Current Pension Topics
High-Fee Annuities Cost You

By JOEL L. FRANK

On Sept. 24, under the new Section 403(b) Regulations, Revenue Ruling 90-24 will expire. This ruling permits you to transfer 403(b) investment accounts that you feel are inferior or too expensive to superior no-load and low-cost mutual funds. You can effectuate these transfers not only from a 403(b) account you have with your current employer, but also 403(b) accounts you have as a result of former employment.

Mr. Frank is a fee-only Retirement Financial Planner and a retired NYC High School Teacher of Accounting. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net .

What should you do? Do nothing if these accounts are with a no-load mutual fund outfit. If they are not, you need to transfer these amounts to such an outfit. If you are not sure about your 403(b) situation, please call me asap.

Q.: Through my job with the City University of New York, I currently have a 403(b) with Metropolitan. What happens to this account if I do not effectuate a Revenue Ruling 90-24 Transfer to a no-load, low-cost investment by Sept. 24, 2007?

A.: Nothing. The Metropolitan variable annuity will continue to charge you the high costs it always has. You will be at the mercy of CUNY. If they do not add no-load and low-cost funds to your 403(b) plan, you are stuck with the high-cost Metropolitan variable annuity until they do, or until such time as you sever employment with CUNY or turn 59-1/2, when you will be entitled to roll over your annuity contract balance to another eligible retirement plan which offers a no-load and low-cost investment menu.

Of note: Costs do matter, much more than you think. Example: Three friends, Tom, Dick and Harry, pay into a 403(b) account at the rate of $250 monthly for 35 years. They each earn an 8-percent average annual return over the 35 years.

Tom invests in an Average Variable Annuity and pays 2.27 percent in fees ($2,227 per year per $100,000 managed). Dick invests in an Average Managed Mutual Fund and pays 1.08 percent in fees ($1,080 per year per $100,000 managed) and Harry invests in an Average Index Fund and pays 0.29 percent in fees ($290 per year per $100,000 managed).

After 35 years, Tom has an investment worth $335,000. Dick's investment is worth $442,000, and Harry's nest egg is worth $534,000. When the commission rep comes knocking, hand him a copy of this issue of Current Pension Topics. Tell him/her that you summarily reject such investments and will be transferring your 403(b) account to a no-load and low-cost firm before Sept. 24, 2007, the expiration date of Revenue Ruling 90-24. Also, write a letter to Chancellor Goldstein. Tell him that the new 403(b) Regulations require the university to offer no-load and low-cost investment funds. Remind him that he, personally, has TIAA-CREF as a no-load and low-cost choice and you demand parity.

Over the last several weeks, I have been helping the skilled-trades people at CUNY effectuate Revenue Ruling 90-24 transfers out of their high-priced variable annuity with Metropolitan to no-load and low-cost investment funds like The Vanguard Group. This variable annuity (like most) comes with a sales commission that must be paid by the investor if he/she pulls out of the investment within a certain amount of years after buying the annuity. This Contingent Deferred Sales Charge could come to thousands of dollars depending on how much was invested and if contributions were ever stopped. The CUNY official(s) who signed off on this offering almost 20 years ago should be tarred and feathered. This person knew very well that the pedagogues had the no-load and low-cost TIAA-CREF since the 1960s, so how dare he/she approve a high-cost variable annuity for the skilled trades on a take-it-or-leave-it basis.

The following is a quote from benefits attorney Fred Reish:

"As a word of advice, don't ever enter into an agreement for the establishment or conversion of a plan unless, and until, you have either a written representation that there are no surrender or similar charges (sometimes called CDSC or contingent deferred sales charges) or a full written description of all such surrender charges and other termination fees."