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EQUITABLE FINANCIAL Life Insurance Co. agreed last month to pay a $50 million fine for engaging in fraud. According to the Securities and Exchange Commission, since at least 2016, Equitable gave the false impression to 1.4 million investors that they were paying $0 in fees and expenses for their variable annuities. The majority of the investors were educators saving for retirement.
The SEC found that Equitable’s statements “listed only certain types of fees that investors infrequently incurred” and that “more often than not the statements had $0.00 listed for fees.” The commission concluded these were “misleading statements and omissions” of the true fees investors actually paid.
Without admitting or denying the charge, Equitable agreed to pay a $50 million civil penalty that will be distributed to its investors. It also promised to reword how it presents fee information to investors.
As a teacher, I’m outraged by Equitable’s actions. No school district should continue to allow Equitable—formerly known as AXA Equitable—to be an option for its employees’ hard-earned money. But come September, I’m sure the company will still be able to roam free in schools across the country.
While the actions of Equitable are inexcusable, it’s important to note that Equitable didn’t get in trouble for charging high fees. Rather, it got in trouble for misleading investors regarding the amount they were paying . This SEC ruling led some to speculate that Equitable would be forced to clearly show the fees educators are paying. I knew all too well that would never be the case.
Since the ruling, Equitable has changed the wording on its statements to say “Administrative/Transaction Charges” instead of “Fees and Expenses.” It didn’t change its fees. Instead, it simply changed the wording on the statements it provides investors.
Equitable, and the vast majority of 403(b) providers, will continue to charge unnecessarily high fees to educators. Why is this? Unlike in the 401(k) world, there’s no fiduciary responsibility for school districts to provide educators with the best possible retirement plans.
What’s an educator to do? The answer boils down to this: Understand the game you’re playing—because it’s a very expensive one. Most educators are paying a mortality and expense fee of around 1.2% annually because, unbeknownst to them, they’re in a variable annuity. I’ve yet to meet an educator who has even heard of this fee. There’s also a good chance they’re paying an expense ratio of around 1% on the same investment.
When added together, 2.2% in annual fees doesn’t sound that bad, but that’s not the right way to think about it. Consider this: If your investments return 10% a year before costs, you earn not 10%, but 7.8%. In this scenario, you didn’t give up 2.2% of your money, but 22% of your annual gain—a shortfall that will compound over time.
An educator can easily lose out on hundreds of thousands of dollars over the course of his or her career due to these high hidden fees. It doesn’t have to be this way. There are excellent low-cost 403(b) options offered by Vanguard Group, Fidelity Investments and T. Rowe Price, but most educators aren’t aware of them.
I hope the SEC’s order will shine an even brighter light on the subject of fees because, come September, the annuity-peddling sharks will be back in our school buildings. They’ll be circling the faculty lounge, looking for unwary educators to help pay for their new Teslas.
Yuck. The industry can disgust me at times. Wish there was more discussion around this, but as always this will be swept under the rug with some other distraction.
I spent my career in the investment business and was always amazed by how little clients knew about the fees they were paying and what even small differences in fees would make to their retirement savings over time. This is especially true for most insurance products. Life insurance and annuities can serve a useful purpose, but most people are woefully uninformed on how and when to use these products and what they cost. As for the 403b market, I simply cannot understand how Congress has allowed these plans to invest their assets in a manner that is not first and foremost in the best interests of the plan participants.
Most annuities have surrender fees also. `If you decide to sell your annuities, you may have to pay a hefty penalty.
It’s not just educators and 403b plans. Many local governments provide 457(b) plans with the variable annuity and all the fees associated with that unneeded overhead.
And that’s not the worst