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Brighthouse 403b Annuity Review

Brighthouse Annuity Review

This is an independent review of the Brighthouse Universal Annuity Contract, a popular 403(b) annuity product. If you work in K-12 public schools and participate in a 403(b), there is a good chance you might have been sold this annuity. If you are wondering what fees you may be paying, what investment options you have or whether you can switch to a different plan, this is the annuity review for you. 

This information was gathered from Brighthouse’s Universal Annuity prospectus dated April 29, 2019 and is not a substitution for individual tax or legal advice. I’m just reporting on the main facts; to find answers specific to your situation may require a review of the full prospectus or a consultation.

Legal Disclosures

Before we get into the details, here are some legal disclosures. For readers who have found my website and don’t know much about me, I am a fee-only financial advisor held to the Fiduciary Standard. I am legally obligated to make recommendations that are in the best interest of my clients. Unlike other advisors, I find that some annuities may be a part of a comprehensive financial plan when used correctly.

This is a review, not a recommendation to buy or sell a variable annuity. Brighthouse Financial has not endorsed this review in any way, nor do I receive any compensation for this review. This review is meant to be an independent review at the request of a client so they can see my perspective when breaking down the positives and negatives of this annuity product. Before purchasing any investment product, be sure to do your own due diligence and consult a properly licensed professional should you have specific questions as they relate to your individual circumstances.

Let’s Get Started!


TABLE OF CONTENTS:

Platform Overview
Investment Options
Fees & Expenses
Advertised Features & Benefits
Conclusion


Brighthouse Life Insurance Co Platform Overview:


Brighthouse Life Insurance Company is a provider of insurance, annuities, employee benefits and asset management. They are one of the largest institutional investors in the United States with a $270.2 billion general account portfolio. Brighthouse Financial, Inc. was formerly part of MetLife, Inc and officially spun off from them on August 4, 2017. Brighthouse Financial is the brand name for Brighthouse Life Insurance Company, Brighthouse Life Insurance Company of NY, and New England Life Insurance Company.

Product NameBrighthouse Universal Annuity
Type of ProductVariable Annuity
IssuerBrighthouse Life Insurance Company
Standard & Poor’s RatingA+
Phone Number(800) 638-7732
Websitehttps://www.BrighthouseFinancial.com
What Is a Variable Annuity?
A variable annuity is a contract between an individual and a life insurance company where, in exchange for the individual’s purchase payments, the insurer agrees to pay out a lump sum or a stream of retirement income at a later date. It is called “variable” because the account and the value of the income payments will vary based on the performance of the investments that you select, resulting in payments that may go up or down. Read More on SEC.gov.

The Brighthouse Universal Annuity is a variable annuity issued to help employees of public schools, colleges and universities, nonprofit hospitals and nonprofit organizations. This variable annuity may help participants accumulate assets for retirement as well as provide a steady stream of income throughout their retirement years.

*Standard and Poor’s Rating Service provides ratings which measure the claims-paying ability of an insurer. These ratings are the opinions of an operating insurance company’s financial capacity to meet the obligations of its insurance policies in accordance with their terms.


Brighthouse Annuity INVESTMENT OPTIONS


Brighthouse Annuity offers a wide range of investment options. Investors have access to over 50 different investment fund options (sub-accounts) including numerous equity and fixed income portfolios as well as various asset allocation and target date retirement portfolios. The underlying investment options available in a variable annuity invest in stocks, bonds, money market instruments, or some combination of the three.

Brighthouse has entered into sub-advisory agreements with these various investment providers:  

Blackrock, Brighthouse, BlackRock, Clarion, ClearBridge, Fidelity, Frontier, Harris Oakmark, Investco, JP Morgan, Jennison, Loomis Sayles, MFS, Neuberger Berman, Oppenheimer, PIMCO, SSGA, Templeton, T. Rowe Price, Victory Sycamore, and Western Asset Management.

These financial companies provide the investment options also referred to as sub accounts in the Brighthouse Universal annuity. Depending on market conditions, you may make or lose money in any of these Funding Options.

You can transfer among the Funding Options as frequently as you wish without any current tax implications. Currently there is no limit to the number of transfers allowed. Brighthouse may, in the future, limit the number of transfers allowed. At a minimum, Brighthouse would always allow one transfer every six months.


Brighthouse Annuity FEES & EXPENSES


Keeping fees low should be a top priority when saving for your retirement. If you’re not familiar with variable annuity products and how they work, their fees can be confusing to decipher. With a variable annuity, the majority of your cost comes from two types of fees:

  1. Fees to the insurance company associated with risk protection: Income & Death Benefit
  2. Fees associated with the investment funds inside the annuity.

Below are Brighthouse Annuity fees and how you will be paying for them.

Mortality and Expense Risk Charge: 1.25% annually
Each business day, Brighthouse deducts a mortality and expense risk (“M&E”) charge from your account. This charge is equal to 1.25% annually and compensates Brighthouse for risks assumed, benefits provided, and expenses incurred, including the payment of commissions to your sales agent. This fee comes right out of your account annually for the life of the investment, whether your investments earn money or not. It compensates the insurance company for the risk it assumes under this annuity contract, and it applies to all variable investment options. This charge is commonly found in variable annuities, but it’s not something you have to pay with all annuities. A variable annuity is the only type of annuity that charges the M&E fee.
Underlying Sub Account Operating Expenses: Range from 0.28% to 1.43%
This is another ongoing fee charged for the investments inside of the variable annuity. You may not find this fee listed by the materials presented to you by the sales. To find out about these fees, you have to dig through the prospectus. I did that for you. The internal expenses of the sub-accounts for this variable annuity contract range from 0.28% to 1.43%.
Administration Charge: $30
Brighthouse deducts a semiannual contract administrative charge of $15 in June and December of each Contract Year. This is a standard fee that is charged in most annuity contracts.
Fixed Interest Account fee: $20
A $20 Annual Contract Fee is imposed on money in the Fixed Interest Account. This fee may be waived under certain circumstances.
Withdrawal / Surrender Charges: Declining 7-year withdrawal charge
In addition to all the fees listed above, this variable annuity also charges a surrender fee (sometimes known as a withdrawal charge). Typically speaking, a surrender fee is only assessed when an investor makes a withdrawal prior to a specified time. If You withdraw amounts from the Contract, Brighthouse may deduct a withdrawal charge. The charge equals 5% of each Purchase Payment withdrawn if withdrawn within 5 years of the payment date. There are situations when the withdrawal charge maybe waived—details are in the prospectus (see link at the beginning of this post.
Brighthouse surrender charge schedule

Commissions: How is Brighthouse paying the agent?

The Financial representative who sells this investment product receives a sales commission. These commissions are not transparent. You will not see this compensation as a line item in any statements. The amount and timing of compensation may vary depending on the selling agreement but could be as high as 6-7% upfront to the Brighthouse annuity salesperson.

A broker-dealer firm or financial representative of a firm may receive different compensation for selling one product over another and/or may be inclined to favor one product provider over another product provider due to differing compensation rates.

Brighthouse pays agents’ commissions on every future dollar you contribute to your 403(b) Brighthouse Annuity. This creates ongoing compensation for your broker.


Brighthouse Annuity FEATURES & BENEFITS


Guaranteed Death Benefit: A common feature of variable annuities is the death benefit. We highly suggest you read our in-depth Death Benefit article to determine whether this insurance benefit is worth the extra cost.

How this insurance benefit works: If you die, a person you select as a beneficiary (such as your spouse or child) will receive the greater of: (i) all the money in your account, or (ii) some guaranteed minimum (such as all purchase payments minus prior withdrawals).

In this case, the Brighthouse variable annuity agrees to pay out your total contributions even if your account takes a significant market hit.

Income Benefits: Brighthouse annuity does NOT provide an income benefit. So, in order to receive income from this account during retirement, you may have to annuitize the contract.

What is annuitization?
One of the basic insurance features that comes with a variable annuity is called annuitization. Annuitization refers to the process by which, you elect, your account value is converted into a stream of payments (this being the payout phase), for a specific period or for the rest of your life. When you annuitize a variable annuity contract, you forfeit your account value in return for these guaranteed payments. The insurance company calculates your payments using an algorithm that considers factors such as your age, your initial investment premium, and the annuity account value at the time of annuitization. Annuitization could be considered if an investor’s account value has declined substantially at a time when he or she needed income from the annuity.

Tax Deferred Benefit: One of the major selling points of a variable annuity is the benefit of tax deferral. An annuity lets you save for retirement and delay paying taxes on your earnings until you make withdrawals. By deferring taxes, you can increase compounded earnings growth and potentially end up with a bigger nest egg.

Here’s what you may not realize: If you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 403 (b) plan or IRA), you will get no additional tax advantage from the variable annuity. Under these circumstances, consider buying a variable annuity only if it makes sense because of the annuity’s other features, such as lifetime income payments and death benefit protection. The tax rules that apply to variable annuities can be complicated – before investing, you may want to consult a tax adviser about the tax consequences to you of investing in a variable annuity.

Dollar Cost Averaging: This is a program that allows you to invest a fixed amount of money in investment options each month, theoretically giving you a lower average cost per unit over time than a single one-time purchase. Dollar cost averaging involves continuous investment in securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit or protect against loss in declining markets.

Automatic Rebalancing: You may elect to have Brighthouse periodically reallocate the values in your contract to match the rebalancing allocation selected.

Free Withdrawal Allowance: Beginning in the second Contract Year and prior to the Maturity Date, you may exchange/transfer up to 10% of the Contract Value annually without the imposition of any applicable withdrawal charges or tax implications if moving to another 403b account.

T-Flex Guaranteed Investment Option: Brighthouse also offers a guaranteed interest account inside this Brighthouse annuity contract. T-Flex is a fixed annuity option that offers competitive interest rates. Interest rate guarantees and income options are backed by the financial strength and claims-paying ability of Brighthouse Life Insurance Co. This product or some product features may always not be available in all states. It also has withdrawal charges of 7% for five years on each purchase payment

Required Minimum Distribution Service (RMD): The minimum distribution generally required each year once an individual reaches age 70 1/2, by Federal income tax rules, can be calculated and forwarded from the annuity contract. Failure to take required minimum distributions for a year will generally result in a 50% penalty tax on the amount of the shortfall. Brighthouse will calculate the required minimum distribution for this Brighthouse annuity contract based on information provided and for this Brighthouse annuity contract only. If the participant opts in, Brighthouse will remit the required minimum distribution to the participant in installment frequencies elected by the participant. May not be available in all markets.

Roth Eligible: Brighthouse allows for Roth Contributions in this Brighthouse Annuity contract.

Loan Provision: The amount that may be borrowed, the interest rate charged, the loan repayment schedules and loan application fees are described in the loan application form and the contract Loan availability may be subject to plan provisions but normally allows you to borrow up to a maximum of 50% of your account balance or $50,000.


Conclusions on the Brighthouse Universal Annuity


To conclude, variable annuities can be unnecessarily expensive and complex investment vehicles for most people. As we learned above, variable annuities will generally add at least 1% in costs just for the M&E fee alone, not to mention the fees for the investment sub-accounts and/or income riders that can (and often are) added on.  Over time, these additional costs can negatively impact your return potential.

My biggest concern with this annuity (and most annuities in general), is that you are paying extra for tax deferred growth when you already have that benefit in a qualified retirement account such as a 403(b). As the Securities Exchange Commission states:

My biggest concern with this Brighthouse annuity (and most annuities in general), is that you are paying extra for tax deferred growth when you already have that benefit in a qualified retirement account such as a 403(b).

As the Securities Exchange Commission states:

If you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 403b, 401(k) plan or IRA), you will get no additional tax advantage from the variable annuity. Under these circumstances, consider buying a variable annuity only if it makes sense because of the annuity’s other features, such as lifetime income payments and death benefit protection.

THINGS TO CONSIDER ABOUT THE BRIGHTHOUSE ANNUITY

  • No additional tax benefits when part of a 403(b): You’re buying a tax-deferred product (an annuity) inside an already tax-deferred product (403b). Since 403(b) plans are already tax-advantaged, a variable annuity will provide no additional tax advantages. It most likely will increase the expenses of the 403(b), while potentially generating higher fees and commissions for the broker or salesperson.
  • Fees: especially the Mortality and Expense Risk charge: There are additional fees associated with variable annuities that are not found in other types of annuities or mutual funds. Over time, higher fees can negatively impact your return potential. If you don’t need the benefits of an annuity at this time, then paying these extra fees for the next 10 to 20 years will hinder the growth of your retirement account. This variable annuity carries additional fees that should be considered. Whether the higher fees make sense for you will depend on your specific needs and situation.
  • Surrender Charges based on ongoing contributions: You should carefully consider whether it is in your best interest to buy an investment that charges a penalty fee to get out of it. Many annuities will impose a surrender charge if the annuity is cashed in before a specific period.
  • No Income Benefit rider available. Brighthouse offers only a standard death benefit. Which means, in order to receive an income for life, annuitization of the contract may be required.
  • Agent commissions and compensation based on ongoing contributions.

HOW DO BRIGHTHOUSE ANNUITY FEES STACK UP AGAINST OTHER INVESTMENT OPTIONS?

According to one analysis from the independent investment research company Morningstar, the most popular version of the Brighthouse annuity has total annual operating costs that can range from 1.50% to 2.50%. Investment products with high costs must perform better than a low-cost investment product to generate the same returns. Comparable investment choices may be available that do not include the additional fees in insurance benefit costs. However, variable annuities offer features and benefits that may not be available with other investment options. 

WHEN THIS INVESTMENT MIGHT MAKE SENSE:

Variable annuities are appropriate only in very specific circumstances. If you have already maxed out all qualified retirement account options (403b, 457b and/or IRA) and would like to put aside more money into a tax-deferred account, then a variable annuity might be an appropriate option. However, think carefully about whether this specific variable annuity with the structure of its surrender fees, agent commissions, and income rider options would best support your retirement goals. You may also want to consider the relative features, benefits, and costs against or with any other investment that you may use in connection with your retirement. Be sure to read carefully the marketing materials and prospectus, and if you don’t understand what you’re paying for, ask questions and receive a full disclosure before deciding.

CAN YOU GET OUT OF A BRIGHTHOUSE VARIABLE ANNUITY?

  • If you are out of the Surrender Charge period, you can transfer the balance to another 403b account.
  • If you are still in the Surrender period, contract owners can withdraw 10% of the value per year without penalty. That 10% can be transferred or rolled to another 403(b) provider or qualified retirement account if you met certain terms.

IF YOU CURRENTLY OWN THIS ANNUITY:

Over the past few years I’ve discovered that many of my 403(b) clients were paying for insurance benefits to protect their retirement savings and paying high costs for it. You should understand that the significant factor in determining your investment’s rate of return—after asset allocation—is cost. Fees eat into your bottom line, so to make the most of this investment, you will want to minimize the fees you pay.

Now may be a good time to take another look and evaluate this product considering your long-term goals. If you are interested in a more detailed analysis specific to your situation, please, contact us.


THANK YOU!

We hope you learned something from reading our Brighthouse annuity review. If you did, please send your friends the link so they can be informed too.

However, if after reading this annuity review you still have questions or concerns, then please reach out to us directly via our secure online contact form here and we’ll be happy to help.

Did you notice anything in this review that may be outdated or in need of revision? Please let us know and we will make the necessary updates as soon as possible.

Are there any other annuities that you would like to have us review?

Let us know the name of the annuity and our team of experienced annuity geeks will get on it!

Thanks for reading! -Ken Ford


None of the third parties referenced in this communication are affiliated with Warwick Valley Financial Advisors, Private Advisor Group or LPL Financial.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Variable annuities are long term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component. They have fees and charges, including mortality and expense risk charges, administrative fees, and contract fees. They are sold only by prospectus. Guarantees are based on the claims paying ability of the issuer. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value.

Investors should consider the investment objectives, risks, charges and expenses of the variable annuity contract and sub-accounts carefully before investing. The prospectus and, if available, the summary prospectus contains this and other important information about the variable annuity contract and sub-accounts. You can obtain contract and sub-account prospectuses and summary prospectuses from your financial representative. Read prospectuses carefully before investing.

Free Guide: What Every K-12 Employee Should Know About Their 403B Plan

Retirement investing for teachers can be confusing. This guide is an excellent source of information about the various options available to you as a school district employee answering important questions.

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