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Learning, Sharing, and Teaching => Investor Alley => Topic started by: fallstoclimb on October 28, 2015, 06:16:37 AM

Title: Question about our 403(b) -- is this really a fixed annuity?
Post by: fallstoclimb on October 28, 2015, 06:16:37 AM
My husband recently switched school systems and we enrolled him into a 403(b) plan with VALIC (as well as a 457, Roth IRA, etc - we have our bases covered).

The 403b is invested in Fidelity & Vanguard index funds (FSIIX, VIMAX, VSMAX, FUSEX) and some global bonds.  We contribute $175/pp, and 2 pay periods in our balance is just over $350.  This seems to be a straightforward investment vehicle.  It was the lowest fee option we had via the county. 

However, under 'account details', the product name is stated to be "Group Mutual Fund w/ Fixed Annuity."

This isn't really a fixed annuity, right?  I don't understand how it could be.  Is that name just an artifact of the history of 403b plans?  I called to ask, and the guy wasn't chill with answering my questions since its my husband's account (so annoying how all investment companies are like that), but when I said "This isn't really a fixed annuity, it's stocks, right?" he said yes but explained nothing.

I just want to make sure I fully understand what we are investing in here.
Title: Re: Question about our 403(b) -- is this really a fixed annuity?
Post by: mizchief on October 29, 2015, 11:23:17 AM
Yes!  This could be an annuity!  I just ran into this identical situation.  I have a Valic Plan in two separate 403(b)'s which I THOUGHT was just mutual fund accounts.  In these accounts I had a range of mutual funds to choose from, with expense ratios listed and I chose some.  It turned out that these mutual funds are within the shell of an annuity, and there was a "hidden" 1% EXTRA charge for the annuity, on top expense ratio (.64%) of the mutual fund fee!  A total of 1.64% every year for all these years!!!!

Mine are old accounts, one started in 1999 and the other started in 1991.  My accounts were "Portfolio Director" and "Independence Plus", and they are labeled that way when I log onto the Valic site.  I also see that there is a death benefit, consistent with an annuity now that I know to look for that.

Before you do anything, look at the return rate on the "fixed annuity" portion of your plan.  In my 1991 account, I had a 4.5% return on short-term fixed rate.  (The newer 1991 was only a 3% return).  I decided to keep this plan from 1991 and covert all my mutual funds into the fixed annuity as a 4.5% rate guaranteed is pretty good and will substitute for bonds in my asset allocation. I had never put money into the fixed portion and didn't know that option existed.  It is not apparent when I log on. 

For the 1999 account the guaranteed rate for the fixed annuity is only 3%.  I am transferring all the funds out of that account into another provider (Fidelity) once I can confirm that there is not a surrender charge in my case.  I do have one Vanguard index option in the Valic account, if I convert to a straight mutual fund account but I am furious for being suckered into buying an annuity and that no one ever pointed out that I could have the same mutual funds without the 1% in a  Valic mutual fund account.    (In my plan there is a mutual fund option without the managment fee and that's where I will go if I transfer to the Fidelity 403(b) provider without a big charge).

Before you do anything,  find out the surrender charges. In my Valic account they are quite hefty (was it 5% if you transfer out more than 10%?   Something like that)  Fortunately both my accounts are over 15 yrs old, so the surrender charges don't apply.  (Read the prospectus and call to confirm your own case).

I am a newbie here trying to figure out a mess of 403(b)'s in my own and my husband's accounts, so take everything I say with a grain of salt!  But I think I figured out this one portion of the retirement puzzle. 
Title: Re: Question about our 403(b) -- is this really a fixed annuity?
Post by: fallstoclimb on October 30, 2015, 07:23:52 AM
Holy crap, how is this not more clear?!?

THANK YOU for responding.  I just did a little more sleuthing on the website and found an area that said our effective interest rate is 2.4% and our guaranteed interest rate is 2.0%.

I don't understand this at ALL.  We're invested in index funds.  The 403b is a standard retirement investment vehicle.  How does index funds + 403b = fixed annuity? 

If this is really a fixed annuity I feel like this should be illegal.  Basically they are putting our money in the stock market which will return, what, 5-7% real returns -- and giving us 2%?  Is that really what's happening?  That can't be right...

Teacher retirement plans are so freaking scammy.  I guess we'll be calling VALIC's financial advisor today....

ETA:  I realized I was looking at the "fixed interest" interest rate and I guess that is OK.  But I still think I don't  understand what we are investing in.   Because a fixed annuity is a set payment over time, right? 

Title: Re: Question about our 403(b) -- is this really a fixed annuity?
Post by: pbkmaine on October 30, 2015, 07:53:11 AM
Call them. It may be that that there is one investment that is a fixed account and the rest are mutual funds. The fixed account will yield as shown. That is one way Valic sets up an investment array. The other way is to wrap all the investments into an annuity with high fees. Call and say you want to understand the investment fees better and need to know the total costs of the mutual funds and whether the expense ratio shown for the mutual funds is all you pay or whether there is a "wrap fee" in addition. Fees can be complicated and it may take you some digging to find the answer.
Title: Re: Question about our 403(b) -- is this really a fixed annuity?
Post by: mizchief on October 30, 2015, 11:06:21 AM
Call Valic and ask for the TOTAL fees in your plan.  Get the name of plan and the prospectus for it.  The way this might work is that you have a annuity with a variable component invested in mutual funds and a fixed component with a defined interest rate. If you are in this kind of annuity plan, there is an additional charge on your mutual funds .  Your yield in this part will be the yield of the mutual funds MINUS THE TACKED ON ANNUITY FEE.  Annuity plans are ususally  expensive to get out (in mine only 10% a year can be transferred free before you are 59.5). 

Do you have other options for providers in your 403(b) plan?  Here is a good site to compare plans,  although the specific details will vary according to your school district.

If Valic is the only provider, ask if you can switch to the straight mutual fund account, WITHOUT an extra management fee.  Find out what the surrender charges are for this account.

I commend you for figuring this out now!  I've had a bunch of money with Valic for more than 15 years and only realized the annuity part a couple weeks ago!   Let us know what you find out!
Title: Re: Question about our 403(b) -- is this really a fixed annuity?
Post by: Lski'stash on October 31, 2015, 03:09:56 PM
Valic has mutual funds or annuities, and it all depends on what your school district bought with them. First, see if you can call anyone in your school district to find out what they have through Valic, and if they offer anything else. Valic should also be able to provide this information over the phone. I would NOT go through an advisor on this issue.

It will probably end up being that your school only offers annuities through Valic. If this is the case, see if there is anyone you can go through and NOT have to get an annuity. I found this all out the hard way:(