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http://tonyisola.com/2016/04/an-army-of-darkness-dominates-the-annuity-market/Last week’s announcement of the Department of Labor’s fiduciary rule was a win for investors. Unfortunately, there is a gaping hole in this legislation that a zombie herd from the Walking Dead could stumble through.
This new “best interest” standard does not cover 403(b) and 457 retirement accounts found in non-profit organizations. It also does not cover taxable, and custodial accounts (which are often used for college savings). Advisors will also be able to continue to sell commissioned products in retirement accounts if a Best Interest Contract Exemption (BICE) is signed by the client and the advisor’s firm. The Department of Labor has made it clear that high commission products, like variable annuities, are not appropriate for retirement accounts based on their “reasonable compensation” edict. This is why the client and agent must sign this form. The client will now have recourse in a court of law and the broker will have to think twice before gouging the client.
Amazingly, predatory brokers selling conflicted, high-fee proprietary annuities will still be freely allowed to hock inappropriate products in the trillion dollar 403(b) market — with no disclosures!
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Comments
As an employee, you have to fight for no load, non annuity options with your employer (if they self administer the plan). I believe these investment options are referred to as 403 (b)(7) options and both Vanguard and Fidelity offer mutual funds that can be designated as 403 (b)(7).
If a third party administrator (TPA) is involved in your plan be aware that you may have more choices, but often with a multitude of additional costs.
I asked about fiduciary responsibility when my contributions (wage deductions) were taking longer than 15 days to reach my investment account. No one cared because there was no fiduciary obligation.
Does anyone know if the 1035 exchange option still available? This allows the transfer from a high fee annuity into a low cost annuity choice (such as a Vanguard annuity).
Here's a link to Vanguard on this exchange:
https://investor.vanguard.com/annuity/1035-exchange
Mine actually promised a 4.17% front load (1970s), but when I did the math after the first payroll deduction, it turned out they were gouging me 7%. Fortunately, I caught it and called it to the agent's attention. He apologized for the "error" and the problem did not reoccur.
At the time it was the best of some very limited workplace options. Several years later employees prevailed on our employer to bring in T.Rowe Price on a no-load basis.
Added - There was no internet in 1971. Hopefully one subscribed to the WSJ and could go back to the week(s) old copy to determine what the fund's NAV had been the day the money went into the TSA. There was a couple weeks' time delay, so determining the actual load paid was quite a chore for a novice investor. As I said earlier: Darkness was their friend.
Michael Kitches doesn't wonder. He writes about how insurance companies will finally be able to compete on the quality of their product as opposed to the ability of their sales staff. Really long (but very good) column.
https://www.kitces.com/blog/why-dol-fiduciary-wont-kill-annuities-it-will-make-them-stronger/
Regarding the WSJ in 1970s, microfilm was your friend. You could also find NAVs in the NYTimes at back then.
Regarding delays in payroll deduction contributions - even for 401(k)s long delays were once allowed:
"Originally, the DOL regulations imposed a 90-day outer limit, but this was shortened in 1997 because some employers were found to be abusing the system."
http://www.401khelpcenter.com/401k_education/deposit_contributions_longday.html
1035 exchanges are still around. Note that this section of code applies only to your garden variety (non-sheltered) annuities, as opposed to 403(b)s, IRAs, etc. A tax-free exchange inside a tax-sheltered wrapper wouldn't make much sense.
Since annuities are an insurance product regulated at the state level (McCarran Ferguson Act and such), a state may add steps to take (aka hoops to jump through). That can slow things down, but the exchanges are still available. I've done them in multiple states (which is why I'm sensitive to differences in state rules).
I'm relieved no one jumped on me for referencing front-loaded mutual funds in a discussion about annuities. My understanding at the time was that the original 403B legislation was aimed at funding annuities for public employees. But through either interpretation, legislation or regulation the scope was expanded to allow these to be used for fund-based investing. The term TSA (tax sheltered annuity) was widely used in the 70s to characterize these mutual fund investments.