Please help me understand 'Separate Accounts'

christineAugust 18, 2008

I recently started the process of looking over our entire retirement portfolio in an effort to actually balance things for our age group and risk comfort level. I had some fairly sound ideas of what I wanted to do.

During this process, I found out something interesting about my husband's current employer's 401k that neither of us realized. All the offerings are called 'Separate Accounts." The information on these on the internet is sparse and vague. I have learned this:

1) They aren't available to the public

2) They have no ticker symbol

3) It is a group of investments in stocks, much like a mutual fund

4) It is often (maybe always?) a product of an insurance company, but the funds are separate from the insurance company's profit or losses with regards to insurance.

5) It is at least some of the time not regulated by the SEC but by state regulations, and I am not sure when it is or isn't.

6) I have no idea if it is insured by a government entity in the same way that the FDIC insures banks.

7) I have no idea how the expense ratios compare to mutual funds.

I have also included a link below that has a brief description of these.

These don't seem like inherently bad investments, but I want some information from someone who has actually heard of these to give me some opinion/information. I consider myself to be fairly educated on at least the terms and options even if I haven't been on top of my funds, so this was a big shock to me. A very large chunk of our money is in these investments. It also sucks that since they are not publicly traded that you can't port them into a Morningstar portfolio to see your entire picture at once. These would have to be tracked separately.

Please let me know anything you can about them - from both an information standpoint and an editorial standpoint.

Thanks for reading this and responding!!

P.S. I am on vacation (fun way to spend a vacation, no?), and we are on to our next leg shortly (which is 6 days long) and I have very limited internet where I am going. I promise to get back to this upon my return, if not during my trip itself.

Here is a link that might be useful: PDF of a description of a Separate Account

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The information provided in that pdf file is, IMO, incomplete. You need to know the following:
1. What is the asset allocation of the "separate accounts" that you hold -- the percentage invested in stocks, bonds and cash equivalents? This is the basic question that addressed the overall level of risk in your 401K. In the early years of building a retirement nestegg, you're supposed to take on more risk, say, 80-100% in stocks. Then at your get closer to retirement age, you should gradually shift to a less risky asset allocation so that, when you actually retire and start drawing on you nestegg for living expenses, your asset allocation should be about 50-50 in stocks and bonds. What is your asset allocation, and do you have an option to adjust it, and if so, how often?
2. What about expenses? What % are they? They almost never tell you.
3. This is MOST IMPORTANT: If I change jobs or reach retirement, do I have the option of taking my assets in my 401K and putting them in a rollover IRA? That would be the best option, so that you can then have full control over where your money is invested, and you can control expenses by investing in low cost index funds that have proven to be the best value for most investors.
4. How well is your 401K performing? What benchmark is appropriate for making that assessment? That depends on the asset allocation. It should be possible for you to do the math and compare your 401K performance against, say, the total stock market index and the total bond market index. Your performance will always be a little bit lower because of the expenses, but it should be just a little bit lower.
5. Mention of "annuity" in the linked file worries me. Some are very hard to get out of, or very expensive to get out of. If that's the case in your situation, you may be stuck with an investment vehicle that you would not on your own select.

I hope these layman's comments are helpful to you. It might be useful for you to go to a NO FEE financial planner to get a fix on your overall situation. I stress NO FEE, because they don't try to peddle any particular investments -- they're not stock brokers looking for high commissions -- and they probably can tell you more about how your 401K fits in ( or doesn't ) to your overall plan. If you google CERTIFIED FINANCIAL PLANNER, you should be able to find one in your area, or ask someone for a recommendation. They usually give you one consultation free to get acquainted so you know in detail what they can do for you.

    Bookmark   August 18, 2008 at 1:19PM
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Well, I've got some bad news for you. That appears to be a group variable annuity program. These things are so bad that the SEC has sued some insurance firms for the exorbitant charges associated with them. The advantage of a variable annuity sold by a life insurance company is that it allows for tax-deferred growth of investments. Well, as you know, a 401(k) is already tax-deferred. There is little reason to have a variable annuity INSIDE a 401(k). That would be like purchasing tax-free muni bonds inside a 401(k).

Unfortunately, I don't think there is anything that you can do about it short of convincing your husband's employer to switch plans. If you google group variable annuity rather than "separate account" you'll find a lot of info on them. In the meantime, I've linked one such article.

Here is a link that might be useful: Variable Annuities and 401(k)s

    Bookmark   August 19, 2008 at 10:12PM
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The financial advisors that don't charge fees have to be paid somehow ... in most cases, that's by way of commissions paid on investment products that they sell. And in many cases also on annual fees paid by the managers of mutual funds, as long as the investor continues to own that product.

Since their income depends (usually totally, though some charge fees for part of their service) on the stuff that they sell, many of us say that they have a conflict of interest - whose are they serving - theirs, or yours?

Rather than choosing a "NO FEE" financial advisor, it seems to me that you might want to choose a "fee only" financial advisor, i.e., one that does not make commission on financial products sold (in fact, quite a few of that rather rare type sell none - charge by the hour for their time).

If you choose to consult a person who sells financial products, earning income by commission on the sales, remember what that person's bias is.

If you don't plan to buy financial products from such a person, you might not choose to confide that information to that person early on in the discussion.

You would want to find out early whether that person were fully conversant with the product in which you're interested.

Good wishes for finding clarification of the circumstances surrounding the financial products that you have.

ole joyful

    Bookmark   August 21, 2008 at 7:59AM
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Oops! Joyful guy is right. I really meant to see FEE ONLY in my entry above, NOT no fee. Fee only means the advisor is on your side, and will give you impartial advice untainted by any self-interest that would lead to selling you products that will bring in a handsome commission, but that you do not need.

In shopping around for a FEE ONLY Certified Financial Planner, it's important to find one who has experience and an interest in people in both your age and income levels. Otherwise you could end up with somebody who does not understand your particular situation.

    Bookmark   August 22, 2008 at 8:45PM
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Not to be unduly argumentative, but this whole discussion of what type of CFP to see is irrevalent to the OP's circumstances. This is an employer's 401(k) program we are talking about here. Seeing a CFP to discuss it would be a waste of both time and money. The OP (or rather, her husband), needs to go to the firm's HR department to find out exactly what he is investing in and also what, if any, alternatives he has.

    Bookmark   August 23, 2008 at 6:46AM
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I agree with bethesda madman. A CFP cannot resolve the knotty issue of the 401K. But a CFP can look at the couple's entire financial situation, of which this 401K is a part, and give some valuable advice on what to do to maximize the couples long-term objectives.

BTW, I am just a private citizen, and I do not represent CFPs either covertly or covertly. To press that point, the couple could alternatively obtain financial planning advice at no cost if they held assets with Vanguard Mutual Funds totalling a certain amount, or at a modest cost if their asset total is below that limit. I think Fidelity and
T Rowe Price offer similar services.

    Bookmark   August 23, 2008 at 10:51AM
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The OP may be in a bind because most HR depts don't understand investing any better than the average layman, so they fall for the easiest/quickest spiel from salespeople. If this 'Separate Accts' mess is truly the only option, it actually might be wise to find an independent fee-only CFP to do at least one or two modest financial planning sessions.

There are CFPs affiliated with brokerages, but you must ask for them. A stockbroker-only CANNOT do a financial plan - they are not licensed to do this. They can skirt around it by examining portfolio allocations and discussing general financial management, but they have neither the training nor experience to develop an estate and retirement plan, which is what a true financial plan is.

The OP might possibly be better off ending contributions and starting afresh with a combination of personal Roth or Traditional IRAs, taxable investment accounts, etc. Only a professional would be able to examine the OP's overall financial situation and give specific advice, in this case. They would have to read the "fine print" info on this particular annuity product, and run a few Monte Carlo simulations to figure out what alternatives are available to the OP.

You may think there is very little information on the Separate Acct products, but in actuality you can get a fair amount of info from the insurance carrier if you are persistent. At the very least the HR dept is legally entitled to demanda full copy of each product policy (e.g., each investment option), and you can then obtain a copy from HR for review.

    Bookmark   August 23, 2008 at 1:08PM
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Hi! I am finally back and have done some of my own research, including DH talking to his HR and calling the company directly.

These are not annuities of any kind. They are just like mutual funds, but privately held. They fall under the same financial protection as all 401Ks (called EGGTRA) but are subject to state insurance regulations even though they are not an insurance product. Their expense ratios are not better or worse than any mutual funds, they are independent and need to researched individually.

Haus - yes, when I mentioned balancing our assets, I meant making sure our overall asset allocation meets with our long term goals and makes sense for our age. I am pretty much on board with all your advice and those are considerations I am checking out now. All the things you mention are on the up and up with these funds - the only thing I haven't reviewed are the expenses. I also agree with Joyful on how a financial advisor would/should get paid. We are likely going to roll everything other than the current 401K into Vanguard and we do qualify for discounted services.

madman - I appreciate your effort to keep this thread on track to the original purpose of my questions. And I am glad these are not annuity products. Thanks for the info!

jkom - we do have outside investments as well Roth IRAs. We have considered going with all post-tax investments, but for now we are going to stay within the 401K structure for the tax benefits unless we see some glaring reason not to. I had also forgotten I had done a MC simulation awhile back, I will look for an online tool again - thanks!

I feel pretty well read about where we should be investing for our age and risk tolerance. I guess I wonder how much additional I will get out of a fee-based service that I don't already know or can ascertain from my investment companies' tools or other free online tools. How often do financial advisors go outside of the standard tools/models to give truly individualized, personal advice?

Thanks, everyone. This has been a great discussion so far and I have learned a lot about where our money is (and isn't!). I'm more than willing to keep the discussion rolling...

    Bookmark   August 26, 2008 at 8:03PM
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>>How often do financial advisors go outside of the standard tools/models to give truly individualized, personal advice? You have to be willing and able to pay for this kind of advice (and then find someone who does it, LOL). When I worked for an independent CFP, the woman who did the estate planning did it entirely by hand, no software shortcuts. She had to read every single legal and financial document the family/couple had, and develop a plan based on their age, family situation, finances, risk tolerance, and goals (identified in previous meetings). It took her from 4-6 weeks to produce a single estate plan, which was an incredibly comprehensive "road map" of how to get from where the client(s) currently were, to where they wished to be in 5-10 years.

For those efforts, the cost was between $4K - $9K. Having seen the plans she produced, and the ones done by most planners using computer software (which includes ones done for my family, who only have a moderate estate), I can honestly say that there was no comparison - the custom plans were far superior to the "plug-in-the-numbers" plans. The custom plan covered every aspect of the clientÂs financial and legal situation, with specific recommendations and a long "to do" list for both client and CFP.

But because the cost is so high, they are out of reach for most people. So there is a place for the "plug-in" software - just don't expect it to be anywhere near as comprehensive or reliable. They are more of a general "where are you?" than a true roadmap to achieving your goals.

One thing most people don't understand - I didn't until I started working in a CFP's office - is how nebulous most of our financial goals are, as individuals. We want A, D, X, Y, and possibly even C, B, F, and Z, too. One of these days...or maybe in ten years...or possibly five....or??

And these goals are specific to us. It isn't enough to say, "I want to travel on retirement". What does travel mean to you, precisely? Somebody who hikes the Grand Canyon with the Sierra Club is doing something entirely different than another whose idea of travel is taking the grandkids to Epcot.

A good financial planner would have to spend time with you - which is expensive, from his/her standpoint - to help you define what your goals truly are. Then they have to analyze your financial and legal situation to see where you are currently, before they can figure out how to get you to your goals within a reasonable amount of time. It is neither a simple nor easy process, precisely because there are no two people with identical situations and ambitions.

    Bookmark   August 27, 2008 at 11:21AM
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Responding to jkom51: Some people can afford and can benefit from a custom tailor who charges $2000 for a suit. Most of us would never consider such a purchase. By the same token, most of us do not need the kind of customized hand-made plan described above. Investment products have improved vastly in recent decades, so that people of modest means can easily acquire investments that are broadly diversified and that have quantifiable risk. Unless your net worth is at least $5 million dollars, you do not need a "hand-made" financial plan. One prepared by a competent CFP with the help of a software package will serve well, provided the stress is on low-cost index mutual funds, and the asset allocation, the most important decision, is arrived at after careful review and consideration of the client's circumstances and tolerance for risk.

    Bookmark   August 28, 2008 at 12:08AM
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Sorry, haus_proud, I have to disagree. What I learned from my CFP boss was that EVERYTHING must be taken into consideration to produce a truly comprehensive estate plan. Just looking at the finances and making an asset allocation is only one small part of it.

But because this type of service is so expensive, even most CFPs don't offer it. One of my friends is a partner at Accenture Consulting - the service he gets from US Trust, now part of BofA, is strictly directed towards investments. This may be wonderful for his $6M portfolio, but it is lousy for his personal life. He is married with two young kids, yet almost 10 yrs later still has no will, trust, or Power of Attorney docs!

Like most people, he **knows** he should do it, but keeps putting it off - again, as many people do. I understand how hard it is to actually accomplish all the right legal/financial details, it took us decades to accomplish it ourselves. But having done it, it is a great relief to know these details are taken care of. They are infinitely more important than just focusing on the ROI of your investment portfolio.

Again, most CFPs won't push you to complete those important "other" details - but some will, and it is a very valuable service no matter how large or small your estate may be. At the office I worked, we had many clients with a net worth well under your $5M level - but to their children and spouses, having their affairs truly in order is a priceless gift.

I apologize to the OP because I think this is a bit OT, but I feel very strongly that people need to realize that many more things go into their estate planning needs than just a healthy asset portfolio. I'm sure haus_proud agrees that is true; I think we are viewing the concept of professional help somewhat differently.

    Bookmark   August 28, 2008 at 11:27AM
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I don't mind that this has taken a turn to talk about overall financial and estate planning as ultimately, my original question has been answered and this is the next logical step in that process.

I think the service you mention is valuable, but how many people need that level of specificity? Will the standard models provide for 95% of the population (and am I in that 95%)? Because ultimately, you have to pay a lawyer to complete the estate planning, and they surely could advise you as well as - likely better than - a CFP with regards to the legal matters of your estate. I want a financial planner to tell me how and where to invest now, and how to adjust it over the years to meet my financial goals and have my money last thru retirement and thensome. I don't think they are as qualified to tell me if I need a will vs a trust, how to protect my children from estate tax issues, etc... If I need someone to give me a 'push' to do those things, maybe it is worth the premium, but otherwise, it seems like I am paying for planning outside of their expertise or for someone to also be a cheerleader for me.

Don't get me wrong, I am not as well versed in this area as I would like to be, but I think I am fairly intelligent and these are my first thoughts about how to divide the responsibilities of what these professionals can and should be doing for me. If my thinking is skewed somehow, I'd like to know.

Does anyone have any good reliable links to financial calculators or book recommendations on retirement or estate planning?

    Bookmark   August 28, 2008 at 12:09PM
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From what i have read, it is extremely difficult to beat the index averages in either stocks or bonds. Some good mutual fund managers can exceed the index or indexes they are trying to outrun for a few years, but that is based on their following a strategy that happens to work for a while, but then that strategy falls short. And theSE funds are more expensive than index funds because of the cost of the manager(s) and transaction fees from trading stocks. So the mind set that makes sense for me is to put most of our assets in index mutual funds with the broadest diversification (whole US stock market, not just S&P 500; whole outside the US stock market), and maybe put in a little bit of money into something else that I believe will do well. But I need to state clearly why I am investing in these other things and specify if/when it will be time to get out. And I would put no more than 5-10% of my money in those other investments.

Aside from these considerations, it goes without saying that everyone with more than the smallest of assets should provide the needed legal paperwork for the transfer of those assets in the event of their demise. I see that as a separate issue. But I restate my basis premise: NO CERTIFIED FINANCIAL PLANNER CAN HONESTLY REPRESENT THAT THEY CAN BEAT THE INDEX AVERAGES IN THE LONG TERM. IF THEY CLAIM THAT THEY CAN, ASK THEM TO SHOW YOU. IF THEY SAY THAY CANNOT SHOW YOU BECAUSE IT IS PROPRIETARY INFORMATION, THAT'S WHEN YOU SHOULD EXCUSE YOURSELF AND GO TO SOMEONE ELSE.

    Bookmark   August 28, 2008 at 8:43PM
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Here is the problem with understanding "who does what." People often assume one professional can or cannot advise them properly in a particular area - but they are wrong.

For example, Christine posted "I want a financial planner to tell me how and where to invest now, and how to adjust it over the years to meet my financial goals and have my money last thru retirement and thensome. I don't think they are as qualified to tell me if I need a will vs a trust, how to protect my children from estate tax issues, etc"

I've posted on other threads the difference between dealing with a broker or planner that is NOT a CFP, so I'm reluctant to repeat myself. However, a licensed CFP is in fact qualified to advise you on whether a will or a trust is appropriate, as well as how to plan for estate tax issues. Now whether you can find someone who will work with you, on an hourly basis, is another matter. Such work is not particularly lucrative for CFPs, and not all of them have the experience/knowledge/interest.

A good CFP should be able to refer you to competent tax and legal professionals who can help you set up your estate the best and most tax-efficient way possible. They will do this as a courtesy, not because they get any kickbacks on it. A CFP has the fiduciary responsibility to give you the best advice possible for your financial and estate situation; a broker does not.

In fact, a broker will be breaking the law if he tries to give you estate planning advice! He can give you investing advice - but any good CFP understands that finances are only a part of what goes into a truly successful planning effort.

A true financial advisor is one-third of your "Financial Triad". Taxes and legal are the other "legs". Now, you may do some or all of this yourself, or hire people to do some or all of your personal Triad. It's your choice.

I don't disdain people who like to do their own investing. I could hardly do so, since I'm one of them! And very successful at it, I can honestly say.

But I take issue, now and always, with people who insist that doing it yourself is the "best" way. Most amateur investors suck at it, frankly. They panic, they get stampeded by friends/media/brokers into "hot" or "safe" investments. They buy high and sell low, instead of the opposite. They have lousy investing instincts and no knowledge or interest in the subject. For those people, learning at least a little about the subject - you are talking about money, so you should ALWAYS know what your legal rights are and aren't in a financial contract - and dealing with a competent professional can help balance overly emotional investment decision-making.

    Bookmark   August 30, 2008 at 1:08PM
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