CHAPTER 6: Observations & Opinions

This has been my attempt to clarify some of the confusion, but I admittedly cannot do it without some injection of bias. It’s important to understand that the personal experiences of your adviser often filter the lens with which they speak to you about financial products.

I’m not specifically advocating one particular type of investment or product here. I have a license that requires I act in my client’s best interest and I take that responsibility very seriously. But I’m also human, and that means I come with opinions and experiences that are unique to me. So, here are some of my opinions.

I am neither for nor against risky investments. However; I happen to be a pretty risk averse person. So, if you tell me you are looking to minimize risk or you do not have time to recover from significant loss, I am more inclined to recommend conservative products to you. If you enjoy taking risk and have a longer time horizon, I will give you advice that is based on past performance and reasonable expectations in regard to gain and risk.

Mutual Fund accounts can be risky or less risky depending on the allocations inside your account. They can also be expensive or less expensive depending on which funds you choose and who you choose to advise or manage that account.

In my opinion, Fixed Annuities are only as good as your guaranteed rate. 3% is a pretty common fixed interest for annuities purchased before 2009. 3% seems okay relative to current interest rates, but it’s not really anything to write home about. I have seen fixed rates of 4% and 4.5%. If you have an annuity with a 4% or 4.5% fixed interest rate, that’s a pretty darn good rate. Explore all your options before moving, changing, or buying a new one.

I am obviously not a big fan of Variable Annuities, but I asked you to put your big girl/boy pants on, so I have to put mine on too. I’ll say that Variable Annuities usually have lower fees inside 403(b)s than outside 403(b)s, like in IRAs or Non-Qualified accounts. That’s not an endorsement. It's me trying to give a product, that I do not like, the benefit of the doubt.

Also, if you’ve had a Variable Annuity for a long time, you might have a decent fixed rate accessible to you. Again, I’m talking about 4% or 4.5%. Older contracts sometimes have these rates. However, some companies will limit the amount of money you are allowed to allocate to a fixed account to reduce market timing. That means you might have a fixed rate available to you, but you cannot allocate all your money to the fixed rate at one time, even if that’s what you want to do.

Like everything else, my warning is to explore all your options before moving, changing, or buying a new one.

Why do I dislike Variable Annuities?

If your intention, as the client, is growth, I believe if you were to search elsewhere there are products that could offer the same or more growth and eliminate some of the fees.

If your intention is safety, there might be options that offer more protection and higher upside potential, depending on the choices within your employer’s plan.

If your intention is income, other types of annuities usually have stronger income guarantees.

If your intention is death benefit, you should consider life insurance.

Maybe the biggest complaint of all is this:

Some companies (not all) make it extremely difficult for clients to move, transfer, or roll over their accounts. To the point where you almost have to fight with them, which leaves many clients asking, “Whose money do you think this is? Mine or yours?” I don’t think clients should have to fight with anyone in order to move their money once they have decided to do so.

Bottom line, I don’t see that Variable Annuities do growth, protection, income, or death benefit particularly well. And yet, I would say roughly 50% or more of the people I speak with own them.

Fixed Indexed Annuities are often a better choice, in my opinion. They can be a good fit IF, and these are big IFs, you are in a good product, and IF it meets your needs and objectives. But, I repeat, Fixed Indexed Annuities are only as good as the company you

select, the features the annuity offers, and the interest rates allowed by the product you are purchasing. I’ve seen some Fixed Indexed Annuities that have been sold inside 403(b)s that have very low rates/caps etc. To make things worse, I think they have often been improperly sold with Income Riders that have a cost to them and reduce the net gain of a product that already has low growth potential.

To their credit, most companies that sell Fixed Indexed Annuities are constantly improving their products to be more competitive in the marketspace. As with Variable Annuities, you should never buy something just because it’s the only thing the person sitting across the table from you sells. Like all the other types of annuities, I’m going to suggest you explore all your options before moving, changing, or buying a new Fixed Indexed Annuity.

What I’d like to see on Your Menu

Remember a few pages ago when we talked about your school or district’s Menu?

Here, in my opinion, is what every district should have on its menu. If you don’t know how to find your menu, this info can be provided by your school district, University, or your Third-Party Administrator (TPA). The TPA is the keeper of the keys and manages the transactions from one company to another, withdrawals, loans, and rollovers out of the plan.

If I could wave a magic wand, every school and district in the country would add these two options to their menu if they do not already have them:

• At least one or more companies that offer Fixed Indexed Annuities with and without income riders. If you have access to a good product line, Fixed Indexed Annuities can be a good choice for people who are risk averse but still want a chance at market-like returns—and a lot of school employees are risk averse. • At least one firm where you can either pick your own investments (DIY) or work with an advisor of your choice. I mentioned Fidelity Investments earlier because they are already on many school districts’ Menus, but they are not the only choice.

How can you add companies to your menu? Well, this one is tricky. You see, school districts are in many ways just like corporations. There are 67 counties in Florida and 67 school districts. They are massive! Some are so big they have budgets larger than small countries. Pennsylvania too has 67 counties, but each of those counties contains multiple school districts, and that state has around 500 districts in total. It’s easier to move the needle at the level of a small business than at the level of a small country. There are some places in the country where you could and simply ask for a company to be added to the plan and it would be done, and others where you would need to wait several years for the district to go through a formal evaluation or reevaluation process.

In short, I think the decision as to which companies are allowed to be on your 403(b) Menu should not be made by committees behind closed doors. I think it should be a public process and I believe safe and inexpensive choices need to be represented in EVERY DISTRICT and UNIVERSITY. You have a right to have

companies on your 403(b) platform that reflect the needs of the collective whole.