I've Got The Best Plan - Or Am I Wrong?

Q. Hi Jeff..

I read some of your “free” informative articles and now have some questions.

Here’s some background:

I’m 62 (a smoker), with $500,000 in my 403b placed in a no front end or backend charge variable annuity. Presently, I have 95 investment choices to select from. When as and if I want I can “invest” in 50 sector classes (semiconductors, biotech, tech etc.), and 50 broad based mutual fund type sub-accounts, and if desired I can even go “short” on the major indexes and bonds. There is unlimited switching, daily if I want, at no cost. There are no withdrawal charges of any kind, so in theory I can move the funds or take 100% of the money at any time. If I leave the money for seven years, worst case, the insurance company guarantees at least my initial investment. Plus, if I want for an annual 25 basis point expense I can get a guaranteed minimum 5% growth; however, certain “black box” type conditions apply.

I have the entire portfolio invested in the Nasdaq type equity side of the market and I assume my downside risk, worst case, is 40%. Although during the recent year 2000 period the downside was considerable more than that. Fact is, I've got term life insurance quotes for protection on half my portfolio and the cost was quoted at about $4400 per year. Plus, the broker that sold me the product for no cost provides her opinion as to asset allocation switching.

Based on the above, as far as I can tell, I have unlimited upside, with no downside risk.

Alternatively, what can you offer and recommend? Exchange traded funds, No Load Mutual Funds, an advisor to advise on and manage the account? If so, can I trade the ETF and mutual funds at no cost and with no restrictions? If so, will the advisor that manages and recommends the switches do it for free? And very importantly; when, as and if the Nasdaq implodes will the ETF, mutual fund or advisor guarantee me at least my initial investment back?

Bottom line, based on the above and my market exposure it seems to me that any alternative proposed in effect will net-net be more expensive than what I got.

Am I wrong?

A. I am assuming that your email is in response to my articles on variable annuities. There is a considerable difference between no-load variable annuities such as those offered by someone like Vanguard and commission-based annuities. I still can't find too many situations in which I would recommend the no-load annuity...

You said, "If I leave the money for seven years, worst case, the insurance company guarantees at least my initial investment." I've never seen a variable annuity that will guarantee the return of 100% of your principal after 7 years without any cost or surrender charges.

Most variable annuities have a death benefit that guarantees the return of principal...is that what you are referring to? If so, then the investor still bears the investment risk. In other words, if the investor wants to use their money while they are alive then they only get the current investment value and hence there isn't a 'principal' guarantee.

The 5% option that you mentioned...I assume that with that option there will be time commitments and other requirements?

I don't see where you have unlimited downside (other than your entire investment) with unlimited upside, but that is based on the 7 year guarantee being a death benefit guarantee...

If it isn't a death benefit guarantee please let me know the company because I am interested in researching it further.

Whether your annuity is better than other alternatives depends on several issues. What M&E charges are you paying? What are the internal sub-account fees? How important is the death benefit guarantee?

My dislike of variable annuities is not only because of the commission-based surrender charges but also the other hidden fees.

Your posted comments on this and other questions are welcome.
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