variable annuity 401k?

Question

My current employer offers a 401k in which they match up to 4%. One thing they don't make clear is that you are not purchasing the funds listed, you are purchasing a variable annuity. From what I can gather, this annuity will match the fund percentage wise minus the fees. I also do not purchase "shares" at the price listed for the fund. There is some kind of way the price is decided initially when purchased. Can someone please explain in detail (layman's terms, no finance PhD here) how these investments work and what the advantages/disadvantages are associated? Should I maximize or simply invest the match amount and take the remaining elsewhere?

Answer 1

Your employer got suckered into a horrible plan. A 401k is already tax-sheltered, which means that a variable annuity wrapper serves no purpose whatsoever. It just adds a worthless layer of fees.



Read the details and understand the fee structure. If they were stupid enough to buy the annuity structure, they may have signed up for other ridiculous fees.



If management is willing to listen, ask if they would consider a small-business 401k plan at Vanguard. Very low fees, both on the plan and on the funds.



I would invest enough to get the full matching funds. Put that in the most conservative choice (money market or stable value). Open a Roth IRA at Vanguard, Fidelity, or Schwab and use that to do your real investing.

Answer 2

I generally dislike variable annuities, but there are pros and cons. A variable annuity is an insurance product. It is basically a contract which acts as a wrapper that goes around a set of mutual fund options that are available in the variable annuity contract.



Pros:



-Variable annuities offer tax deferrals, taxes on gains are not paid until money is taken out. This is redundant if the variable annuity is within an IRA or a 401k plan as these plans already offer tax deferral.

-Variable annuities often provide an added level of guarantees. This depends on the variable annuity purchased. often times the insurance company will guarantee a certain amount of money annually that may be withdrawn and/or a will guarantee a certain death benefit to any named beneficiaries no matter what happens in the stock market. This is the appeal for many fearful investors and is one of the reasons people often are sold variable annuities.



Cons:



-Like any insurance contract, there is a premium paid for additional protections. Variable annuities are very expense and can average between 2%-5% per year depending on the options selected. These expenses can often exceed any gains from your portfolio and will affect your long term investment performance negatively.



-The guarantees offered by the insurance company are only as good as the insurance company itself. If a financial mega-catastrophe were to happen, not only would your variable annuity account be lower due to a stock market crash, but the insurance company who sold you your variable annuity may also be on the verge of collapse. This may make it difficult for the company to pay you the benefits that it guaranteed you.



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I personally would avoid variable annuities. People are often easily persuaded to purchase variable annuities for their "insurance" against market loss. However the expenses and risks are not often well explained by the sales person. Variable annuities also generate very large sales commissions (often between 5% and 9% of total assets) so insurance agents love to sell them.



I would probably invest in the 401k up to the match, and then go elsewhere with the rest of your savings. Read your 401k plan documents to learn more about the expenses and options associated with the variable annuity. You may even have the opportunity to opt out of many of the costly features.



Good luck!

Answer 3

Your employer has purchased a 401K that's a rip off. They did this because;

A. They don't know any better

B. They like the fact that (most likely) they pay no administrative fee. The fee's on the annuity are so high that it covers the administrative fees and a whole lot more.



The number one benefit in a Annuity product is tax deferral. But.... a 401K is already tax differed. The high fee is for something you are getting anyway. Then on top of that there are higher fees for the investment products (another rip off).



So ultimately your employer & the sales rep are very happy.

Answer 4

Variable annuities are a rip off. Fees average about 12%

Put in the minimum and open your own IRA

Answer 5

in all likelihood might have been extra useful to circulate with a usual software from American money, forefront, constancy and so forth. Annuity contracts are traditionally extra high priced as you have embedded insurance expenses linked with the product. Advisors desire to sell them as they are extra worthwhile.