Advisors with clients who work at educational institutions believe the new technology will enable them to tap into 403(b) assets. "We have some doctors who work at teaching hospitals that have accounts with us, but who also have 403 (b) plans somewhere else," says Paul Forman, principal in Buckingham Asset Management in St. Louis. "In many cases, the 403(b) is larger than the accounts we currently manage." Forman says the firm is currently testing the new downloading system with a doctor who has a $2.5 million account at his firm, and a $3.5 million TIAA-CREF 403(b) plan. The ability to transmit and download information from the 403(b) into their own systems "is turning a $2.5 million client into a $6 million client," he says.
Financial advisors who use Advent, however, await a downloading solution. Janet Briaud, a CFP licensee with Briaud Financial Planning in Bryan, Texas, says about 60% of her clients work at nearby Texas A&M University. Although she has been authorized to manage a number of 403(b) plans since 1986, she has had the cumbersome task of inputting trades and other information from those plans into her own computer systems manually. Because fees cannot be automatically deducted from the account, she must bill clients separately. "I have asked, begged and pleaded for downloading capabilities," she says. "Advisors need to have that to really tap into the 403(b) market."
As he works on technology and service issues, Lane also faces the challenge of getting advisors to try products they may not be familiar with, such as a recently introduced low-cost survivorship life insurance policy with no surrender charges. Lane says that by eliminating the surrender charge, which can apply for as long as 15 years at some companies, the policy makes it easier to adapt to the possible demise of the estate tax in 2010. At that point a policyholder who no longer needs survivorship life to cover estate taxes could simply cash out without incurring any surrender charges or penalties.
Another low-cost twist on a traditionally high-cost product is the firm's tax-deferred variable annuity, Personal Annuity Select. With just 30 basis points of total insurance expenses and no surrender charge, it is among the cheapest variable annuities around. The cost of building a portfolio of sub-accounts ranges from 37 basis points to 59 basis points, including all expenses, compared to an average of 2.18% for the industry.
The fixed-account option allows for full withdrawals at any time and partial withdrawals or transfers every 180 days with no market value adjustments or interest penalties. The contract guarantees 3% during accumulation, and in mid-December, had a current rate of 4.1%-about the same rate as a 10-year Treasury bond, but without the risk of principal fluctuation.
The fixed-account option, in fact, seems to be the major draw for advisors so far. "Right now we're using the guaranteed account as a parking place for cash and as a fixed-income alternative," Stephens says. "In this environment, a guaranteed 4% return is a good deal." Don Kukla believes the guaranteed account is "a nice resting spot for money from securities that are maturing." Neither views the insurance aspect of the annuity as particularly important.
Lane hopes that advisors will eventually migrate to equity and bond mutual funds and corresponding annuity sub-accounts once the markets stabilize. It's a fairly young group. Although the company has been managing money since 1918, its first publicly available mutual funds came out in 1997, and include Bond Plus, Growth Equity, Growth & Income, International Equity and Managed Allocation. Most of the 17 funds currently available are less than three years old, and six of them came out in the fall of 2002.
Some of the funds use a pure indexing approach, while others employ what the company calls a dual strategy by combining active management for a portion of the portfolio-typically less than half-and an enhanced indexing strategy for the rest. Lane says that the dual strategy reduces cash-flow concerns, since managers can sell stock from the indexing side to meet redemptions.
While the actively managed funds that have been around at least five years have a mixed record when it comes to beating their benchmarks, it's hard to dispute that when it comes to low expenses, TIAA-CREF is a fund industry leader. Its mutual funds are among the lowest-cost funds around, with expenses ranging from 26 basis points to 49 basis points. It also gets high marks for financial stability, with triple-A ratings from both Moody's and Standard & Poor's.
Lane also is urging advisors to reconsider the use of annuities for at least part of their clients' portfolios. That may be a tough sell for many fee-only financial advisors, who have a history of resistance both to buying variable annuities as long-term savings vehicles and annuitizing for income at retirement.