Eleven ‘must have’ features to sell an annuity to an avid annuity LOATHER 

by Steve

Hey there Mr. or Ms. tax-shelter annuity (TSA) insurance agent. I have a challenge. The 403(b)-advocacy community know how your industry can sell annuity contracts worth hundreds of millions in commissions to our professional colleagues—most are naïve public PreK-12 teachers.

Would you like a challenge that would increase not only the number of your clients but also offer a plan that looks out for the teachers’ best interest? People would agree that a sale of anything which benefits both the seller and the buyer would increase clients and sales.

I offer the following 11 clues to assist you in turning this hardcore skeptic (me) against TSAs into an annuity buyer:

1. Proper for retirees 60-years-old and up
2. 100% liquidity 24/7
3. No up-front or back-end sales charges (surrender charges)
4. No commissions
5. No advisory or deferred advisory fees
6. NO hideous Mortality and Expense fees
7. Expense Ratio under .20%.
8. No “Riders”
9. Principal protection, never a loss in principal.
10. The annuity must have excellent financial resources from the insurer.
11. Pays 3.0% or more interest

As you might know Mr./Ms. Salesperson, I have had negative experiences with two annuities. I was so angry that I wrote two books helping my teacher colleagues avoid the same fate. However, after years of reflection, sharing with colleagues and learning more about the financial landscape, I turned my anger into an advantage. Along the way, I learned a thing or two about annuities. There is one annuity which meets all my 11 “must haves.”

 

1. I am 70 years old and retired. Annuity products are appropriate for retirees who stopped working and stopped contributing and building their retirement nest egg. These retirees might have their money in one of the five IRAs: 403(b), 401(k), 457(b) employer-sponsored tax-deferred retirement plan, a regular IRA or Roth IRA and after-tax savings. The point is that annuities are a good choice as one of your fixed accounts in most retiree portfolios.
2. My entire 7-figure nest egg is 100% liquid. I invest my money in stocks and bonds of all types. Complicated insurance products are different and have punishing surrender periods of 7-15 years before you can get your money. Most of the time my cash request is completed within 48 hours. I can withdraw any amount without back-end loads or surrender fees (discussed next). Important!
3. Annuity products are oozing with up-front and back-end sales charges also known as surrender charges. These charges incentivize the salesperson to sell you a product that is good for them, but not necessarily good for the client. Also, in many cases, it is not suitable for the client. For example, I paid $6,000 in surrender costs to get $33,000 out of two horrific annuities so I can invest my money in genuine growth stocks and bonds. Never choose a product with a surrender fee*. They’re hideous!
4. I had not paid commissions since I was sold two annuities 32 years ago when I was a young teacher. Fortunately, commissions of financial products are fading away because of the continuous bad press. Commissions are terrible because right off the top you are reducing your principle. For example, American Funds charge 5.75% so investing $10,000 means you put $9,425 to work. That’s TERRIBLE! Many investors don’t know the enormous drag on your nest egg by lucrative commissions.
5. An advisory fee pays for the manager of a mutual fund company or insurance company for managing your money. It is part of the disclosed expense of the fund in the prospectus. The advisory fee is part of the expense ratio. I don’t employ an adviser.
6. Mortality and expense ratios (ER) protect your original principal when you die. For example, if you start contributing to an annuity in your 403(b) plan, and your accounts adds up to $10,000. Next, your account drops in value to $995.00 and you die. Your beneficiaries will get the original $10,000. The benefit is $5.00. Yep, that’s right, but the company salesperson, with the enthusiasm of a 5-year-old with a holiday present, says that you get $10,000 giving the impression that $10,000 is the benefit. NO! the mortality benefit replaces what you lost and, in this case, it’s $5.00. However, here is the biggest lie about this “benefit.” First, risk adverse people are the most likely to purchase annuities as they are afraid of the stock market. Second, annuities are structured and designed to protect the investor from losing principal in a down stock market. Finally, what is the point? Millions of people pay 1.25% every year for this useless protection. Go figure. The structure of the annuity already protects you. M&E insurance is one of the most ludicrous coverages ever created by the industry.
7. I pay .07% ER for my entire portfolio of stock index funds and bonds. All investments charge some fee. Every fund, ETF, and index fund charge an Expense Ratio. My portfolio’s ER is low. With a little effort and time, most investors can control their investments costs to under .20% (1/5 of 1.0%).
8. Riders add coverage or other pricey features to your plan. That coverage is paid for by a reduction of your interest rate. The interest rate is already low, and it’s another hideous and expensive feature that’s unnecessary. I want as much of the interest rate that the company will pay me.
9. Just about all annuities protect your investment gains against bear market losses. However, so does Money Market and stable value accounts (these products are discussed elsewhere in many online discussion forums and financial websites). The primary criticism of annuities is that people will never get the stock or bond market returns because to do so means taking the stock market risk. The risks of losing money fuels too much anxiety for risk adverse people. Risk adverse thinking implies that people are willing to accept mediocre returns while allowing the insurance company to use the clients’ money to make huge profits. That’s a considerable price, the loss of gains, that your money will not keep pace with standard of living. I want to make profits! Click here, and I share how and why my portfolio gained 9.0% in 2017. People in annuities will not get anything near 9.0% in returns.
10. The company must have billions of assets and possess a long history and outstanding ethics for investors.
11. I get 3.0% from a Teachers Insurance Annuity Association (TIAA’s) Traditional Annuity the prestigious pension firm where I invested $250,000.

My heart will melt faster and hotter than the lava out of that Hawaiian volcano if you offer TIAA’s annuity to my friends and me. I have owned TIAA’s Traditional Annuity since 2002. This exceptional firm meets all the ‘must have’ features I demand. TIAA is celebrating 100 years of service. In all those decades they never charged commissions, 100% liquid, no front and back-end surrender costs, no advisory fees. To my knowledge, no other insurance company offers a product similar to TIAA’s Tradition Annuity. Currently, TIAA pays 3.0% interest with principal protection (Interest rate could change at any time). It has over a trillion in assets and has no costly riders. This account does what I want it to do in the fixed allocation of my portfolio and represents about 16% of my total assets.

*Surrender costs are the commission that was paid to the agent by the insurance company when the product was sold to me. I paid the surrender cost to get my money. Thus, the company will no longer have my money to invest. Since the company already paid a commission to one of their agents, they needed surrender costs to break even. For full disclosure, the M&E cost is not hideous at .005%. If I die today, there would be no insurance benefit because I have not lost any of my original principal.

Books!

Besides my two free books, Late Bloomer Millionaires and Fighting Powerful Interests, my friends, and fellow 403(b) reform warriors, Dan Otter and Scott Dauenhauer wrote three great books. Dan wrote two books for educators who wish to discover how to watch their 403(b) and 457(b). Scott’s book is for financial advisers who wish to enter the PreK-12 marketplace and offer fee-only genuine fiduciary financial advice. Check them out here: https://403bwise.com/bookstore 

 

Bio

Stephen A. Schullo, Ph.D. (UCLA ’96) taught in the Los Angeles Unified School District (LAUSD) for 24 years and UCLA Extension teaching educational technology to student teachers. Steve wrote investment articles for the United Teacher-Los Angeles (UTLA) newspaper for 13 years. Thrice featured retirement plan advocate in the Los Angeles Times and U.S. News and World Report. He co-founded an investor self-help group 403bAware for teacher colleagues and wrote 7,500 posts in three investment forums since 1997. Frequently quoted by the media, testified at California State legislative hearings and honored with the “Unsung Hero” award by UTLA for his retirement planning advocacy.

For the last twelve years, he serves on LAUSD’s Investment Advisory Committee as a “Member-at-Large” and former co-chair. The committee contains collective bargaining reps from the unions and monitors the district’s tax-deferred retirement plans, 457b/403b, of 55,000 former and current LAUSD employees, worth $2.5 billion in total assets.

He wrote two books, Late Bloomer Millionaires and Fighting Powerful Interests, both books are a free download as a PDF and based on his experience with investing and the corrupted 403(b) world with public PreK-12 school districts and the unions.