Author Topic: Fixed income option 3% inside variable annuity (employer contribution)  (Read 1538 times)

Mariposa

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Getting my financial house in order. I'm currently rolling over what can be rolled over and rebalancing across all accounts.

My employer contributes to a variable annuity on my behalf, and one of the options is a fixed option with Great West at 3%. I can move the entire balance to other investment options at any time. This seems better than a total bond fund: VBTLX, for instance, currently has a SEC yield of 2.4% and is subject to price risk.

Question: Should I just max out the fixed option in that account for the bond portion of my AA? What am I missing?

I know that annuities have all kinds of hidden fees (wrap, mortality & expense, surrender charges, etc). They aren't clearly outlined in the Plan Description. But I don't have a choice where my employer's contribution goes for this slice of our investments anyway.

Any feedback from savvy MMM people appreciated!

Mariposa

  • Bristles
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No love for this question; maybe that's because I'm not missing anything.

It's a small slice of our portfolio anyway. At what point is the juice not worth the squeeze for these small optimizations? At some point may be healthy to allow for some degree of chaos and uncertainty.

Thanks for reading!

FIPurpose

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No love for this question; maybe that's because I'm not missing anything.

It's a small slice of our portfolio anyway. At what point is the juice not worth the squeeze for these small optimizations? At some point may be healthy to allow for some degree of chaos and uncertainty.

Thanks for reading!

I think no one's responded because they don't know what your other options are. If you list out what your options are in your annuity, then someone would be able to tell you if you're choosing the best option.

Mariposa

  • Bristles
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Sounds like my question isn't clear.

After ~100h of reading and thinking things over, I've decided to do a basic 3-fund portfolio over all of our accounts, taking advantage of the lowest-fee options. There's a decent total market fund and bond fund in this annuity, but that's perhaps not relevant. My question is: if I've decided to allocate, say, 15% of our overall portfolio to "bonds," wouldn't it be better to use the fixed income offering in this annuity, since it's currently offering a higher yield than VBTLX and isn't subject to price risk?

This annuity (from my employer contribution) only represents a small percentage of our portfolio currently. Will need to hold additional VBTLX equivalent in the 403b to meet our desired asset allocation.

Have also been trying to wrap my brain around tax-adjusted asset allocation, but many uncertainties with that.

Thanks.

FIPurpose

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Sounds like my question isn't clear.

After ~100h of reading and thinking things over, I've decided to do a basic 3-fund portfolio over all of our accounts, taking advantage of the lowest-fee options. There's a decent total market fund and bond fund in this annuity, but that's perhaps not relevant. My question is: if I've decided to allocate, say, 15% of our overall portfolio to "bonds," wouldn't it be better to use the fixed income offering in this annuity, since it's currently offering a higher yield than VBTLX and isn't subject to price risk?

This annuity (from my employer contribution) only represents a small percentage of our portfolio currently. Will need to hold additional VBTLX equivalent in the 403b to meet our desired asset allocation.

Have also been trying to wrap my brain around tax-adjusted asset allocation, but many uncertainties with that.

Thanks.

Ahh I see where you are now. In modern portfolio theory, you want to have investments that have negative correlations. i.e. you want bonds to have price fluctuation because when bonds are down, equities tend to go up and vice versa. This means that rebalancing your portfolio you will sell high and buy low alternating between years where you rebalance to buy more equities and others you buy more bonds.

I don't know the liquidity of your annuity, but I doubt it is the same as the bond fund.

https://www.bogleheads.org/wiki/Rebalancing

Mariposa

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That's a good point about liquidity. But I can actually transfer 100% of the assets from the fixed option to any other investment option at any time. (Fund info attached.) Stated interest is currently 3%. Therefore, I'm unable to see any downsides to using this rather than VBTLX or equivalent.

I myself would never choose a variable annuity, since they often have hidden fees. But I have no choice in this matter because it's my employer contribution.

FIPurpose

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If you have the ability to liquidate, I would not keep any money in the annuity. It is far too much hassle to know all the rules and fees associated with the annuity. A Vanguard Bond fund is completely known. The fact that you can't find out what the fee structure is should tell you everything. I personally wouldn't keep my money there if I didn't have to.

I don't know what company you work for, but it sounds like it would be worthwhile pushing for a different 401k.

MDM

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This may be a "stable value fund."

If so, see Stable value fund - Bogleheads, A Retirement Plan Rip Off That Insurance Companies Hope You Don't Learn More About - Pg.3 - TheStreet, etc. for more.

Do you currently have money invested in this 3% annuity?  Is it actually paying out 3%?  If so, it is a reasonable fixed income investment.

Mariposa

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@FIPurpose: You're undoubtedly right that I'm just trying to tweak a suboptimal option. Only my employer contribution goes into this variable annuity; my own contributions go into a 401k managed by Principal, which has okay but not great options. Unfortunately, my employer is large and extremely Byzantine. If I end up changing jobs, suboptimal retirement options will be the least of it.

@MDM: Thanks so much for the links. Very helpful. Based on the numbers from my quarterly statement, I calculate that the effective annual yield for the fixed option is 2.36%. Much of the difference from the stated 3% is because of a $5 quarterly "account maintenance" fee. Looks like it's the same charge no matter what investment option I choose, so it would still make sense to go with the fixed option for the "bond" part of my AA. Just hope this is a flat fee and doesn't go up as the account balance increases.

I'm consolidating 12 accounts into 9 and rebalancing ~$300k of invested assets. All the rebalancing will be done in tax-deferred or Roth accounts, so there won't be tax consequences. We basically ignored what was happening with our investments before I discovered MMM, so you can imagine that there have already been a couple of horrible revelations.