Retirement funds in annuities cost more

[nun]

In previous posts I told you guys that I was in academia and saved with TIAA-CREF. Maybe its a historiical anomoly, but the TIAA-CREF university retirement funds are actually retirement annuities. One consequence of this is highter fees eg. Inside the retirement annuity the Equity index fund has an expense ratio of 0.43% outside its 0.26%.

Why do index funds held inside annuity contracts cost more, or is this the case for funds in all retirement accounts, 401k etc? In general I like TIAA-CREF, the only subtle pressure I 've ever felt from them is the concentration on using lifetime annuities for income on their website.

 

[MasterBlaster]

Annuities are life insurance. Besides all of the other fees you are paying for a life insurance policy.

The Annuity guarantees that if you die your heirs get at least the amount that you put in.

So at a minimum, thats why annuity fees are higher than normal fund fees.

 

[JohnP]

nun - TIAA-Cref is a well respected annuity shop which has been primarily serving the university market with some contracts in the k-12 403b sector;  IMO T-C is by far the best annuity provider in the school market, which is otherwise dominated by sharks providing high cost funds and wrapped with extra fees. 

401k accounts are a different animal than 403b accounts;  401k accounts are 'typically' considered to be the responsibility of the company and the company often pays the 'wrap' expenses of the retirement accounts.  In 403b systems, the schools pass on the responsibility to the 403b providers and do not provide funds for the 'wrap' expenses so a higher cost wrap is experienced by the school employees. 

Enjoy your TIAA-Cref account because it is  far better than most school system accounts.  DW is a k-12 teacher who has a Putnam sponsored 403b which is very high cost (B shares, er>1.5, 12b of .25%/yr) but beats the Ins Co Annuities she had in her 403b before we married.  I'd recommend keeping your TIAA-Cref account until you retire then roll it over to a Vanguard or Fidelity IRA and avoid the annuities option. 

A good site to learn more about school system 'stuff' is www.403bwise.com

JohnP

 

[SolidA]

JohnP - that is a great website - glad you recommended it. I also am suffering from 403B Annunity-itis. I have been trying for several years to get other alternatives in our mix for the District I teach in, but the apathy is palpable!!! Bummer - it irks me to NO end everytime I get my statement

 

[nun]

nun - TIAA-Cref is a well respected annuity shop which has been primarily serving the university market with some contracts in the k-12 403b sector; IMO T-C is by far the best annuity provider in the school market, which is otherwise dominated by sharks providing high cost funds and wrapped with extra fees.

401k accounts are a different animal than 403b accounts; 401k accounts are 'typically' considered to be the responsibility of the company and the company often pays the 'wrap' expenses of the retirement accounts. In 403b systems, the schools pass on the responsibility to the 403b providers and do not provide funds for the 'wrap' expenses so a higher cost wrap is experienced by the school employees.

Enjoy your TIAA-Cref account because it is far better than most school system accounts. DW is a k-12 teacher who has a Putnam sponsored 403b which is very high cost (B shares, er>1.5, 12b of .25%/yr) but beats the Ins Co Annuities she had in her 403b before we married. I'd recommend keeping your TIAA-Cref account until you retire then roll it over to a Vanguard or Fidelity IRA and avoid the annuities option.

A good site to learn more about school system 'stuff' is www.403bwise.com

JohnP

Great information, I was always curious why the fees were so relatively high
FYI I compared the fees for Vanguard, Fidelity and TIAA-CREF retail mutual funds and in general Vanguard
are uniformly low, Fidelity has low fees, but they have a larger variation that Vanguard,
and TIAA-CREF's are the highest of the 3, but still very low.

 

[ats5g]

Hi Nun,

I think the rather simplistic answer is that a lot of annuities in 403(b)'s cost sooo much because those insurance companies can charge that much!! Kind of like "hey, how do all those high expense ratio loaded mutual funds keep getting bought?" Simple, they've got good sales people.  Also, I would venture to guess that the vast majority of those insurance companies selling the high cost 403(b)'s are "for-profit" companies, with the sharholders of those companies sharing the profits.

TIAA-CREF, while not a non-profit anymore, is still not owned by outside shareholders. IIRC, there is something like 1 share of stock of TIAA-CREF controlled by the Board of Oversee-ers at TC.

As to Masterblaster's comments, not all annuities have the "if you die your heirs get what you put in" clause. This is usually a "rider" that one has to choose to add onto their annuity contract, and of course this extra cost to the insurnace company raises your expense ratio too. TC does not have this option in their retirement annuities.

Also note that TC's mutual funds have been going in the wrong direction lately:

TIAA-CREF's Version of Democracy Gives Investors Raw Deal

Fund Times: TIAA-CREF Pushes Backdoor Fee Hike

So, make sure the TC mutual funds you invest in are not the mutual funds which are getting their expense ratios raised. There still may be a reason to keep some of your money w/ TC retirement annuities. Namely, TIAA Traditional and TIAA Real Estate. I know of no other retirement vehicle that allows you to invest in a fund that directly holds real estate.

- Alec

 

[nun]

I read 403bwise and it has nice information, but I'm still mystified why the retirement side of TIAA CREF
and its 403b offerings are all organized as annuities whereas all the 401ks I've seen are in mutual funds
not wraped in an annuity. Is this just a result of the way TIAA-Cref started out ie. as an insurance company. If so maybe its time TIAA-CREF offered something other than annuities for retirement accounts

 

[brewer12345]

I read 403bwise and it has nice information, but I'm still mystified why the retirement side of TIAA CREF
and its 403b offerings are all organized as annuities whereas all the 401ks I've seen are in mutual funds
not wraped in an annuity. Is this just a result of the way TIAA-Cref started out ie. as an insurance company. If so maybe its time TIAA-CREF offered something other than annuities for retirement accounts

Yup, it is an artifact of the way TIAA-CREF started out. Back in the bad, old days, 403bs offered by others were overwhelmingly annuities as well mostly based on who happened to be fishing in that pond at the right time.

 

[MasterBlaster]

Arts5g:

you are misinformed as to what (deferred) annuities are.

Every deferred annuity is fund wrapped around a life insurance contract. The life insurance amount that the heirs would get is exactly the amount that is invested.

This insurance costs a bit, so that's why annuity funds will always have expenses greater than a very similar mutual fund.

 

[brewer12345]

This insurance costs a bit, so that's why annuity funds will always have expenses greater than a very similar mutual fund.

That, plus any insurance product requires the paymt of premium taxes and other obnoxious gummint feees, plus usually the insurer has to put up some capital.

 

[nun]

Hi Nun,

I think the rather simplistic answer is that a lot of annuities in 403(b)'s cost sooo much because those insurance companies can charge that much!! Kind of like "hey, how do all those high expense ratio loaded mutual funds keep getting bought?" Simple, they've got good sales people. Also, I would venture to guess that the vast majority of those insurance companies selling the high cost 403(b)'s are "for-profit" companies, with the sharholders of those companies sharing the profits.

TIAA-CREF, while not a non-profit anymore, is still not owned by outside shareholders. IIRC, there is something like 1 share of stock of TIAA-CREF controlled by the Board of Oversee-ers at TC.

As to Masterblaster's comments, not all annuities have the "if you die your heirs get what you put in" clause. This is usually a "rider" that one has to choose to add onto their annuity contract, and of course this extra cost to the insurnace company raises your expense ratio too. TC does not have this option in their retirement annuities.

Also note that TC's mutual funds have been going in the wrong direction lately:

TIAA-CREF's Version of Democracy Gives Investors Raw Deal

Fund Times: TIAA-CREF Pushes Backdoor Fee Hike

So, make sure the TC mutual funds you invest in are not the mutual funds which are getting their expense ratios raised. There still may be a reason to keep some of your money w/ TC retirement annuities. Namely, TIAA Traditional and TIAA Real Estate. I know of no other retirement vehicle that allows you to invest in a fund that directly holds real estate.

- Alec

Hi Alec,
With TC offering so few funds its a good bet I own the funds that will increase, and guess what, after reading the links in your post all my funds will soon have increase fees and 12-1bs. This may be the breaking point for me, should I go to Fidelity or Vanguard?

 

[JohnP]

nun & ats6g

Very recently TC went into the retail selling of mutual funds and tried to offer low-expense-ratios relative to Vanguard and Fidelity.  Sort of like the old Kmart tried to compete head-to-head with the significantly more efficient WalMart;  Well, Kmart went bankrupt in short order.  TC is realizing that competing on expense ratio with VG and Fido so they have been attempting to quadruple the er on the very new retail mutual funds. 

Note that TC's annuity-based mutual funds are unaffected and remain profitable for TC and their education customers.

If you are not pleased with TC's retail mutual funds, it may be a good time to make a change - I don't know the details of their quick turn-around fees, but I believe that TC and their retail customers need to rethink the whole thing.  I've never had second thoughts with my funds at Vanguard.

JohnP

 

[ats5g]

Masterblaster,

I think perhaps we're saying similar things. I checked TIAA-CREF's retirement accounts and Vanguard after tax deferred annuities to be sure:

CREF prospectus

TIAA Real Estate Prospectus

Vanguard's deferred annuities

With TIAA-CREF, the death benefit in the accumulation stage is the market value of the accumulation.

With Vanguard, there are three options:

1. market value of the accumulation at death.

2. greater of market value of the accumulation or amount invested.

3. greater of 2 or market value of highest accumulation on some prior anniversary date.

#2 + #3 have higher expense ratios than #1.

- Alec

 

[ats5g]

Hi Alec,
With TC offering so few funds its a good bet I own the funds that will increase, and guess what, after reading the links in your post all my funds will soon have increase fees and 12-1bs. This may be the breaking point for me, should I go to Fidelity or Vanguard?

Nun,

Personally, I'd go with Vanguard b/c the expense ratios are generally lower, especially if you can use their Admiral Funds. Not too mention that I think the Johnson Family, who owns the management company that manages the Fidelity funds, are satan's minions. Plus, Vanguard's funds generally have more stable management.

- Alec

 

[SolidA]

I WISH we had Vanguard or Fidelity (or even TIAA-CREF!) as a choice - but in our district, these are not available. YES - if you have the choice of one of these, GO FOR IT. But for those of us who don't...

 

[yakers]

I WISH we had Vanguard or Fidelity (or even TIAA-CREF!) as a choice - but in our district, these are not available.  YES - if you have the choice of one of these, GO FOR IT.  But for those of us who don't...

Oh, hope you're not a VALIC victim....

 

[nun]

Nun,

Personally, I'd go with Vanguard b/c the expense ratios are generally lower, especially if you can use their Admiral Funds. Not too mention that I think the Johnson Family, who owns the management company that manages the Fidelity funds, are satan's minions. Plus, Vanguard's funds generally have more stable management.

- Alec

I'm taking your adivce and going to Vanguard. I was happy with TIAA-CREF when their fees were low and I liked their philosophy, even if that isn't a sound financial reason for investing somewhere. However, with all the revoting for higher fees going on at TIAA-CREF and the introduction of 12b-1 fees I'm getting out asap.
I'll have to continue with the University retirement accounts at TIAA-CREF, but they are on the annuity side of the business soe aren't affected by all the price hikes going on on the retail side of things. I'd wish the retirement side wasn't a variable annuity as the fees are running at 0.5%, even if it is pretty good it could be lower,
but the funds are pretty good and its still a good plan.