Help with Annuity

[smooch]

Two years ago I put $35k into a Merrill Lynch annuity. It’s currently invested in the ML Global Allocation fund, which has an ER of 1.86. In addition, the maintenance fee on the annuity is $40 per year and the account fee that I hold it in is $125 per year. The annuity is currently worth $49k, so I have $14k growth. It will be 6 more years before the surrender charge is eliminated. The charge is currently about $1800.

I’m trying to figure out the least damaging course of action. If I take the profit out, it will be taxed at my ordinary income rate. If I cash in the whole thing, it will be the surrender charge of $1800 plus what I owe in taxes. But, if I don’t take it out, I am trying to determine if I will end up paying as much in fees over the next 6 years as I would losing the $1800 surrender fee. Also, there is the possibility that the fund will lose money and then I won’t have a gain to pay the taxes on.

I’d appreciate hearing what you would recommend. Also, if I cash it in, can I subtract the surrender fee from the profit?

 

[Rich_by_the_Bay]

I’d appreciate hearing what you would recommend. Also, if I cash it in, can I subtract the surrender fee from the profit?

Lick your wounds, consider it a lesson learned, wait the 6 years and dump the annuity. These products make no sense to me - seems there is almost always a better alternative.

 

[brewer12345]

Let's see. I believe you could probably find an annuity with an ER 1.4% less than what ML is charging, and without the account fees. So in 6 years you would save 6 times (1.4% of $49k) = $4116. You also save the fees or 6 times ($40 plus $125) = $990. So you are weighing a surrender charge of $1800 versus excess fees of $5106. Sounds like a no-brainer to me.

What I would probably do if I were you is do a 1035 (tax free) transfer from the ML annuity to a suitable offering from TIAA-CREF (my first choice) or Vanguard. Both of these guys offer variable annuities with no bells or whistles with much lower expense ratios.

 

[mickeyd]

Sounds like you have a variable annuity (though you do not mention the name of the insurance company). This is a vehicle that insurance companies and their blood sucking minions use to siphon off millions of dollars from unsuspecting investors under the cover of "helping" them with their finances.

Have you asked the salesman who sold you this junk why he advised you to place your hard-earned money in this contract? Of course, we all know the reason was that he recieved a healthy commission for little or no work. It might do your heart good to confront him and watch him squirm as he hems/haws.

A agree that you should consider bailing out ASAP but the surrender charge will probably reduce at the anniversery of the policy so it may be in your best interest to save yourself 1% and do the 1035 exchange after the anniversery date if it is within the next few months.

 

[brewer12345]

Sounds like you have a variable annuity (though you do not mention the name of the insurance company).

Could easily be through Merrill's own insurance company. They have a couple of relatively large ones.

 

[smooch]

It is through Merrill's own insurance company. I asked the guy at Vanguard about a 1035 exchange and he said that I would basically have to liquidate the annuity with ML, so it would not save me anything. Does that sound right?

 

[ats5g]

smooch,

He might mean liquidate the investment funds/accounts inside the variable annuity, and then do the 1035 exchange. You wouldn't be able to do an "in-kind transfer" like you can with stocks, bonds, or mutual funds.

- Alec

 

[smooch]

But I would still have to pay the surrender fee?

 

[LOL!]

But I would still have to pay the surrender fee?

You don't save the surrender fee. You don't have to claim the transfer to another annuity as income, so you avoid income taxes on the ML annuity in the year of transfer.

 

[brewer12345]

Just to amplify LOL's point: you would pay the ~$1800 surrender fee no matter what you do (but you'd have savings of ~$5k to offset it). What the 1035 exchange does is help you avoid taxes that you would otherwise pay from having ML just send you a check.

 

[smooch]

Thanks, All. I am going to do the 1035 exchange. I see that I can save more on fees than I would lose on the surrender fee. More importantly, my husband also has a small annuity with ML that he's had for 11 years. We were worried about paying the taxes on that (although it hasn't made much), but now we will just 1035 exchange it into Vanguard!

 

[smooch]

Does anyone know if the FA who sold us the annuity gets an on-going commission? She is really trying hard to get us to stay with the 2 we have at ML.

 

[brewer12345]

Does anyone know if the FA who sold us the annuity gets an on-going commission? She is really trying hard to get us to stay with the 2 we have at ML.

Sometimes producers get "trail commissions" paid out over time, and sometimes they get bonuses for persistency (i.e. getting the suckers to stick around). So, yes, it is very possible that she is financially motivated to keep you from walking.

If it helps, think of her as a hooker.

 

[cute fuzzy bunny]

A really, really ugly hooker.

 

[brewer12345]

Huhuh, maybe think of it as "tail commissions"...

 

[smooch]

And one more question. The return that the FA is quoting me from the annuity is not what I am seeing on Morningstar, but maybe I am reading it wrong. For instance, if the 2005 return for the index is shown as -4 on Morningstar, does that mean the index returned -4 for that year or does it mean the fund returned 4% less than the index? Thanks for all of your help!

 

[brewer12345]

I am not familiar with morningstar's return numbers. I'd guess that showing -4% for an index means that total return for the index was down 4%. A fund might return more or less than an index in any given year. What index and what fund/sub-account are you looking at?

 

[smooch]

I am looking at the Merrill Lynch Global Allocation Fund (MBLOX). The index that Morningstar compares it to is the MSCI EAFE. I Googled the MSCI EAFE and it says it returned 39% in 2003. The fund returned 35, so that would be consistent with the Morningstar notation of -4% next to the index.

 

[brewer12345]

I am looking at the Merrill Lynch Global Allocation Fund (MBLOX). The index that Morningstar compares it to is the MSCI EAFE. I Googled the MSCI EAFE and it says it returned 39% in 2003. The fund returned 35, so that would be consistent with the Morningstar notation of -4% next to the index.

Holy crap! Looks like half of the difference could be ascribed to the 1.89% expense ratio. I assume you are paying M&E fees on top of that. That would motivate me pretty stringly to move the money.

 

[Brat]

I think what he is looking at is the Alpha against Standard Index, and then there is the Beta against Standard Index. Since the group was talking about Wellesley recently its Alpha is -1.10, the category -2.13. My favorite, OAKBX was 0.87, and -2.05 respectively.

So, what is the Alpha actually measuring?

 

[smooch]

It gets better

Now she is telling me that Morningstar is using the wrong index. She's using an average of three different indices, so basically creating her own measuring tool!

 

[smooch]

Brewer,

Does M&E mean Management and Expense? I thought that was included in the expense ratio. Could there be other fees as well?

 

[brewer12345]

Brewer,

   Does M&E mean Management and Expense? I thought that was included in the expense ratio. Could there be other fees as well? 

M&E means "Mortality & Expense" fees. In most variable annuities, there are several layers of fees:

- Contract charges levied to pay for policy administration
- mortality and expense fees, to pay for the true mortality insurance coverage and insurance-related expenses
- The expense ratio of the underlying fund
- any guarantee fees for minimum withdrawal, minimum death benefit, and other corny guarantees

For a VA with minimum withdrawal, etc. guarantees, it is typical to see expense ratios in the 3 to 3.75% range!

Smooch, the hooker agent is playing games with you. Making up a benchmark, not having an open discussion of expenses, and frankly, selling you a wholly unsuitable product in the first place.

 

[brewer12345]

I think what he is looking at is the Alpha against Standard Index, and then there is the Beta against Standard Index.  Since the group was talking about Wellesley recently its Alpha is -1.10, the category -2.13.  My favorite, OAKBX was 0.87, and -2.05 respectively.

So, what is the Alpha actually measuring?

Alpha is measuring excess return versus an index. It doesn't work very well when you specify the wrong benchmark, like when you compare an equity index to a fund with a blob of bonds in it. This is one of the (many) reasons I am not enthralled with m*.