi-Vest Variable Annuity
In summary, when considering an investment in the Equitable Equi-Vest Variable Annuity, it’s important to keep in mind that as a participant in a 403(b) account, you already have access to tax-deferred growth. Therefore, purchasing this annuity specifically for the purpose of tax deferral would not provide additional benefits. Additionally, it’s important to carefully evaluate the costs associated with the annuity, including the M&E fee and any additional fees for investment options or income riders, as they can negatively impact your potential returns over time. Ultimately, it’s crucial to consider the annuity’s role in your overall retirement plan and whether it aligns with your goals.
Variable annuities were designed to offer “Tax-Deferred Growth” to investors. However, purchasing a variable annuity within a 403(b) plan does not provide any additional tax benefits as the plan already has tax-deferred growth. Equitable’s website states :
“An annuity contract that is purchased to fund an employer-sponsored retirement savings plan should be done so for the annuity’s features and benefits other than tax deferral. For such cases, tax deferral is not an additional benefit for the annuity.”
It is important to thoroughly understand the costs associated with the features and benefits of the annuity contract before making a decision. If you believe a variable annuity is the right investment choice for your retirement, reach out to Equitable via their website. The company will be happy to connect you with a representative agent.
As an individual Investor, I would be incredibly careful dealing with a company that has settled a lawsuit for misleading their investors in this product.
You may want to read this recent SEC Press Release in its entirety before investing in the annuity.
Thank you.
Thanks for reading this review. If you have any questions or would like to have your retirement portfolio reviewed, don’t hesitate to reach out and schedule your no-obligation consultation.
Securities are offered through LPL Financial, Member FINRA/SIPC. Investment advice is offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and K-12 Financial Advisors are separate entities from LPL Financial.
Investors should consider the investment objectives, risks, charges, and expenses of the variable annuity contract and sub-accounts carefully before investing. The prospectus and, if available, the summary prospectus contain this and other important information about the variable annuity contract and sub-accounts. You can obtain contract and sub-account prospectuses and summary prospectuses from your financial representative or by clicking on the prospectus link within this article. Read prospectuses carefully before investing.