My 401K turns out to be a Flexible Payment Variable Annuity Account A

[Dreamer]

I work part-time as a receptionist in a doctor's office. I earn very little at this job. However, I was looking forward to being able to contribute to a 401K and having the doctor contribute 4%. He also will contribute to this account with profit sharing once per year. I met with the agent who handles this for the doctor on Friday. He is an agent with The Northwestern Mutual Life Insurance Company. I was shocked when I found out that it is a Flexible Payment Variable Annuity Account A and that it is a Back-Load Contract. One has to keep the money in the account for 8 years or face a withdrawal charge rate as high as 6% decreasing down to 1%. Their is a chart for the current annual contract fees showing 1.45% and maximum of 3.00% total fees. Also, there is an annual contract fee of $30.00.

I am 58 yrs old and wonder from day to day, how long I am going to keep this job. I could quit next month or decide to stay until age 62. I already have a COLA'd pension and sometime wonder why I am working this job. I had planned on putting 90% of my pay into this 401K and then whenever I quit, I was going to roll it over into my TSP. I would not sign The Application for Deferred Annuity when I found out it was a Variable Annuity. I told him that I did not know enough about them and that I needed to do some reading first. I think that I am the first person that would not sign up for it. All that I could think of was that everything that anyone had ever posted on this site about Variable Annuities was negative.

I was looking forward to being able to shield most of my earnings from taxes, getting 4% contributed by employer and receiving profit sharing. Now, I don't think that I am going to join. What if I did and decided to quit in a year. I would still have the 1.45% fees and $30.00 withheld at the minimum and it could go up to 3.00% for the next 7 years. If I rolled my money over to the TSP within the first 3 yrs, the charge would be 6% and then goes down 1% each year until 8 years from now.

What is your opinion of my options and what I should do? Also, why would an employer set up a pension fund using a Variable Annuity? I would appreciate all thoughts on this. Thanks in advance.

 

[SteveL]

It is possible that your employer isn't well informed about these matters. More likely, having any kind of small business pension plan can be expensive for a small employer to set up and run. This thing might be free to him. You might consider approaching the employer and explaining your concerns. If you explain what the issues are with the current offering there might be a way to get something better for the office.

 

[LOL!]

Can you sign up and contribute nothing and still get the profit-sharing and 4%?
Sure it will cost you $30, but might be worth it.

The doc does this because she has a small office and the plan costs her nothing. Participants pay through the nose for the plan instead.

 

[clifp]

I work part-time as a receptionist in a doctor's office. I earn very little at this job. However, I was looking forward to being able to contribute to a 401K and having the doctor contribute 4%. He also will contribute to this account with profit sharing once per year. I met with the agent who handles this for the doctor on Friday. He is an agent with The Northwestern Mutual Life Insurance Company. I was shocked when I found out that it is a Flexible Payment Variable Annuity Account A and that it is a Back-Load Contract. One has to keep the money in the account for 8 years or face a withdrawal charge rate as high as 6% decreasing down to 1%. Their is a chart for the current annual contract fees showing 1.45% and maximum of 3.00% total fees. Also, there is an annual contract fee of $30.00.

I am 58 yrs old and wonder from day to day, how long I am going to keep this job. I could quit next month or decide to stay until age 62. I already have a COLA'd pension and sometime wonder why I am working this job. I had planned on putting 90% of my pay into this 401K and then whenever I quit, I was going to roll it over into my TSP. I would not sign The Application for Deferred Annuity when I found out it was a Variable Annuity. I told him that I did not know enough about them and that I needed to do some reading first. I think that I am the first person that would not sign up for it. All that I could think of was that everything that anyone had ever posted on this site about Variable Annuities was negative.

I was looking forward to being able to shield most of my earnings from taxes, getting 4% contributed by employer and receiving profit sharing. Now, I don't think that I am going to join. What if I did and decided to quit in a year. I would still have the 1.45% fees and $30.00 withheld at the minimum and it could go up to 3.00% for the next 7 years. If I rolled my money over to the TSP within the first 3 yrs, the charge would be 6% and then goes down 1% each year until 8 years from now.

What is your opinion of my options and what I should do? Also, why would an employer set up a pension fund using a Variable Annuity? I would appreciate all thoughts on this. Thanks in advance.

I really like your plan of rolling your 401K with the match into the TSP after you retire, that is brilliant.

The problem as I see it is the doctor picked (or more likely was sold) a really bad plan. My approach would be to offer to help the doctor find a better plan. Cause as it stands now you are right the benefits of the match will almost certainly be largely wiped out by the high fees surrender charges etc.

I know there are people on the forum who have been involved in researching/recommending 401K for their small business and they can give you some pointers about where to look on setting up 401K and getting out of a bad one.

To me the toughest trick is convincing the doctor, that a mere part-time receptionist actually knows more about this money and retirement than a DOCTOR who spent years in medical school. (No offense to doctors or receptionists but I don't think I am too off-base suggesting that this maybe a hard sell). However, I'd bet big bucks that somebody who has been reading this forum for 6 years does know more than typical doctor about the subject.

 

[LOL!]

Here's a link on how to try to get a better 401(k) plan:
Wiki article link: Setting up a 401k plan

 

[clifp]

Here's a link on how to try to get a better 401(k) plan:
Wiki article link: Setting up a 401k plan

The case studies at the bottom of the article point to some very interesting threads on Bogleheads.

One more suggestion, since the Doctor is I imagine part of the 401K, I think it would be very worthwhile to show how much money the typical person can save by reducing expense. You'll probably be the only one putting in 90% of your salary. So I would show how much he can save if he maxs out his 401K with the current plan vs a Vanguard/Fidelity.

 

[Dreamer]

Can you sign up and contribute nothing and still get the profit-sharing and 4%?
Sure it will cost you $30, but might be worth it.

I must contribute at least 5% in order to get the 4% match and profit-sharing.


As far as suggesting a different 401K plan to the doctor, I can't see that happening. I started working there 3/5/10 and some days we say Good morning to each other if we make eye contact when he comes into the office and we say Good Night to each other when I leave. Most days that is our entire communication for the day. He is the only doctor in the office and does not have time for chit chatting. There are only 4 other people in the office besides him and including me. There have been 2 other people who have come and gone since I have been there and another one is leaving end of July. He is used to people coming and going. The other 2 people who have been there longer, 3 years and 5 years, are both in the plan and were surprised that I did not sign the paperwork.

Would it be better to sign up for just 5% withholding in order to get the 4% match and profit sharing, or just not sign up at all. I could very well not be working there this time next year.

 

[Texas Proud]

First off.... the annual fee that is high is only on the account balance... so a 1.45% or 3% is not like the 4% match... it will not eat up your match that quickly...


I would put pen to paper and see how much money I am ahead if I contributed to some other account that has low fee and this account WITH the match with high fee.... I would venture to guess the high fees are well covered by the 4% and match...

When you leave, you do not have to roll over right away... you can leave it in this bad plan for a couple of years to get the penalty down... this is where the huge negative of this plan is IMO... if you quit and leave soon, then the 4% match is gone paying the 6% surrender...


I still think you are ahead of the game getting the match and leaving it where it is for years.... besides, you still have the tax savings

 

[Dreamer]

Good suggestion, Texas Proud. I do need to put some figures on paper and then it should make more sense to me.

I am still amazed that anyone would choose such a plan for their employees.