Annuity IQ

Jefferson National is hitting the street hard with their Monument Advisor flat fee variable annuity product. They have issued a challenge to compare their flat fee variable annuity to other variable Annuity contracts, boldly stating that they are cheaper than 99% to 100% of the contracts currently available.

With their flat fee at $20 per month it would seem they are correct, but deeper analysis would prove otherwise. Here is where they get you:

“Jefferson National’s Monument advisor has a $20 flat insurance fee on more than 97% of our underlying funds. Certain funds also have a transaction fee ranging from $19.99 to $49.99 per transaction, depending on the number of transactions per year. See the prospectus for details. Like other variable annuities, the customer pays fees of the underlying funds selected (currently ranging from 0.23% - 2.72%; except for Rydex VT Inverse Gov’t Long Bond Fund which is currently 5.12%) plus the fees of any advisor hired. The range of underlying fund fees reflect the minimum and maximum charges after contractual waivers that have been committed to through at least May 1, 2008.”

The added expense of transaction fees, between $20 and $50 dollars (with a maximum cost of $74.99 per transaction), those costs can add up very quickly for the consumer. The other interesting thing is their average fund expense is high, between .23% and 2.72% with one fund at 5.12%.

One really has to consider where the company is making their money from. No company could turn a profit on only charging $20 a month and not be catching a piece of the fund action on the side. That would explain why their fund charges seem higher than normal, industry average for sub-account expenses is slightly over 1%.

Let’s take the challenge, shall we. A $50,000 investment made in a traditional variable annuity with total expenses equaling 2.8% a year, the consumer will pay $1,400 in total expenses. This provides you with a living benefit, death benefit, includes fund expenses and covers the cost of commission paid to the advisor.

Let’s look at Monument Advisors contract with $50,000 invested. You will pay; $240 a year in ‘subscription fees’, 1.30% (an average cost) in fund expenses we assume no transaction fees, although some would apply. You will pay $890, plus any applicable transaction fees, in the first year. A whopping savings of $510! This, of course, will not cover the cost of your additional expenses if you bought this product from an adviser.

If you buy this product from an adviser they will charge you an annual percentage of the assets. In my experience the smaller the account the higher the fee is. On $50,000 I will assume only 1.5%, but usually an adviser will charge 2% on an account that size. Now, we have to add that fee to the already mentioned costs above. $890 + $750 (the cost of the adviser’s fee) = $1,640. That is $240 above the broker sold annuity, not including any transaction fees.

For all that cost what are you getting? Nothing. The death benefit is contract value, which could be at zero upon death, and there are no income guarantees at all. Market timing is not really allowed in most of the portfolios, many have 30 day or more hold periods, so that is not a good reason to buy it.

If you want tax deferral only there is no question that this is the best product available, if you buy it direct. If you want advice or guarantees then look at a traditional variable annuity, it makes much more sense for the consumer.

It is all perception versus reality and this product is perceived to be the best or cheapest out there, but the savings are mostly perception. This is especially true if you are purchasing this contract through an adviser.

Also, credit ratings do matter and Jefferson National is still in the B’s with their credit rating, which makes me very uncomfortable. Even though the money is invested in separate accounts if the company stumbles and the state steps in they will still restrict your ability to access your money.

If you are seeking guarantees for yourself or your heirs then consider a traditional annuity product, it actually offers those protections. At the end of the day the costs will all even out unless you buy it direct without an adviser.

As for the ‘annuity Rescue Challenge’ there is no challenge and little need to rescue Annuity holders. Given the fact that they are advocating going direct with the carrier and not have you hire an adviser it makes me wonder what financial professional, in their right mind, would do business with a firm that wants to put them out of business?