Variable Annuities – (Q & A)

Aug 2018

Dear Rick:

I have two variable annuities at AXA. I am considering surrendering them. Can I have their values rolled over into my TD Ameritrade IRA? I’ve had these contracts for six years and they keep on losing value. One is $139,000; the other is $171,000 currently. They are variable annuities, and I originally invested $200,000 in each. They are AXA Accumulator 11.0 Series L annuities. The contract type states traditional IRA. What are your thoughts?


Dear Gary:
Yes, you can have these monies transferred into your TD Ameritrade IRA. The reason is that these are traditional IRAs and thus they’re eligible to be transferred. The key is to have the money directly transferred from AXA to TD Ameritrade. TD Ameritrade can certainly help you with the paperwork.

I think it is a smart move on your part to have the money transferred into your TD Ameritrade IRA. First, you will have more flexibility and investment options at TD Ameritrade than you would in the AXA annuity. With AXA, your investments are limited to the options within the annuity itself. With TD Ameritrade, you can virtually invest in any investment. Therefore, as your goals and objectives change, you can easily make the necessary changes in your portfolio. I believe in today’s world you need flexibility and that is certainly something that you do not get from variable annuities.

Another reason I believe the change makes sense is regarding the fees involved. Variable annuities are one of the more expensive financial products on the market. In the AXA annuity you have fees for such things as distribution charges, administrative fees and mortality and expense risk fees. In addition, in many of the underlying funds that you invest in, they also have high fees. The bottom line is high fees equal low returns. With TD Ameritrade you can invest in a wide variety of funds that are commission-free and have very low management fees.

In any one year, fees may not be important; however, when you add them up year after year they are significant. In a variable annuity like AXA, you end up paying about two percent a year in additional fees. Trust me; the two percent a year looks better in your pocket than it does anywhere else.

On the whole, I am not a big fan of investing in variable annuities within an IRA. As far as I’m concerned, there’s no benefit. Yes, variable annuities do grow on a tax deferred basis; however, since the money is in an IRA, and IRAs grow tax deferred, what benefit is there to invest in a variable annuity within an IRA? As far as I’m concerned, the only benefit is for the salespeople, who make substantial commissions.

For all those who have variable annuities, whether they’re in an IRA or not, you should always look for ways to reduce your cost. One way to do that is to look for variable annuities with much lower fees. Companies like Fidelity, Schwab and Vanguard all offer no-load annuities. These annuities have no surrender charges and very low on-going management fees. Therefore, if you’re in an annuity and the surrender fees have either gone away or are very low, you should consider making a change. If the money is in an IRA, all you need to do is have the money directly transferred into a lower cost IRA.

Variable annuities are aggressively sold, and it’s important that as investors, you and I resist the high pressure and don’t get fooled by the sales talk. That doesn’t mean that in certain situations variable annuities may make sense; however, it almost never makes sense to go into a high fee variable annuity. After all, why go into a variable annuity that has high surrender charges when you can go into one that has no surrender charges? The reason why people go into high-fee, high-surrender charge variable annuities is because those are the annuities that are aggressively sold. The reason why they are aggressively sold is because of the sale incentives and the commissions. You and I have to be smarter than that to fall for their sales pitch. You may ask why the government allows high-fee, high-surrender charge annuities to be sold. My answer to that is how does the government allow cigarettes to be sold when they are aware of the effects? The reality is we live in a free society, and companies can sell products that are not consumer friendly. It is up to us as consumers and investors to look out for our best interests. I can assure you that in the great, great majority of cases, it is not in the investor’s interest to invest in a high-cost variable annuity.

One way to avoid the sales pressure is to not get into an awkward position. The next time you receive a card for a free dinner to go to a presentation, simply decline the offer. The free dinner is not worth subjecting yourself to the sales pressure. Remember, there’s no such thing as a free dinner.

Good luck!



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