Fees take huge toll on 403(b) plans |
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Consider as an example the difference in the growth of two investments, one with fees of 2.25 percent and the other with fees of 1.4 percent. Contributions of $250 a month are made for 35 years, and the annualized rate of return is 8 percent in both cases. The account with the higher fees would amount to $336,320 after 35 years, while the one with lower fees would add up to $409,585 -- a difference of more than $73,000.
There are two types of annuities
to choose from: fixed and variable. Fixed
annuities guarantee individuals a rate of
return for a specific length of time. Currently,
that's about 6 percent annually, says O'Connor.
By comparison, stocks have historically gained
10.4 percent a year, Ibbotson Associates says.
The values of variable annuities,
which currently make up about 34 percent of 403(b) holdings, fluctuate because
they depend on the performance of underlying
investments. These typically include funds
invested in stocks, bonds, money market products
or some combination of these choices. The
total cost of annuities depends on the vendor,
but there are several fees to watch out for.
Types
of fees
Mortality and expense
risk fees: These are fees participants
pay each year to the insurer to offset risk
of investment loss plus fees involved to pay
financial professionals for selling the annuity.
So-called "M&E" charges are
set as a certain percentage of an account's
value -- generally 1.25 percent annually,
the Securities and Exchange Commission says.
That's $250 per year on a $20,000 account.
Administrative
fees: These can be flat fees of, say,
$25 a year, or a percentage of someone's account.
Typically that's 0.15 percent -- or $30 for
a $20,000 account.
Initiation
fees: These are one-time start-up fees
that may be waived. Prices vary but can run
about $60.
Sales loads: These are nothing more than sales commissions that you pay when you buy (front-end load) or sell (back-end load) a fund. For example, a 7 percent front-end load on a $10,000 investment would cost you $700 for what effectively amounts to a sales charge. That money could be invested instead in a no-load fund.
Death benefit charges: These are used to pay for the so-called death benefit, an extra annuity feature that guarantees your heirs will get a certain amount, such as the total account value at a certain date in time or, alternatively, the value of the payments you've made minus any withdrawals. Other fees for special features include guaranteed minimum benefit charges and long-term care insurance benefit fees.
Surrender
charges: These apply when you sell
an annuity within a certain period of time,
know as the surrender period, which can last
up to 15 years, says Otter. The charge is
a percentage of the amount you withdraw or
transfer and depends on how long you've had
your money in place. For example, if you have
a seven-year surrender period, and you withdraw
money early -- say, in the first year -- you
might pay a 7 percent surrender charge. The
surrender charge typically decreases by 1
percentage point each year until the surrender
period finally expires in the seventh year.
Some funds allow you to take a certain percentage
of your money out -- say, up to 10 percent
annually -- during the surrender period without
paying the fee. |
