An Independent Review of: The AXA EQUI-VEST® (Series 201) contract for employer-sponsored 403(b) retirement plans
Dear Reader,
This is a detailed post about a popular 403(b) annuity product, the AXA EQUI-VEST variable annuity. As a participant in a 403(b) account, you have the choice to invest in either mutual funds or annuities. If you work in K-12 school and participate or plan to participate in a 403(b), there is a good chance you may get pitched the AXA EQUI-VEST variable annuity. In 2017, the North American Securities Administrators Association listed “variable annuity sales practices” as one of its top investor threats. If you own this annuity, or you’ve been pitched this by an agent/advisor and want an independent, objective review—then you’re in the right place.
For readers who have found my website and don’t know much about me, I am a fee-only financial planner held to the Fiduciary Standard. I am legally obligated to make recommendations that are in the best interest of my clients. I’m also on a mission to inform teachers about this commonly available variable annuity.
About this Review
Today I’m going to break down an annuity that is issued by AXA Equitable Life Insurance Corporation. Unlike other fee-only planners, I find that some annuities may be a part of a comprehensive financial plan when used correctly. My goal is to make my review of annuities as impartial and objective as possible.
This independent review will cover the following information on the AXA Equi-Vest Annuity:
Product type
Investment Options
Contribution Limits
Fees
Benefits
Features
Advantages
Disadvantages
Conclusions/Opinion
How will this AXA annuity product review help you?
If you are like many school district employees, there is a good chance you are using a 403(b) plan as a way to supplement your pension in order to build a healthier retirement. 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.
The world of investments can be intimidating, but really it’s like any other shopping experience. You want to compare prices and features, and understand exactly what you’re buying. This review will help you do that.
In this review you will:
Learn facts/information you need to know about one of the most popular products being sold in school districts around the country today so that you can decide whether or not it is a good fit for you.
Get familiar with the various types of fees so that you’ll know exactly what you’ll be charged by the AXA Equi-Vest variable annuity.
Understand how to compare this product’s fees, features, and benefits against other available 403(b) investments options in order to determine whether this product is reasonably priced.
Gain a much clearer sense of whether this annuity fits your individual savings needs so that you can make an informed decision.
Legal Disclosures
This is a review, not a recommendation to buy or sell a variable annuity. AXA has not endorsed this review in any way, nor do I receive any compensation for this review. This review is meant to be an independent review at the request of a client so they can see my perspective when breaking down the positives and negatives of this particular annuity model. Before purchasing any investment product, be sure to do your own due diligence and consult a properly licensed professional should you have specific questions as they relate to your individual circumstances.
This information was gathered from their prospectus dated May 1st 2018 and is not a substitution for individual tax or legal advice. I’m just reporting on the main facts; to find answers specific to your situation may require a review of the full prospectus for applicable the details.
So let’s get started.
AXA Equitable Life Insurance Company Variable Annuity Review
AXA EQUITABLE logo
AXA Equitable Life Insurance Company is the #1 provider of retirement plans for K-12 schools, serving more than 820,000 participants in over 17,000 plans.
The AXA EQUI-VEST® 201 series for 403(b) plan is a deferred annuity contract that is designed for school district employees.
Product Name: AXA EQUI-VEST® 201
Type of product: Variable Annuity
Issuer: AXA Equitable Life Insurance Company
Standard & Poor's Rating: A+ (Strong)*
Phone Number: (800) 628-6673
Website: https://us.axa.com
*Standard and Poor’s Rating Service provides ratings which measure the claims-paying ability of an insurer. These ratings are the opinions of an operating insurance company’s financial capacity to meet the obligations of its insurance policies in accordance with their terms.
Product Type: Variable Annuity
Investment Options: AXA EQUI-VEST variable annuity offers a wide range of investment options inside this contract. It offers Structured Investment Options (SIO) that enables you to invest for growth with some downside protection for a set period of time. Personal Income Benefit investment options give you the ability to turn your retirement savings into an annual withdrawal benefit. Investors have access to over 80 variable investment options including numerous equity and fixed income portfolios as well as various asset allocation and target date portfolios.
AXA has entered into sub-advisory agreements with Fidelity, Goldman Sachs, Invesco, Ivy Funds, Lazard, MFS, Oppenheimer, PIMCO, Franklin Templeton and Van Eck. (12b1)
Summary of Fees
Administration charge: 2% or $30
Separate Account Charges: 1.20 % (Mortality & Expense charge 0.95% + other expenses 0.25%)
Underlying Portfolio Operating Expenses: 1.03% (average fund expense)
Personal Income Benefit Charge: 1%
Withdrawal Charges: 5%
If you’re 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 to the insurance company associated with risk protection
Fees associated with the investment funds inside 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 a retirement, fees are an important consideration. Let’s examine each fee and how they stack up against other investment options.
Administration Charge: This fee is charged on the insurance side and it will be the lower of either 2% or $30 of your account value plus any amounts withdrawn. They won’t charge you the $30 fee if your account value is $25,000 or more. This fee is pretty standard for annuity contracts of this nature.
Separate Account Charges: This is what the AXA Variable Annuity calls the M&E or mortality and expense fee at 0.95%, and they add another 0.25% for a total fee of 1.20%. This fee comes right out of your account annually for the life of the investment, whether your investments earn money or not. It compensates the insurance company for the risk it assumes under this particular annuity contract, and it applies to all variable investment options.
This charge is common for variable annuities, but it’s not something you have to pay with all annuities. A variable annuity is the only type of annuity that charges the M&E fee. Mutual funds typically do not charge you this fee.
While 1.20% might not sound like that much, this fee can make a significant difference to the value of your portfolio when you retire. The SEC’s Office of Investor Education and Advocacy has issued bulletins warning investors how much fees can impact the growth potential of a portfolio. While the difference between .25% and 1% might not sound like a lot, assuming a hypothetical investment of $100,000 earning a 4% annual return, in 20 years’ time, that difference could reduce your portfolio by nearly $30,000. That could mean the difference between retiring early or late. Once you do retire, the difference between paying 1% or 2% could mean running out of money sooner.
Underlying Portfolio Operating Expenses: This is another ongoing fee charged for the investments inside of the variable annuity. Detailed information about these fees can be found by digging through the prospectus. I did that for you. The internal expenses of the sub-accounts for this particular variable annuity range from 0.61% to 2.09% and average around 1.03%.
Personal Income Benefit Charge: This is the charge for Income Rider, an optional fee common for deferred annuities. This fee is charged by the life insurance side to cover the cost of providing the “Personal Income Benefit.” For this benefit, you will pay 1% annually, based on the value of your Personal Income Benefit account. One percent is a pretty standard charge for income riders, but do you need it?
For the younger investor in their 40s or 50s, paying the additional 1 percent for an income guarantee now may not make sense, especially when you consider that the income rider fee is assessed for the life of the policy. I’ll be going into the details when we get to the benefits and features section.
Withdrawal Charges: In addition to all the fees listed above, the AXA Equi-Vest variable annuity also charges a surrender fee (sometimes known as a withdrawal charge). Typically speaking, a surrender fee is only assessed when an investor makes a withdrawal prior to a specified time.
Deferred annuities are long-term contracts and most annuities of this type charge surrender fees during the first 5 to 10 years of the contract. They also typically allow a 10% free withdrawal amount subject to federal income tax withdrawal restrictions.
In this case, AXA charges its contract holders a 5% penalty on any funds withdrawn that exceed the free withdrawal amount, but the duration of this fee starts over when you make a contribution. AXA states in the prospectus: “. . . the amount of the withdrawal charge deducted is equal to 5% of any contribution withdrawn attributable to contributions made within the current and five prior contract years, measured from the date of the withdrawal.”
It’s very common for people to withdraw money from their retirement plans. One in four workers currently in a qualified plan will take some form of an early withdrawal from a 401(k) or similar plan (according to the 17th annual Transamerica Center for Retirement Studies (TCRS) report). One thing to be aware of with this particular annuity is that the surrender charge is based on how long your contributions have been in the contract.
For example, if you are contributing $1,500 a month to your retirement plan, and 10 years into your contract you want to make a small withdrawal to pay off your home, you would have to pay 5% to AXA on any contributions made during the five previous years. Furthermore, withdrawals may “significantly reduce” the future income payments of the Personal Income Benefit for which you’re paying that additional 1%.
There are situations when the withdrawal charge is waived—for example, if you are confined to a nursing home for more than 90 days—and they no longer apply after the completion of 12 contract years.
How do the fees in this particular annuity stack up against the fees inside other investment options? According to one analysis from the independent investment research company Morningstar, the most popular version of the AXA Equi-Vest annuity has total annual operating costs that can range from 1.81% to 2.63%. By contrast, the average investment fees for mutual funds inside a 401(k) retirement plan cost investors 0.88%, according to a 2015 BrightScope report. However, variable annuities offer features and benefits that may not be available with other investment options. Whether the higher fees make sense for you will depend on your specific needs and situation.
Benefits & Features as Advertised by the AXA Equi-Vest Annuity:
Contribution Limits
$18,500 / year (same as with a 401(k))
$6,000/ year allowed for catch-up contributions if over 50
Features
Tax-deferred Growth
Guaranteed Death Benefit
Personal Income Benefit
Structured Investment Option
Target Date Allocation Portfolios
Guaranteed Investment Option
Dollar cost averaging
Required Minimum Distribution Services
Roth Eligible
HOW IS AXA PAYING THE AGENT?
The salespeople who come out to your workplace and present you with investment options typically earn a sales commission whenever they get someone to buy into their annuity. AXA Equitable pays contribution-based and asset-based compensation to their agents.
Brokers generally receive an up-front commission when they sell a variable annuity.
This annuity also gives the agent commissions based on your contributions.
AXA pays agents 1.5% to 2% commissions on every future dollar you contribute to your 403(b) annuity. This creates ongoing compensation for your broker.
If you’re contributing the maximum 2018 amount of $18,500 to your plan and, if over 50, also taking advantage of $6,000 catch-up contributions, then AXA could be paying as much as $490 a year to your broker.
HOW AN AGENT MIGHT TRY TO SELL YOU THIS POLICY
EQUI-VEST® is a deferred annuity contract issued by AXA Equitable. This product is marketed as a solution to help supplement your retirement income needs. Its benefits include providing for the accumulation of retirement savings via tax-deferred growth. The contract also offers death benefit protection and, as discussed earlier, it offers a Personal Income Benefit for an additional cost.
A variable annuity is a type of deferred annuity, so there are two phases to your contract: the growth phase, and the income phase.
During the growth phase, you can invest on a tax-deferred basis in one or more of AXA’s variable investment options or guaranteed interest options (GIO) or structured investment options (SIO). There is no charge to move among the investment options. The sales agent may also tell you that these investments all benefit from tax-deferred growth.
Here’s what you may not realize:
If you have a 403(b) plan, then you’re already getting tax-deferred growth. It’s a perk that comes with the plan. Buying this variable annuity or any annuity cannot give you double tax-deferral because there’s no such thing. Furthermore, any investment that you purchase inside your 403(b) account can give you tax-deferred growth.
There is no additional tax benefit to you when you buy this annuity inside a 403(b) or retirement plan.
On AXA’s website it will tell you this:
“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.”
AXA also reminds you that you should buy this annuity based on its features and benefits, so let’s take a look at those.
Additional Benefits and Features of the AXA Variable Annuity
The Guaranteed Death Benefit Feature
Variable annuities invest directly in the market, and as such, they can lose money just like stocks and mutual funds. The death benefit is often sold as a way to guarantee that even if the market goes down and your contract loses money, a death benefit would still be paid. In this case, the AXA Equi-Vest variable annuity agrees to pay out your total contributions even if your account takes a terrible market hit.
Here are 3 things to keep in mind:
First, the death benefit is only paid out if you die. It does not guarantee that your account won’t lose money.
Second, this benefit doesn’t come free. You’re paying for it with the M&E fee we talked about earlier.
Third, you really have to ask yourself, what are the chances that you will die during the same year as a big market downturn?
Let’s say hypothetically you’ve contributed $100,000 over a 15-year period, and the investment performance helped it grow to $150,000 over that time period. Then the market takes a turn for the worse and drops by 30%. You basically lose all the returns you’ve gained. You see a $45,000 drop in your total account value, and your new account balance is now $105,000. You have a heart attack and go into the hospital. But you remember you have a death benefit! So, even if you die, you’ve been paying that 1.25% M&E fee all this time to guarantee that your beneficiary (in this case, your spouse,) will still get all the money you paid into this account. Then, you do the math and realize, you’ve only paid in $100,000. Even if you do die, your account didn’t drop below your total contributions, so the death benefit guarantee did not provide any guarantee in this example.
Statistically speaking, the chances of meeting with an untimely death when the market is down AND when you’ve lost a portion of your contributions may be relatively low. Yes, it could happen. But you should consider whether the cost of this feature is worth the potential benefits you could receive.
Case in point: 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 one potential outcome: 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. The answer: $119.[1]
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 AXA:
“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 2.5% 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 these five allocation models:
AXA Moderate Growth Strategy,
AXA Balanced Strategy,
AXA Conservative Growth Strategy,
AXA Conservative Strategy, and
EQ/AB Dynamic Wealth Strategies.
EQUI-VEST® Structured Investment Options, Target Date Allocation, and Guaranteed Interest Option
AXA also gives you other options if you don’t want to pay the income rider fee. In fact, that’s one thing this annuity does have—a lot of choices.
If you’re looking for protection from market risk, you may select the Structured Investment Option (SIO) available within certain EQUI-VEST variable annuities. The SIO enables you to seek growth, up to a limit, with some downside protection. But how good is the protection?
The EQUI-VEST overview states: “There is risk of substantial loss of principal because you would agree to absorb all losses to the extent they exceed the protection provided by the SIO at maturity. If you want a guarantee of principal, you should consider other investment options or products that provide such guarantees.”
Okay. So, then you might select a Target Date Allocation Portfolio. This option gives you different investment strategies designed to adjust with you as you move through the phases of your life and become more conservative. Does being more conservative inside this variable annuity mean you won’t lose money right before your retirement date?
Says AXA: “The Target Date Allocation Portfolios are not guaranteed at any time, including the target date.”
How about the Guaranteed Interest Option (GIO)? This offers a guaranteed rate of interest and a guarantee of principal. That might sound good for someone who is nearing retirement and wanting to protect their nest egg. But how much can you protect?
25%. What if you know you need more money than that? Says AXA: “No more than 25% of any contribution can be allocated to the GIO.”
Let’s recap: As a participant in a 403(b) account, you have a choice to invest in either annuities or mutual funds. As previously noted, mutual funds may be less expensive, but do not offer the same features and benefits.
However, in general, variable annuities will add at least 1% in costs just for the M&E fee alone, not to mention the fees for the variable sub-accounts and income riders that can (and often are) added on. Over time, these additional costs can negatively impact your return potential.
POTENTIAL CONSIDERATIONS
Tax-deferred Growth: One of this annuity’s main advantages is that the investments inside this product give you tax-deferred growth. Investments growing tax-deferred can accumulate and compound untouched by federal, state, or local income taxes until you begin making withdrawals, which is usually after retirement. This is a good thing. But you’re probably already getting this benefit.
All deferred annuities provide tax-deferred growth potential, not just this one. Any investment inside a 403(b), 401(k), IRA, or tax-qualified retirement plan has the potential to grow tax-deferred, even if they aren’t inside an annuity.
A variable annuity in a 403(b) does not give you any additional tax benefits.
Overall Fees: There are additional fees associated with variable annuities that are not found in other types of annuities or mutual funds. If you don’t need the benefits of an annuity at this time, then paying for these fees for the next 10 to 20 years may not be in your best interest. Over time, higher fees can negatively impact your return potential.
The variable annuity carries additional fees that should be considered.
You may annuitize your money
Deferred annuity contracts such as EQUI-VEST® provide for conversion to payout status at or before the contract’s “maturity date.” This is called annuitization. When your contract is annuitized, your money is converted into payouts (this being the payout phase). During this phase, you may receive periodic payments for life or for a specified period of time.
The contract may be annuitized.
Conclusions on the AXA Equi-Vest Variable Annuity
Before buying into an annuity, it's important to understand how it works, what benefits it may provide, the cost to you in fees, and perhaps most importantly, the role it can help play in your overall retirement plan. If the annuity doesn’t help move you toward your retirement goals, then it might not be the right choice for you.
Things to consider about this policy:
Overall fees including a Mortality and Expense Risk charge
Surrender Charges based on ongoing contributions
Agent commissions and compensation based on ongoing contributions
Income rider features that limit investment options for a lifetime fee
Annuitization of the contract may be required
Death benefits
No additional tax benefits when part of a 403(b)
When this investment might make sense: If you have already maxed out all your qualified retirement accounts and would like to put aside more money into a tax-deferred account, then a variable annuity might be an appropriate option. However, think carefully about whether or not this specific variable annuity with the structure of its surrender fees, agent commissions, and income rider options would best support your retirement goals. You may also want to consider the relative features, benefits, and costs against or with any other investment that you may use in connection with your retirement. Be sure to read carefully the marketing materials and prospectus, and if you don't understand what you’re paying for, ask questions and receive a full disclosure before making a decision.
If you currently own this annuity: Now may be a good time to take another look and evaluate this product in light of your long term goals. If you are interested in a more detailed analysis specific to your situation, feel free to contact me.
Thank you
Thanks for reading this review. It’s always satisfying for me to break down complicated financial products out there to try and provide some clarity on how they really work.
If you have an annuity or other financial product you’d like to see an in-depth review on just let me know, I’d be happy to take a stab at it. If you know a teacher or someone who is thinking about an annuity and might benefit from this post, feel free to forward it on to them via email. If you have a Facebook account, one of the best ways to spread this message around is by “sharing” the post by using the Facebook icon below (it’s a blue square with a white F on it).
Thanks again for reading, and as always, 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.
FREE GUIDE: WHAT EVERY K-12 EMPLOYEE SHOULD KNOW ABOUT THEIR 403B PLAN
Retirement investing for teachers can be confusing. This guide is an excellent source of information about the various options available to you as a school district employee answering important questions.
[1] “Can Annuities Pass Muster?” The Free Library. 2000 A.M. Best Company, Inc. 20 Apr. 2018
None of the third parties referenced in this communication are affiliated with Warwick Valley Financial Advisors, Private Advisor Group or LPL Financial.
Variable annuities are long term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component. They have fees and charges, including mortality and expense risk charges, administrative fees, and contract fees. They are sold only by prospectus. Guarantees are based on the claims paying ability of the issuer. Withdrawals made prior to age 59½ are subject to 10% IRS penalty tax and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value.
Asset allocation does not ensure a profit or protect against a loss.
The target date is the approximate date when investors plan to start withdrawing their money.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Investing in mutual funds involves risk, including possible loss of principal.
Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.
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.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and Warwick Valley 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 contains 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.