Sunday, July 19, 2009
Double Tax Deferred!
"At stake: whether to continue paying AIG an annual 1.25% of assets to manage their 401(k) plan as part of an insurance contract, or switch mutual funds costing a third less. No surprise that the proposal to convert passed easily. ... Or, more aptly, the plans they were sold by people motivated by lavish commissions. Many hyped the product as a low-or no-cost proposition for employers while glossing over the fees charged to employees. A successful ruse it is. All told, insurers have lured 18,000 companies into parking $185 billion of 401(k) assets inside group annuities and similar contracts, according to an analysis by Larkspur Data Resources of plans with under $25 million in assets. 'Insurance companies cater to the smaller, less sophisticated part of the market,' says Robert Prall, managing partner of Rx Investment Solutions, which advises companies on how to build low-cost 401(k) plans, 'Every time we've gone into a company that has a group variable annuity contract, no one has really understood how it worked.' ... 'When it comes to fee abuse in retirement plans, you can put group annuities at the top of the list,' says Daniel Maul, an investment advisor in Seattle, Wash. who helps small firms set up 401(k) programs. ... The fact that annuities may be tax-deferred is irrelevant inside a retirement account, which is tax-deferred no matter how it is invested. ... The fact that group annuities are sold at all is largely a function of muddled 401(k) regulation. ... While insurance salesmen are free to present themselves as honest brokers, they are not required to regard themselves as fiduciaries with a legal obligation to put plan participants' interests first. Some insurers, including New York Life, refuse to offer group annuities", original italics, Scott Woolley at Forbes, 13 July 2009.
I kid you not. I have seen pension administrators brag about keeping 401(k) money in group annuities as they are "double tax deferred". Apparently sales hype these ignoramuses got. If Teresa Ghillarducci wants to crusade against 401(k) abuses, here is a good place to start. Ban future sales of group annuities to tax deferred plans.