Q. My brokerage firm advisor just put my teacher retirement annuity in a Sun America variable annuity. He did not use the term, "variable annuity" in our meeting. I signed the paper work last week, but I have thirty days to return it because it replaced another annuity contract of seven years ago (another mistake). What should I do? —A.L., Dallas, TX
A. The vast majority of the products on the approved list of the Texas Teachers Retirement website are from insurance companies because annuity contracts have dominated this area since its inception. Today, however, you also have access to non-annuity products from lower cost, no commission firms like Fidelity and Vanguard.
The most likely reason to change what you owned was the salesman's incentive to generate a new commission. If you were told that the change was suggested because of the wonderful new guarantees in more recent contracts, such as living benefits options, find out how much it has increased your annual costs. Living benefits options work to increase already high variable annuity costs by about 0.50 percent a year. I have demonstrated, in other columns, that a better and more flexible choice is to combine a traditional life annuity with a low-cost index-investing plan, such as the Couch Potato portfolio.
Here is what I suggest:
- First, exercise your right of rescission immediately. This means call him and cancel the sale. Do what it takes to make this happen, which probably means writing a letter that states you want the sale cancelled. Do not delay. This action will avoid subjecting you to a whole new set of penalties for early withdrawal. This can save you 8 to 10 percent.
- Your next step depends on whether or not you are still teaching. If you are still teaching, just getting back to where you were may be the best you can do. While the Texas Teachers Retirement list of approved firms lists some low-cost firms as well as high-cost annuity products, what you actually have access to will depend entirely on your independent school district. If Vanguard or Fidelity is available, consider transferring your current investments to a lower cost fund with one of these firms.
- If you are no longer teaching you have a lot more freedom because you are at liberty to move your 403(b) account to an IRA Rollover. This will allow you to shift out of the expensive variable annuity product into low-cost indexed funds or a low-cost managed fund such as Vanguard Wellington or Fidelity Puritan. Both are balanced funds.
- Finally, if you are still working, redirect your ongoing 403(b) plan contributions to a low-cost provider if one is available in your school district.
Most of the people who sell the expensive commissioned products soft-pedal the impact of costs. They will attempt to make you feel silly for being concerned about how much costs will affect your long-term results. They will also tell you that superior management cost more, but will fail to mention that 70 percent of all managed funds fail to beat their target index.
There is a reason I may seem to obsess over cost— and I am not alone. Recently, the Texas State Securities Board launched an educational effort directed at teachers. (http://texasinvestored.org/voi/index.html) It is brief, very instructive and lets you know that costs do matter.
To get a visceral feel for the impact of costs I suggest you visit their on-line calculator and put in two sets of values to see the difference expenses can make. You can do this by visiting www.texasinvestored.org/expenses_mutual_fund_returns.php
Here is a sample comparison using this calculator. One teacher invests $10,000 in an expensive product that costs 2.00 percent a year and has a front-end commission of 5 percent. The product has a pre-expense return of 8 percent. At the end of 30 years that teacher will have $52,146. Another teacher does some homework and invests in a no-load index fund that costs one-tenth as much to run, 0.20 percent. This fund also has a pre-expense return of 8 percent. At the end of 30 years this teacher will have $94,761.