variable annuity inside 401k

My wife's company is changing from a simple IRA plan to 401k. In this process, the plan provider (Axa) is offering what appear to be mutual funds inside a variable annuity. I believe
the consensus on this board is that VA inside 401k is a bad idea. I want to gather some background information to provide to her company's HR department to make them rethink their decision. Can anyone here please provide some links summarizing the arguments? The other question is -- are there any other good alternatives for a small company (about 15-20 employees)? Do the big 401k providers like Fidelity take such small clients?
Kaspa
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kaspakhine wrote:

I've been reading and analyzing the numbers from a different angle, trying to answer the question "at what expense level (for the 401(k)) do you advise that a post-tax account is the better choice?" This is for next month's article on my personal blog. It's still being edited, but you can take a look at http://www.joetaxpayer.com/401rip.html The answer turns out to be about 0.80%. i.e. when your 401(k) has expenses that are 0.80% higher than the expenses you can incur in a post tax account, the recommended direction is to invest post-tax.* The AXA VA I was able to find was not the 401(k) version (you need to call them and ask for the exact numbers), but contained charges of 1.25% in addition to the funds expenses ranging from 1.15% to 1.45%. If their 401(k) version isn't much better, I'd advise to contribute to get the matching money, if any, and then invest outside of that account.
This is a recent Forbes article on the topic, no longer free at Forbes, but still available through Yahoo, http://biz.yahoo.com/weekend/401rip_1.html
*This statement comes with the usual disclaimers, such as the time horizon (20 years) that I chose for the calculations. Likely, each person has a more narrow set of variables, knows the exact fees they are paying, their own age, retirement goals, etc.
Let us know what you find out from AXA. JOE
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My company is using Power401K.com party due to favoratism. One of our biggest clients owns the payroll company they are partnered with. But still the fees aren't that bad. For a small company, roughly $250 setup fee and $20 a month or so (paid by the company). There are a few other players like this who offer very low fees for small companies: theonline401k.com, online401k.net, etc.
Looking at an AXA prospectus, I see they list the following charges: 0.80% Mortality Expense 0.30% Administrative Expense 0.20% Distribution Expense Low balance charge: $30 or 2% (whichever is less)
These are fees in addition to the fees charged by the mutual funds held in the VA. Looking at the list of funds, most of them are actively managed + load funds. So expect 1%-1.5% as typical for the fund charges. Add in the 1.3% for the VA charges and you're easily in the 2.5%-3% range.
Why companies choose such plans for 401Ks when a 401K already offers tax-deferred benefits? My personal guess why the company is choosing AXA -- AXA offer no/low fees TO THE COMPANY compared to a 401K offered by the big players (Fidelity, T Rowe Price, etc). And of course, to recoup those fees, AXA will then take it out of the contributions made by the employees. If your company goes with this plan, just do the minimum to get company matching. Otherwise, it's way better to put money in a taxable Vanguard funds.
kaspakhine wrote:

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A few observations ... With your wife's small size company you won't find a financial group wanting to service the 401k without charging a proportionately high fee to cover their expenses. Therefore they need to make up their administration expenses by charging high fees (generally paid by the employees) on the products they make available for the 401k. The most costly product is the variable annuity, since it is primarily an insurance vehicle with many undisclosed/hidden charges. As an aside, commissioned, financial product salespersons really push hard to sell VAs because of the high sales commissions. They are so sweet to the salesman since they get a big up front commission and then a trailing commission paid out year after year.

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Marlowe wrote:

Thanks everyone for their suggestions. Meanwhile, my wife convinced her employer to rethink and postpone this decision till end of January 07. If they still don't change their mind, she will just contribute the amount which the company matches.
Kaspa
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