I'm almost 50 and plan to work another 10 to 15 years, and I need to roll over my 401-k since I've changed employers. About 60k of it is in a Roth, which my new employer doesn't offer, so I'll need to park that somewhere else. I have a Roth IRA Annuity with Northwestern Mutual that I opened 20 years ago (converted to a Roth about 5 years ago) that has only 1k in it. My NW Mutual agent tells me that would be the perfect place to roll the 401-k Roth into, since it's already established, and purchased when rates were much cheaper. Does this make sense, or should I simply open up a standard Roth IRA?
My NW agent is also recommending that I take the other 140k left in my 401-k, and roll it into their IRA annuity which will guarantee payments when I retire. Good move, or should I simply roll the $ into my new employer's 401-k (managed by Fidelity), or open up my own IRA?
Comments
Many of us on this board have live through several changes of employers in our career. If you want to manage it yourself, rollover old 401(K) into Rollover IRA is a solid choice. The other choice is to rollover it into your new employer and live with whatever choices available in their 401(K) plans. I chose the former route years ago and never regret a moment in learning every aspects of investment. The choices are yours to make, but please think carefully and critically before you make your decision.
Regards,
Ted
Since you have significant assets in your current 401(k), you have the right to keep your money there if you so choose. If it is a low cost plan with good options (more typical of large plans than small ones), this is something to consider.
In thinking about where to move your 401(k), you'll want to think about where to put the pre-tax money as well - unless you're doing a simultaneous Roth conversion, that money will have to go somewhere else. You seem to be implying that you'd move that money to your new employer plan, but is that the best place for it, as opposed to leaving it where it is, or moving it to a traditional IRA with more flexibility?
Regarding the annuity itself, if it were a fixed annuity, where you had locked in a good rate for a period of years, and you could add to the annuity at the same rate and without extending the penalty period, it could be a good deal. But since you added the comment that it's a VA, the only rates we're talking about are annuitization rates (or possibly guaranteed minimum withdrawal rates). What are your plans regarding withdrawals - how many years down the road are we talking, do you anticipate annuitizing (98% of people do not, which I think is sometimes a mistake but then I'm obviously in the tiny minority
If the answer is essentially no - you weren't planning on using this for cash flow in retirement, then the rate guarantee has no value. If you were, then you begin to look at how valuable that guarantee is, and for that matter, whether you can get that same guarantee by adding the money just before you start drawing it out. (In that case, you could move the Roth money elsewhere, and then transfer it in when you wanted to start annuitizing or otherwise withdrawing.)
I'm guessing, since the annuity is 20 years old, that it doesn't come with a withdrawal rider (that's a fairly new "innovation"). So the question could be as simple as what the guaranteed rate of return is once you annuitize (and are you planning to annuitize).
The nice thing about my existing NWM Roth IRA Annuity, is that I bought it 20 years ago when I was 30, which locked in my minimum guaranteed settlement rate (based on a shorter life expectancy). So if I rollover into that account, that rate is going to be better than the rate I would get with a new annuity, since life expectancy is longer today than it was 20 years ago (and I've already absorbed a lot of the expenses associated with the annuity).
As far as the non-Roth money is concerned, I could roll it into my new 401-k (which is better than my former), but then the bulk of my retirement will be determined by market performance over the next 10 to 15 years. At least with an annuity, I have some guarantees, while also staying in the market. And as far as the front-load sales charge goes, since I'll be rolling over 140k, my rate will drop from 4.5 to 2.0% for all money over 100k...which is comparable to mutual fund sales charges. And the expenses within the NW Mutual Select Variable Annuity will average 1.23%, which is about the same as the Morningstar Mutual Fund average of 1.22%, and much better than the Morningstar Variable Annuities average rate of 1.74%. The final advantage over a traditional IRA is the ability to move my money around among several different fund families without a fee.
I plan to get all of the expenses and fees in writing before I sign on the dotted line, but it seems like I can get some security with the little extra expense it would cost to go the annuity route.
Likely that I have not had enough coffee yet this morning; and some days the old brain cells are not working, so I shouldn't even place a question; but I will ask anyway.
You wrote:
" The nice thing about my existing NWM Roth IRA Annuity, is that I bought it 20 years ago when I was 30, which locked in my minimum guaranteed settlement rate (based on a shorter life expectancy). So if I rollover into that account, that rate is going to be better than the rate I would get with a new annuity, since life expectancy is longer today than it was 20 years ago (and I've already absorbed a lot of the expenses associated with the annuity).
--- Assuming the following: Trad. IRA and annuities monies are taxed as ordinary income, and Roth IRA monies not taxed upon withdrawal.
>>> If I recall from your first write, you had the Trad. IRA noted above with NWM which you converted to a Roth IRA, yes? Also noted above.....NWM Roth IRA Annuity.
This is a tax sheltered acct. within a sheltered acct; with an additional layer of expenses to you, from the insurance company.
Is the noted guaranteed settlement rate you mention a fixed, annual rate of interest on the monies in the Roth? Is this what this statement means?
And what are you planning to rollover into the "NWM Roth IRA Annuity"?
As far as the non-Roth money is concerned, I could roll it into my new 401-k (which is better than my former), but then the bulk of my retirement will be determined by market performance over the next 10 to 15 years. At least with an annuity, I have some guarantees, while also staying in the market. And as far as the front-load sales charge goes, since I'll be rolling over 140k, my rate will drop from 4.5 to 2.0% for all money over 100k...which is comparable to mutual fund sales charges. And the expenses within the NW Mutual Select Variable Annuity will average 1.23%, which is about the same as the Morningstar Mutual Fund average of 1.22%, and much better than the Morningstar Variable Annuities average rate of 1.74%. The final advantage over a traditional IRA is the ability to move my money around among several different fund families without a fee.
>>>I'm confused with this above paragraph. It appears you're talking about rolling over an old 401k to your new employer 401k; and also stating you will be restricted by market performance. The answer would be "yes", regardless of which employer 401k. You could likely always place all of the monies into a "stable value" area of the 401k, which is available with most 401k's if you are concerned about making choices of other investment areas.
>>> You note: "At least with an annuity, I have some guarantees, while also staying in the market." What does this mean? I will presume the annuity has a life insurance package combined with investment options for type of guarnateed payout at some future point.
>>> Where is the $140k coming from?
>>> You note: " The final advantage over a traditional IRA is the ability to move my money around among several different fund families without a fee. " Who told you this, that there is an advantage with the annuity? We have Trad. and Roth accts with Fidelity and do not have additional fees unless we wander outside of Fidelilty offerings; and then may only find a fee here and there, depending upon which other fund family we may choose to invest with, among the several 1,000 other choices.
>>> You note: " my rate will drop from 4.5 to 2.0% for all money over 100k...which is comparable to mutual fund sales charges. " This is a one time 4.5% front load on $100K, yes? Or is there also an annual fee/expense of 2% on these monies?
>>> If this annuity is a life policy, with a guaranteed payout blended with investing choices; perhaps the fees are in line. I can not speak to this, as I am not an insurance person, nor do I choose to be one from the investigative side. I am also not able to validate your noted above regarding the M* numbers for these products. A plain jane variable annuity (to be used when all other tax sheltered options are exhausted or not available) with Fidelity, has 57 fund choices, an average expense of about .95%; but is not a guaranteed life payout insurance plan, but also does not have any penalty features associated with most annuities during the first 1-7/10 years.
You note: "I plan to get all of the expenses and fees in writing before I sign on the dotted line, but it seems like I can get some security with the little extra expense it would cost to go the annuity route. "
I am only playing the devil's advocate here; to better understand what you are attempting to do, and that you may also discover some additional questions to ask your insurance salesperson. If you are not involved in a "must do" time frame, you should investigate this plan to your fullest abilities.
Lastly, you suggest that you are wary of market losses going forward. You are not alone in that boat. Capital preservation should always be a prominent consideration for one's monies, regardless of age. If one goes backwards too far in losses, it requires that much more in future gains to offset the losses. This also applies to overcoming front-load or recurring fees. These fees are loss dollars that must be overcome with forward gains in one's portfolio. To this note; and regarding the insurance company variable annuity you mention, who will be making the choices of which funds to invest your monies? I note this; as with the few folks I know who use investment advisors, none were able to position their client monies coming into the market downturn in 2008. I also presume your monies in your 401k are placed to your own choices.
Welcome to MFO. You will gain much knowledge from the wonderful folks at this forum.
Respectfully,
Catch
Let's tackle the Roth portion of my question first. My new employer does not offer a Roth 401-k, so I must find a new home for that money. I already have a NWM Roth IRA variable annuity, with a guaranteed minimum benefit (that was determined when I purchased it 20 years ago...much better than if I were to open one up today). So since I already have this "bucket" ready to go, with many of the expenses already paid over the past 20 years, doesn't it make sense to roll my 401-k Roth money into it? And yes, I will have the ability to move my money around the numerous funds, which are from several different fund families, without charge.
My advice is to either 1) move the dollars to your new employer's 401k, or 2) roll the dollars into a self-directed IRA at Schwab, TD, Fidelity, etc. In either case, you will not be donating to your agent's retirement account, and you will have the freedom to select from just about ANY mutual fund, no matter how conservative you are. Just stay away from this annuity.
" since I already have this "bucket" ready to go, with many of the expenses already paid over the past 20 years, doesn't it make sense to roll my 401-k Roth money into it? "
>>> As BobC also noted; there are likely additional fees in place with this annuity and not knowing what your future benefit may be; it is not possible to validate the quality of placing monies into this account. Just because this bucket is ready to go and allows the money move easy; does not mean the same thing as this being the best vendor for the money and its purpose; nor that past expenses paid on the "old" money will not find expenses on the "new" monies.
I wish you well with your decision and investment returns going foward.
Regards,
Catch
In summary, you will be paying about 2.5% annually in fees, and your ability to access your dollars in severely restricted. Meanwhile, Northwestern and your friendly agent are raking in fees and commissions each year. This is NOT something in your favor. The insurance company always wins in this relationship. If Northwestern has $1 billion in these annuities, just imagine how much they are raking in each year in policy fees, commissions, and surrender fees.
You asked: "And how do I compare all of the fees within the annuity, including the hidden ones, versus a self directed IRA?"
Request from your agent the contract you would have to sign, including all related documents and to use a yellow highlighter to mark all fees to be incurred by you on an annual basis. The fees list would be totally inclusive as noted by BobC in his reply. Request the agent to list and total all fees and include in the list the surrender charges going out for 8 years or whatever the period may be. Request the agent to sign the document for your records and request the document to be notarized (likely available within the office) at the time of signing.
Or for yourself, have the agent do all of the highlighting so that you are aware of the full, total fees. Have someone else qualified to review this type of contract and offer their opinion of fees and the value of the investment to you. Place the document under your pillow and sleep upon this proposed decision for as long as needed.
Our retirement funds accts., which include Trad/Roth IRA's has an average expense of .73%..........period. The only other expense one might find with a self-directed IRA is an annual dollar fee of $30 or so; if the total acct value is less the $30K or whatever value is set by the vendor. Your total will exceed this.
Your main decision appears to revolve between wanting an annuity with some future insurance payout versus an IRA. Obviously, only you can make this decision; based upon all other variables and assets going into your retirement years.
Our list:
FAGIX Fid Capital & Income
SPHIX Fid High Income
FHIIX Fed High Income
DIHYX TransAmerica HY
---Total Bond funds
FTBFX Fid Total
PTTRX Pimco Total
---Investment Grade Bonds
APOIX Amer. Cent. TIPS Bond
DGCIX Delaware Corp. Bd
FBNDX Fid Invest Grade
FINPX Fidelity TIPS Bond
OPBYX Oppenheimer Core Bond
---Global/Diversified Bonds
FSICX Fid Strategic Income
FNMIX Fid New Markets
DPFFX Delaware Diversified
TEGBX Templeton Global (load waived)
LSBDX Loomis Sayles
---Speciality Funds (sectors or mixed allocation)
FRIFX Fidelity Real Estate Income (bond/equity mix)
FDLSX Fidelity Select Leisure
FSAGX Fidelity Select Precious Metals
RNCOX RiverNorth Core Opportunity (bond/equity)
I'm assuming from the name you gave of the annuity, and the fact that it's being used for an IRA, that this is the prospectus.
Generally, back end loads are rigged so that whether you buy front end or back end, you'll wind up with roughly the same value at the time the shares convert from back end load shares (with higher expenses and possible loads to get out) to front end load shares (with lower expenses and no load to get out). That's to answer your question about access to your money at any point. More or less, it tends to cost the same to get your money out, whether you pay up front (losing some value) and then get it out for free, or put it in for free but pay to get it out.
In your case, any money you add over $100K will be charged a 2% load, rather than a 4.5% load (or if you stick with the back end version, you'll "only" have to keep the money there four years, with back end fees declining from 4%, instead of eight years, with fees starting out at 6%). Should still come out about the same, but it's, well literally, half as painful as the first $100K. (See p. 22, pdf p. 61 of prospectus.)
The M&E fee that BobC quoted (1.25%) is for the back end load shares. (See p. 2, pdf p. 41) You're not paying that now on your current investment, as it has been there many years. That money is all converted to front end load shares, where the M&E expense is 0.50%. Combine that with the fact that they have enough house funds (submanaged by outside companies) that are decent and cost about 0.50%, to recognize that your total costs could be around 1%-1.1%. (See supplement dated Feb 28, 2012 on pdf pp. 15-16, and propsectus on pp. pdf 42-43 for these expense ratios.) It is quite possible, to the surprise of others, that the 1.23% average cost you were given in the promo literature includes both M&E and underlying fund costs.
All that said, there are a lot of reasons why this is likely not a good idea (including the fact that you'll only get down to that cost with new money in four years, but only for new money above the first $100K paid in; for earlier money, it takes 8 years to get the cost down).
As to the funds themselves, you'll find their performance figures and M* ratings here. Be advised that the M* ratings are for the effect of the fund performance and the M&E annuity charges combined. If you want to see the ratings/performance of the underlying NW funds, independent of the annuity wrapper (which is the way I try to judge the quality/performance of the underlying funds), here's the set of funds on M*. I might start by looking at the TRPRice submanaged funds, e.g. Equity Income (Brian Rogers). You're getting a clone of his PRFDX at essentially the same cost (0.67% vs. 0.68% for the retail version), plus the M&E expenses of 0.50%.
You commented on the ability to move money from one fund to another. You can do that easily with an IRA at a brokerage. While I am loathe to suggest WellsTrade, you could use them (open up a PMA checking account at Wells Fargo with $1 and link it to the brokerage IRA), and then you'll be able to switch among any no-load funds they carry at zero cost (well, unless you do this over 100 times a year).
The really tricky part, and what I don't have time to look at now, is what sort of lock in the annuity gives for annuitization rate. Since you said you bought the annuity around 20 years ago, and this particular annuity (Select NWM) has only been around since 2000, I'm guessing that you transferred from one annuity into this one. Terms may have been different then. Don't know if they get applied to new money, and how long new money has to be in the annuity to get that rate. Don't know what the rate is, whether any of this is worthwhile. And all of this is by way of saying that this would be the only reason I could possibly see for adding money to this particular IRA annuity.
Since we successfully built our retirement assets in a much earlier timeframe, many of the choices that you are faced with did not then exist. Consequently, I have very little direct knowledge of many of the options open to you, and cannot offer much in the way of direct advice.
But this I absolutely can tell you: I've followed MFO and it's predecessor financial site for many years. In answer to your questions you have been given excellent advice by some of the most professional and experienced long-term board members. I strongly suggest that you consider their advice, particularly with respect to the negative aspects of any variable annuity. We do have friends who, in ignorance, made the mistake of going the VA route, and the results have not been pretty.
A few last reads, if you choose.
>>>Read the second sentence of this document from NW 3 times...the remainder of the document may be or have some redundant portions to msf's linked document.
http://www.northwesternmutual.com/products-and-services/personal/annuities/select-variable-annuity.aspx
http://www.wisegeek.com/what-is-an-annuity-prospectus.htm
http://www.sec.gov/investor/pubs/varannty.htm
Lastly, congratulations that you are saving/investing.
Regards,
Catch
So you're saying that with some investment houses (WellsF), you can move your money around different families of funds without a charge? The pitch to me was that the only way to avoid an extra fee with a traditional IRA was to limit yourself to moving your money around WITHIN the same family of funds...that's the way my inherited IRA works with Merrill Lynch.
And I gather from your analysis thus far, it's possible that the Roth IRA Variable Annuity that I locked in 20 years ago may be a decent option to dump my Roth 401-k rollover into (depending on the annuitization rate), but to roll the rest of my non-Roth money into one of their variable annuities doesn't make sense?
Lots of the funds in you annuity are clones of no load retail funds so you'd be able to switch without charge if you owned the retail versions in an IRA. And you'd have a good chance of finding better no load funds for an IRA, because they're all available to you, rather than just a relatively small number in an annuity.
Merrill Lynch is probably holding load funds in your IRA, so you can't switch from one fund to one in a different family without a load. But you could transfer that IRA to Fidelity, to Schwab, to WellsTrade, to any broker, and trade no-load funds without loads. The particular broker might charge you a fee (depending upon the broker and the particular fund), but it will generally be a relatively small flat fee, not based on the amount of the transaction, like a load. And you can avoid that by sticking with NTF funds (no transaction fees), or at WellsTrade, any no load fund they sell (at least 100 transactions/year).
Regarding the lock in. Make sure you're clear on what you mean by "annuitization rate". Generally, this means the underlying rate of return you get once you annuitize. Your contract may have a rider (extra legal terms) that states a minimum guaranteed rate of return. That would mean that once you annuitize, the amount of money you get monthly will be based on your life expectancy and rate of return that Northwestern fixes when you begin to annuitize; Northwestern has promised you to fix that rate no lower than that stated annuitization rate. But if you're not planning to annuitize (98% of annuity owners don't), then that number is meaningless for you.
If you are expecting to annuitize, but the contract doesn't require you to have put the money in, say 5 years before annuitizing, then it seems you could invest the IRA money elsewhere and then transfer the IRA into the annuity when you wanted to start annuitizing. Until you annuitize, you're paying extra fees (the M&E expenses) to have the money in the annuity instead of in a different IRA.
It seems that every decade or so, the insurance industry gets pricing wrong, so that one can come out very handsomely with an annuity (in terms of value of benefits, whether that is annuitization rate, guaranteed minimum withdrawal, or some other aspect). You ought to make sure that this is one of those times, that you can get the same rate with new money, that you will be annuitizing, and that the company is sound enough that it will be around long enough to make good on the annuity payments.
I would recommend that you roll your 401k to Roth IRA and Traditional IRA at Fidelity, T. Rowe Price or Schwab. I've my rollovers at Fidelity. There is no charge for having your account there. You can choose from multiple No-transaction-fee fund families in addition to Fidelity's. You can choose from a large selection of conservative funds to go with your risk tolerance and situation.
One additional choice you may not be aware. You can leave your old 401k at the former employer especially if they had a good plan. They would have forced you to take it out if you had small monies but you certainly accumulated enough to be able to keep it there. However, I certainly think you should favor the flexibility. If you leave at former employer plan make sure there are no account maint. fees. You can roll over at a later time if you do not roll now.
I disagree that the rate you would get now is better than one 7 or 8 years from now. As interest rates go up, so will the guaranteed annuitization rate. With the current low interest rate environment, lifetime annuitization has little attraction.
Yes, NW Mutual has been around a long time. Long enough to know how to train their salesforce to make every new product sound like the greatest thing since rolled toilet paper. My advice is still DO NOT DO THIS.
20 years ago, you bought an annuity with a minimum guaranteed settlement rate. You also say something about it being based on a shorter lifetime. That part I don't understand, as I'll explain now.
I believe a min guaranteed settlement rate is the lowest rate that an insurer will give you when you elect to annuitize. That is, when you start to take annuity payments, the insurance company then locks in a rate of return. That rate is based upon choices you make in your election - whether it is for a single life or joint lives, whether there is term certain (payouts for a minimum number of years even if the person dies), etc. Since there are lifetimes involved, the rate set is obviously set based on expected lifetimes. You seem to be saying that the insurer promised to use the mortality tables from 1992, and not current tables. That's definitely a new one on me (though I know that insurers will reduce life expectancy - and increase payments - based on certain medical conditions).
Forgetting for the moment the life expectancy issues, what the min guaranteed settlement rate is doing is setting a floor on the rate. For example, suppose you have a min settlement rate of, say, 6%. That means that the rate of return the insurer gives you when you elect to annuitize won't be less than 6%. Now I think 6% is a high rate these days; it may or may not be high in 7-8 years if you annuitize later. So if you didn't need to annuitize now (you didn't need the cash flow), you might choose to annuitize later. You'd be sure of getting the same minimum, and you might get more if rates went up.
While you're waiting to annuitize, what about the 401K money? If you invest it in the VA, you'll get charged the M&E fees (0.50%) in addition to the underlying fund costs. You could just as easily invest in comparable funds in an IRA, save the M&E fees, and then, shortly before annuitizing (if you still like the rate you'd get, and you want to annuitize everything), you could transfer that IRA into the annuity. (Unless the policy prohibits annuitizing in under a certain number of years after adding money.) Let's not forget the load (2-4.5%) that you'd pay, now or later, to get that money into the annuity.
What if you're annuitizing now? (I'll go more into "why wait" below.) Then it would seem you'd have to add the 401K money to the annuity now, if you wanted the 401K money to get the settlement rate.
But why would you want to annuitize now? As BobC said, you'll be locking in a rate that may look good compared to current rates, but quite possibly won't look good several years down the road. You're likely not close to retirement, so my guess is that you don't need the cash flow. You could keep the investment in the annuity (but not add to it), having a whole variety of fund options that could grow your investment faster than the minimum settlement rate. You also have a GIF (guaranteed income fund) available within the VA - how does that compare to the annuitization rate? (Remember, the former would be for just a few years; the latter could lock you into a rate for life that would look low in a decade.)
Unlike others, I'm not willing to say that it's impossible for this to make sense, for you to come out better by adding the 401K money to the annuity and annuitizing now based on the min guaranteed settlement rate. It's just really, really, really unlikely.
So you're saying most annuity holders give up on the yearly payments and simply cash out to get a lump sum? In that case, those people would surely have done better with their money outside of an annuity.
But annuities are like life insurance in that a lot of policy owners surrender them in the first few years. Whatever the reasons, its a big money maker for insurance companies.
In 25+years of work in the advisory business, life expectancy changes have had a minimal effect on annuitization rates. But changes in interest rates have had a HUGE impact on those rates. FWIW, I think the agent is full of BS telling you that you will get a better deal now than in 10 years. Do you really believe interest rates will be at this record low level in ten years? Neither does he, but that's the line of BS he is feeding you. Do for a minute buy this sales pitch. Have you asked him how much he made on your initial premium, how much he makes each year since, and how much he will make on this new rollover? THAT'S the reason he is pushing so hard.
My cursory look suggests an increase of about 4%. 4 percent! That's about what you need to pay just to get more money into the annuity. (And if you're looking at that 2% load, remember that you're also adding 0.5% each year to the cost as well - in four years, you've paid more than any benefit from an old, shorter lifetime.)
People are indeed generally better outside of an annuity for IRAs. That's exactly what the SEC says in the link that Catch already provided: http://www.sec.gov/investor/pubs/varannty.htmBy the way, that's the SEC's bold print, not mine. So if you're not going to take the lifetime payments (and nearly no one does), and you hold it for more than a few years (so that it's worth more than you paid, rendering the basic death benefit pointless), it's hard to see any reason for an IRA inside a deferred VA for an IRA.