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Do Annuities Make Sense in a 403(b) or 457(b)?

When the 403(b) was first created in 1958 annuities were the only investment option allowed. In
1974 Congress added paragraph 7 to the plan creating the 403(b)(7) custodial account and opening
the way for investment in mutual funds. More than 30 years after this act close to 80 percent of all
403(b) money sits in annuity investments. While participation in annuities is not as great in 457(b)
plans it still exists. Is it wise to invest 403(b) or 457(b) money in annuity products?


Annuity Background
An annuity is contract with an insurance company. Two kinds of annuities exist: fixed and
variable. Fixed annuities operate much like a certificate of deposit and come in three basic
flavors: traditional fixed, two-tier, and equity-indexed. Variable annuities are simply mutual
funds with an insurance wrapper. There are two phases to an annuity: the accumulation
stage and the distribution stage.

What the Industry Says
Michael DeGeorge, vice president general council of the National Association for Variable
Annuities (NAVA), said in a March 2004 appearance on CNNfn's Your Money program that
annuities are right only for people "who have maxed out first in 401(k) and other qualified
plans." The 403(b) and 457(b) are other qualified plans.

This sentiment is echoed by Gary Schatsky, president of The Objectiveadvice Group, and a
a fee-only NAPFA Registered Financial Advisor. He says the truth is that annuities usually
only makes sense outside of retirement plans for a very select group of wealthy investors
who are in a high tax bracket and are in possession of a significant amount of cash they
need to tie up.

Certified financial planner Scott Dauenhauer, president of Meridian Wealth Management
says: "Variable annuities make very, very little sense. I think some fixed annuities have a
place inside a retirement account. The challenge is finding the right product. That would be
one that has a fair rate of interest and a reasonable surrender period or no surrender period
at all."

The Knock on Variable Annuities
Exceptionally high fees up to eight times more expensive than mutual funds
Dubious insurance component in order take advantage of this "benefit" two things
must happen: you must die and the market must have dropped. Even if these two
events occur you can protect beneficiaries much more affordably by purchasing low-cost
term insurance. If you die and the market has not declined you are now dead and have
paid a hefty fee for a "benefit" that is worthless to your survivors. With term insurance if
you die your heirs benefit whether the market goes up or down.
Surrender charges often lasting as long as 10 years


Reasons Annuities Are Prevalent in 403(b) Plans
Pushed by commission-based sales force
Lack of employee understanding about workings of the 403(b)
Lack of employer oversight and understanding about workings of the 403(b)


Low-Fee 403(b) and 457(b) Products
Fixed annuities with a fair rate of return and a reasonable surrender charge, and no-load
mutual funds from the likes of Fidelity, T. Rowe Price and Vanguard can be attractive
low-cost options. Loaded mutual funds can be just as expensive as high-fee variable
annuity products. The notable exception to high-cost annuities are annuity products from
TIAA-CREF. With fees that are among the lowest in the financial service industry and the
absence of surrender charges, a fixed or variable annuity from TIAA-CREF can be just as
affordable as a low-cost, no-load mutual fund.

See: Fees and How They Affect Savings
See: Retirement Plan Fees
See: 10 Questions to Ask Before Buying a 403(b) Fixed Annuity

If You Need Advice
Explore hiring a fee-only Certified Financial Planner Practitioner. You will pay a flat hourly
Read a rebuttal to this
article.

Read More
What's Wrong With
Variable Annuities?
Smart Money

Beware the Equity
Index Annuity
San Diego Union

403(b)wise : Wise Moves : Do Annuities Make Sense? http://www.403bwise.com/wisemoves/annuities.html
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fee and have piece of mind knowing your advisor is not pushing product due to financial
incentives.

Resource: Protect Your Money: Check Out Brokers and Advisers from the SEC.

Annuities in Retirement
Immediate annuities or "annuitizing" portions of retirement balances can make a lot of
sense in retirement. This involves trading a sum of money for a steady stream of income.

For more information see: Webannuities.com

Annuity Warning
Equity-indexed annuities are being heavily pushed by the insurance industry as a way to
enjoy the growth of the stock market without the risk. Lack of disclosure and complicated
return formulas, coupled with extremely high commissions and long surrender periods have
combined to make this "investment" a riddle wrapped in an enigma. Two-tier and bonus
annuities are equally suspect. Some agents push the tax-deferred benefits of annuity
products. The 403(b) and 457(b) are already tax-deferred vehicles. No further tax benefit is
achieved by investing 403(b) and 457(b) money in an annuity. Finally, be wary of those
tauting the loan provisions of annuity products. See: The 403(b) Loan: The New Debtors
Prison?

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