403(b) Story: Is Bad Advice Better Than No Advice?
by Tony Isola, CFP
“Motivated blindness is when you don’t recognize facts that are sitting in front of you because they would be inconvenient for you to recognize,” Scott Killingsworth
This term perfectly defines the attempt by AXA Advisors to justify selling inappropriate retirement products to public school teachers.
According to Tara Siegel Bernard, in the second part of her groundbreaking series for The New York Times, “An Annuity for the Teacher-and the Broker,” this excuse is paramount in AXA’s awkward attempt to defend the indefensible.
AXA holds about $16.3 billion in 403(b) assets for K-12 teachers. Their top- selling product, Equi-Vest, brought in $2.2 billion last year.
AXA Products: Complex, Expensive and Yield Big Commissions
This “investment” is extremely complex. There is a reason its prospectus is 460 pages long!
It is also very expensive; charging between 1.81%-2.63% a year. The price tag can be considerably higher when additional riders are added to the product.
These products are sold, not bought. The prime perverse motivation for AXA salespeople are the 5%-7% upfront commissions.
In addition, AXA Reps also receive 1.5%-2% on every future paycheck deduction contribution.
AXA's True Motivation
The true motivation for AXA to pitch this product is greed. “The annuity sold to the teacher, in a sense, becomes an annuity for the sales rep and the company’s managers,” according to Ms. Siegel-Bernard.
Obviously, AXA has a different take on this. Let’s give them the floor and see if their justifications pass the smell test.
“In a statement, AXA said that it offered a range of approaches and products to meet each individual client’s needs, and that the company appropriately disclosed all benefits, risks, fees, and restrictions. “
I can tell you from personal experience. The teachers we have managed to extract from these “monsters of complexity” had no clue what they owned, or what they were paying AXA.
Most could not even define what an annuity is!
Many believed the product was free because they never saw a bill for services provided. Others simply thought, or were misled to think, the $40 annual fee was the sole price of admission.
“The variable annuity product we make available in the 403(b) space offers guarantees not available in mutual funds or index funds,” an AXA spokesman said, “which can significantly reduce our clients’ exposure to market loss.”
These “benefits” come at a very steep price. They are often not needed, or could be purchased in a much more efficient and cost-effective manner.
For instance, the M+E, or mortality expense, insures that upon premature death of the client, 100% return of all their contributed premiums would be paid to the beneficiary.
Is it necessary to have this insurance when, in ANY 20-year period imaginable, equity markets have provided a positive return?
The purchase of a cheap term insurance policy would give an investor a much bigger payout, at a much lower cost.
This would not include a 5%-7% upfront commission to the agent.
Often these policies come with Personal Income Riders. These guarantee that the client will receive lifetime income upon retirement, even if their account balance goes to zero in the future.
What they don’t tell you is this can be done with any low-cost index fund. An investor would accumulate more funds in this manner (because of the lower fees) and receive a higher lifetime payout.
Teachers could simply purchase a basket of low-cost index funds, and hold them for several years. Upon retirement, they could exchange this lump sum for a fixed annuity.
In addition many teachers are covered by pensions and social security. It is more important for most to have a basket of assets that focuses on protecting purchasing power against the ravages of inflation.
In other words this can be done without an expensive, complicated rider and may not be necessary at all!
“Many school employees would have never taken the initiative to open a retirement account if I had not been there. The fees that were built into the annuity product paid for a field staff of agents to go into the schools and reach out to people. I feel good about what I was able to do for them.”
This is often the result of the wrong type of incentives, like high up-front and ongoing sales commissions.
Providing a horrible product because “it is better than nothing” is not a viable argument.
Even worse, is justifying the expense by saying it costs a lot of money to get salespeople into schools.
Clients should not have to pay for the time and expense of unnecessary paperwork and complexity. The prime motivation for this is to protect the company from litigation, not to benefit clients.
I am not sure what is more disturbing, the products provided by AXA or their misleading arguments of defense.
They need to rethink their current business model and pivot so they are on the right side of history.
Eliminating the policy of withholding health benefits for employees when they fail to hit annuity quotas would be a good place to start.
Better yet, they should push the reset button based on the wisdom of Warren Buffett, “Culture, more than rule books, determines how an organization behaves.”
They owe this to their own employees and the millions of teachers who put their trust in them.
If you are interested in hearing more, give me a shout out.