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?
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,
*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.
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
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.
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.
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
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