Financial "Innovation" in a Nut Shell

Here we have Wall Street at its finest, cheating teachers out of their retirement:

Bradley Bergeron’s first professional job out of college was selling retirement savings investments to public schoolteachers in Connecticut. The applications he carried in his black leather briefcase, however, were for one type of product only: a high-priced variable annuity.

“From the teacher’s standpoint, they really miss out getting quality advice,” said Mr. Bergeron, 27, who sold the plans for Axa Advisors’ retirement benefits group. “People who are in the schools pitching them and positioning themselves as retirement specialists are really there just to sell them one product.”

Workers at private companies typically enroll in a 401(k) retirement plan approved by the employer, which is held responsible for the menu of investment options offered. But public school employees and people working for nonprofits and religious institutions are often exposed to brokers who operate in a more unruly marketplace under different rules, which are defined by a patchwork of state laws and less stringent securities regulations.

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“Teachers are still being preyed upon by salespeople,” said Dan Otter, founder of the advocacy and educational site 403bwise.com, and a longtime teacher now working at the University of New Mexico. “The problem is their first experience with a 403(b) is in a sales environment.”

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Brokers are trained to start by explaining how a teacher’s state pension works, how the tax-advantaged 403(b) operates and what sort of gap might have to be filled with savings to help maintain the teacher’s standard of living in retirement. Many — even those who later became disenchanted with their jobs — said they believed they were helping teachers save and realize their long-term goals.

Only after setting the stage does the broker introduce the main performer. For Axa’s brokers, that role is usually assigned to Axa’s Equi-Vest variable deferred annuity. It isn’t simple: To get the full rundown on how it works, people must sift through a document that is 460 pages long.

And it doesn’t come cheap. The most popular version of the Equi-Vest annuity has a total annual cost that can range from 1.81 to 2.63 percent, according to an analysis from Morningstar.

In contrast, large 401(k) plans usually charge an annual fee of less than half a percent of assets, according to a May report by BrightScope using 2013 data. Large, federally regulated 403(b) plans charge a bit more.

Then there is the surrender fee. An Equi-Vest annuity owner who wants to transfer savings into another 403(b) product or roll it over into an I.R.A., for example, would pay 5 percent to Axa on any of the withdrawal that was contributed in the previous six years.

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Take an employee with a starting salary of $40,000 who saved 6 percent of her salary over a 40-year career. She would retire with about $175,000 when paying annual fees of 2 percent, assuming a 4 percent return after inflation, according to an analysis conducted by Vanguard. (The analysis also assumes that her salary rises 1 percent annually, also adjusted for inflation.)

But she would have 25 percent more, or a total of nearly $218,000, if fees had been 1 percent, and almost $260,000 if she paid 0.25 percent in fees.

As former S&L regulator and avenging angel Bill Black notes, pretty much all of the profits from the financial industry come from various flavors of fraud.

There needs to be hard fee limits on all forms of tax exempt investment vehicles.