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Which VA to use for 1035 exchange?

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  • Which VA to use for 1035 exchange?

    About to cancel a whole life insurance policy (had it for 9 years, paid about 50k, now worth 32k,.....).  From what I learned on this site and others,  it seems that my best option is a 1035 exchange to a variable annuity to preserve the loss until it grows back to its cost basis.
    The White Coat Investor usually recommends Vanguard’s VA, which has a 0.5% annual fee. I just found out that Fidelity’s personal retirement annuity has a 0.25% annual fee, and also no surrender or other fees (Unfortunately neither policy allows for investment in the lowest fee index funds that are offered in other accounts, but some options are close enough).
    Is there any reason to go with Vanguard rather than Fidelity? Is there a catch that I am missing?

  • #2
    Both are good options. I think it depends on whether you feel strongly enough about wanting Vanguard investment options to pay the extra 25 bp of expenses to use the Vanguard annuity.


    • #3
      How old are you?


      • #4
        I'm writing a blog and put the following together. Vanguard ER is the only fee. For Fidelity add 0.25 to the ER of the funds and Nationwide add 0.35 to the "low cost funds". Nationwide waves the $20 a month fee if you use their low cost funds (but of course adds 0.35 if you do).


        ER Actual Expense
        Total stock market 0.38
        International 0.66
        REIT 0.54
        Total bond 0.42
        High Yield bond 0.55
        Global bond 0.44
        Money Market 0.43
        Total Stock Market 0.15 0.5
        International 0.37 0.72
        Reit 0.26 0.51
        Total Bond 0.14 0.49
        High Yield bond 0.26 0.61
        Global bond 0.14 0.49
        Nationwide MM 0.34 0.69
        Total stock market 0.12 0.37
        International 0.18 0.44
        REIT 0.75 1
        Total bond 0.14 0.39
        High Yield bond 0.71 0.96
        Global bond 0.9 1.15
        Money Market 0.28 0.53


        • #5

          Vanguard ER is the only fee.
          Click to expand...

          Just want to make sure nobody misunderstands this. Vanguard's variable annuity product has the following expenses:

          • Annual Contract Maintenance Fee of $25 for contracts valued at less than $25,000

          • Total Separate Account Annual Expenses of 0.30%, consisting of

            • An administrative expense charge of 0.10% per year

            • A mortality and expense charge of 0.20% per year (unless you choose one of the optional death benefits)

          • Fund Operating Expenses that range from 0.11% to 0.39% per year, depending upon funds selected


          • #6
            Michael, you are wrong sir! The Administrative charge and the M&E are incorporated into the ER.


            Name   Number   Total Expense Ratio Mortality & Expense Risk Charge
            (Included in Total Expense Ratio)
            Administrative Expense
            (Included in Total Expense Ratio)
            Redemption Fee
            VVA-Balanced 0069 0.48% 0.17% 0.10% None


            I'm not sure where you got that fund operating expense, I'll have to look into that but Vanguard doesn't hide fees so I think you are wrong about that as well.


            I'm glad I looked because this was news to me: Vanguard will be transitioning the client service and account administration for the Vanguard Variable Annuity to Transamerica, the issuer of the annuity, by December 2020.



            • #7

              Michael, you are wrong sir! The Administrative charge and the M&E are incorporated into the ER.
              Click to expand...

              I'm sorry, but I am correct. The table you reference, from the Vanguard website (not the actual prospectus) simply expresses the total of the expenses as one number. I took the time to break them down into their respective components. Here's the link to the prospectus dated 5/1/2019. The prospectus should ALWAYS be the place to look up answers to annuity contract questions:

              You'll notice on page 6 of the prospectus, it clearly outlines the various fees broken down into their respective components. I will admit that I did not use the 0.03% TEMPORARY reduction to the Mortality and Expense Risk Charge (which is where the 0.17% figure comes from in the information you cut and pasted), as I doubt that Transamerica will be as generous when they takeover servicing and administration of the contract. The 0.20% I referenced is the contract maximum, per the prospectus.

              I’m not sure where you got that fund operating expense, I’ll have to look into that but Vanguard doesn’t hide fees so I think you are wrong about that as well.
              Click to expand...

              Total fund operating expenses is taken from page 7 of the same prospectus. Each fund has it's own separate operating expense, ranging from 0.11% to 0.39%.

              I'd appreciate if you'd remove your accusation that I was wrong. I am not here to get into an argument over these things. I just try to make sure that the folks getting their information from this forum are getting the most accurate information possible, upon which to base their financial decisions. I wish you the best as you continue to participate in the forum, as I see you're a relatively new poster and a fellow advisor.


              • #8
                I just did this exchange 3 months ago!  I actually did the Speak Pipe thing on the WCI podcast about this very same question, and Jim Dahle admitted he had not looked at Fidelity which is why it is not in his blog post.  By my calculations as well as the nice chart by FiPhysician above, Fidelity is the cheapest as there is 25 basis points annual fee + any of the fund options within the annuity, so I have picked the cheapest ones: Fidelity VIP Total Market Index (12 basis point), Fidelity VIP Extended Market (13 basis points), Fidelity VIP International Index (18 basis points), and Fidelity VIP Bond Index (14 basis points).

                As you can see then these funds cost me overall between 37-43 basis points total, which is still lower than the 50 basis points of Vanguard, and also lower than Nationwide's fees given the $20 monthly flat fee would be higher than 25 basis points until you hit a cash value of $96K or higher, and even then if you use Nationwide's low fee index funds, as FiPhysician points out, the cost then becomes 35 basis points, and the chart above shows very nicely that overall Fidelity is still cheaper than Nationwide.

                The only reason you might do Vanguard is if you want a REIT fund for all your exchanged cash value, as you see above it is cheaper than overall than the Fidelity option.  I don't think this is wise- if REIT's are part of your overall asset allocation, get a REIT fund in your 401k/403b/457 or Roth where you can get those REIT funds much cheaper.