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  • 401k wrapped into an annuity?

    Hey there. Wondering if anyone else out there is in the same boat, and if this is common with small practices. Recently found out that the American Funds 401k plan I have been dutifully contributing to for several years of employment is actually 'wrapped' into an annuity. So even though I have all my money invested in the lowest-cost funds available to me (Vanguard 500 index and small/mid cap index), the expense ratios for these accounts are 1.04% and 1.05%. This is because there is an additional 0.99% fee or 'program charge' that comes from the annuity company (Great-West Life and Annuity Insurance Company). Seems like a huge waste of money to have this additional fee, but maybe this is standard for 401k plans at very small practices (we are a single specialty clinic with 3 physicians and 1 PA, 9 office staff). Anyone have a similar story or know anything about this?

  • #2
    So 94% of your fees are going to the annuity instead of the actual investment, and you’re paying 20x more than you need to. Whoever signed up for that probably got taken for an absolute ride.

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    • #3
      You guys have been scammed by whoever set it up. There's no reason to be paying fees that high. 1% for a 401k is way too high. You might discuss with the others in your group and offer to change it.

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      • #4
        I agree. While it used to be common for Section 403; "Taxation of employee annuities" plans to be wrapped in an annuity. It was relatively rare for a 401k plan. Now it borders on an abject failure of the employer's fiduciary responsibility.

        My guess, this is an affinity situation. One or more senior partners most likely listened to a pitch from the absolute worst place to get a 401k plan. Their insurance agent.

        I would petition for a low cost 401k plan that isn't so last century.

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        • #5
          Originally posted by Derm81 View Post
          Hey there. Wondering if anyone else out there is in the same boat, and if this is common with small practices. Recently found out that the American Funds 401k plan I have been dutifully contributing to for several years of employment is actually 'wrapped' into an annuity. So even though I have all my money invested in the lowest-cost funds available to me (Vanguard 500 index and small/mid cap index), the expense ratios for these accounts are 1.04% and 1.05%. This is because there is an additional 0.99% fee or 'program charge' that comes from the annuity company (Great-West Life and Annuity Insurance Company). Seems like a huge waste of money to have this additional fee, but maybe this is standard for 401k plans at very small practices (we are a single specialty clinic with 3 physicians and 1 PA, 9 office staff). Anyone have a similar story or know anything about this?
          While annuities are not as common these days, it does happen from time to time, whether there is an annuity or just a record-keeping charge that is very high. The great thing is that it is possible to set up the same low cost plan for a small practice as for a large practice, but of course the service providers you currently have are not fiduciaries, so they wouldn't be advising the plan sponsor on any of this. Here's some background articles on this topic:

          http://whitecoatinvestor.com/how-to-...ment-plan-cost
          https://www.whitecoatinvestor.com/ev...all-practices/

          If you are one of the partners, it should not be difficult to do a cost comparison using a cost comparison calculator such as this one to convince other partners that they are better off switching to a lower cost arrangement with no AUM fees:
          https://retirementplanhub.com/retire...st-calculator/

          I'm sure there are probably other issues with this plan that can be addressed in the process. It is also possible that the broker who set it up is working with one of the owners, so this is usually how these types of plans are set up. These days it is not necessary to pay huge AUM fees to brokers and insurance companies to set up a small practice 401k plan - removing all AUM fees can potentially save lots of money for the owners and also enable them to hire the best service providers for a fraction of the cost that would be paid via AUM fees.
          Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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