The pilots at Delta are in their first annual open enrollment window for a new Global Variable Life Insurance (GVUL) plan that was added in their new contract. This plan offers exactly the same benefits as their old plan, but adds significant tax advantages. For more detail, read my post about that side of things.
The GVUL is unique because it offers a related, but completely optional benefit. This plan acts similar to a brokerage account where pilots can invest money in the stock market.
In and of itself, that’s unimpressive. Any pilot can go to Vanguard right now, and open a brokerage account in about 5 minutes without having to talk to a single human being. Vanguard is easy to work with, links directly to your bank account, charges you zero fees for having an account, offers exceedingly low-fee mutual funds and ETFs, doesn’t charge you anything to make trades, and doesn’t charge you to withdraw your money.
The investing side of the GVUL is worse than Vanguard in almost all of those areas, but offers such significant tax advantages that it might be worth putting some money into anyway. Let’s see how.
Review: Imputed Income
The GVUL’s first investing plus is that it reduces a pilot’s imputed income. This is the IRS taxing you for benefits you got from your company, even though you never received any cash. Delta Air Lines pays the premiums for their pilots’ term life insurance, but the IRS considers that imputed income and adds that amount to each pilot’s taxable income.
Thanks no doubt to a lot of lobbying for reasons that may or may not benefit pilots, the insurance industry convinced Congress to write a tax loophole for plans like the GVUL. Now, the IRS will only count a small part of Delta’s premiums as imputed income against pilots participating in the GVUL.
This is a huge tax benefit enjoyed by every participating pilot, whether they use it to invest or not.
Applying Pilot Math to this situation says that pilots should not spend those saved tax dollars on hookers and blow. Instead, that new annual windfall should be invested toward your future. However, this benefit is measurable and significant whether you invest those funds or not.
While the GVUL benefits all participants by reducing imputed income, it adds an even bigger tax advantage for investors. Through some more lobbying efforts, Delta’s premiums help pilots escape taxation in the future because those premiums get rolled into the cost basis of each pilot’s investment. (If you just said, “Wow, nice,” you can skip this section. If you just asked, “Huh?” then stay here.)
Cost basis is a way of saying: “what you put into an investment.” If you were to buy $1,000 of Fidelity’s Total Market Index Fund (FSKAX), your cost basis would be that $1,000. Let’s say that after a few years your shares of stock are now worth $1,500, so you sell them.
When you do your taxes, the IRS says:
$1,500 – $1,000 = $500
and makes you pay capital gains tax on that $500 of investment income. Capital gains tax is based on your overall income, but for most pilots it’ll either be 15% or 20%. That sucks. Old Neegan takes $75 out of your investment earnings, reducing your Return on Investment (ROI) to 42% instead of 50% (in our theoretical example).
The GVUL helps you avoid that tax hit. You use the investing side of your GVUL just like a brokerage account and buy a fund similar to FSKAX. You could put in that same $1,000 and get out that same $1,500 after roughly the same amount of time. When you sell, you’d still realize that $500 capital gain.
However, during that same amount of time, Delta will have been paying insurance premiums into this plan, and everyone keeps track of total premiums paid. Let’s say Delta had paid exactly $500 in premiums on the day you sold. The IRS allows your cost basis to change in the GVUL according to this equation:
Cost Basis = Money Invested + Company Insurance Premiums Paid
Since you’d originally invested $1,000 and the company paid $500 in premiums, your new cost basis looks like this:
Cost Basis = $1,000 + $500 = $1,500
Now, when the IRS calculates how much capital gains tax you have due they’ll subtract the price at which you sold your shares from this new cost basis like this:
Capital Gain = Price of Shares Sold – Cost Basis
Capital Gain = $1,500 – $1,500 = $0
That’s right, thanks to Delta’s insurance premiums increasing your cost basis, you can take 100% of your earnings (capital gains) and not pay any tax on them.
In my mind, this ends up being a double benefit:
- Delta’s premiums reduce your imputed income on the front-end (and you should invest the difference).
- Delta’s premiums increase your cost basis, reducing capital gains tax when you cash in your investments. This further reduces your tax bill on the back-end.
That’s a lot of bang for your buck, and the best part is that it isn’t your buck. This all happens thanks to Delta’s money covering your insurance premiums. I don’t know of another brokerage account option with this kind of benefit. (I do know some other investing options that offer what are likely greater benefits. We’ll get there shortly).
The (First) Catch
If you think this sounds too good to be true, you’re right. We should all be asking: “Why would MetLife bother advocating for this?” The lobbying required to get this rule passed can’t have been cheap. It costs them a lot of money to administer the brokerage side of their business. They’re good to offer us a favorable insurance product, but make no mistake: they didn’t get us these investing deals out of the goodness of their hearts!
The first catch here is that MetLife charges the pilot (not the company) what’s called a “front load” of 2.25% on any money invested. This is a fee they take the moment you send them investing dollars.
If you’re new to investing, this may not sound like a lot. If you aren’t, you’re probably frustrated by this number. If a friend were to tell me, “Hey Emet, I just invested in this great new deal…and I’m only paying 2.25% in fees,” I would immediately give him a Gibbs slap and ask what he’s thinking.
In this day and age, a 2.25% fee for any investment is simply too much. As we mentioned earlier, you can invest with Vanguard, Fidelity, and a variety of other companies with a 0% front load. That is the industry standard. A whopping 2.25% is…well below standards.
And yet, pilots should remember that they can offset a lot of taxes and fees in the GVUL using Delta’s premium dollars. We’ll quantify all this shortly. However, there’s a clearly definable point at which those premium dollars cover any expected capital gains, plus this ridiculous 2.25% fee, and the pilot still comes out ahead.
The next catch in this whole plan is the withdrawal fee. For some inexplicable reason, MetLife decided to buck the industry standard and charge pilots $25 every time they pull money out of this plan. This fee is just silly. I’ve never done business with a brokerage that charges a fee like this. Personally, I’m not going to pass up a good opportunity over a $25 money grab, but that may be important for you. In truth, this fee is so small, I completely ignored it in my calculator (see below).
Yet Another Catch
I wish I could tell you that the 2.25% front load, and $25 withdrawal fee were the only issues with the investing side of the GVUL, but they aren’t.
Unfortunately, the GVUL only allows pilots to choose from a menu of 20 specific funds for investing their money. This isn’t unheard of, even in things like a major airline pilot 401k plan. However, the funds that MetLive chose for the Delta GVUL are extremely expensive.
Each of these investments charges investors a fee, also called an expense ratio. Thanks to Vanguard founder John Bogle, most modern index funds charge extremely low fees. That Fidelity FSKAX we mentioned earlier? The expense ratio is 0.015%.
The fund charges this to you annually, by simply reducing your investment gains. I don’t begrudge a fund charging some fees. Essentially large companies, it costs a lot of money to keep these entities running. The government paperwork alone must require numerous full-time employees. I don’t mind paying investment fees at or below 0.05%. However, anything above that subjects me to involuntary facepalms.
The lowest-fee option in the Delta pilots’ GVUL has an expense ratio of 0.24% – a full 16 times higher than FSKAX at Fidelity. The most expensive option in the GVUL charges a staggering 0.63% – making those fees 42 times those at Fidelity!
Even more frustrating is that Fidelity offers a zero-fee index fund (FZROX).
So, with the GVUL you’re paying 2.25% up front, and $25 to withdraw your own money. Then you’re also paying investment fund fees at least 16 to 42 times higher than an equivalent fund elsewhere, every year.
Is it now clear why MetLife wants you using the GVUL to invest?
Are Higher Fees Worth It?
If you’re the type of person who reacts emotionally to the news about these fees and immediately decides to not invest through the GVUL no matter what, you should consider getting out of investing altogether. Sink your money into a high yield savings account and get a hobby to keep your attention off your money, or hire a pro and let them manage your money for you.
At this point, savvy investors might consider the possibility that these particular investment funds could perform well enough to justify their fees. If they do far better than those low-cost alternatives at places like Fidelity, why not pay the fee to the pros with the best performance?
Let’s compare some of these funds to see.
Two of the GVUL investing options include: Blackrock’s Capital Appreciation Fund (MGFDX), and Brighthouse Funds Trust II MetLife Stock Index Portfolio Class A (I can’t find a ticker symbol, so we’ll just call it Brighthouse). We’ll compare these to the Fidelity Total Market Index Fund (FSKAX) I mentioned earlier. First, let’s look at just expense ratio, year to date performance, and performance over the last 1, 3, and 5 years:
|Fund||Expense Ratio||YTD Returns||1 Year||3 Years||5 Years|
If all we looked at was YTD returns, we’d conclude that the Blackrock fund is totally worth the higher fees…even at 42x. Their returns this year have more than doubled the competitors we’re considering. However, if we look further along the timeline, the picture changes drastically.
By the 5-year mark, we see that the Fidelity fund did better than both of these higher-cost options. (I didn’t include the 10-year figures here, but to be fair, MGFDX is currently beating FSKAX by about 2% at the 10-year point). Best case, I think we need more information.
Let’s try looking at performance by calendar year:
For me, these numbers tell a much more useful story. In good years, when the entire market goes up, all of these funds go up as well. In 2020, MGFDX went up nearly twice as much as both competitors. However, in 2021, the low-fee Fidelity index fund out-performed it.
It’s also important to note that in the bad years, every fund does poorly. In 2018, MGFDX stayed just above zero while the other two funds lost money. However, in 2022, MGFDX lost twice as much money as the other two options. (It’s important to note that with compounding interest, drops hurt more than rises help. If your portfolio drops 20%, it will take a rise greater than 20% just to get you back to zero.)
Overall, I don’t feel like these expensive GVUL funds have performed better enough to justify such high fees. Depending on when you need your money, the extreme volatility of these funds could be a major problem. Overall, I’d rather pay a much lower fee and get an index fund that more closely tracks the market average. It will still experience volatility like the rest of the market, but that volatility won’t get amplified like it does for those other funds.
Over the very long term, it appears that most of these funds approach the overall average performance of the market. It’s critical to note that none of them does consistently better than the other. This is fundamental to the idea of index fund investing.
Over the long term, very few people do better than the market average. If you haven’t read The Simple Path to Wealth by JL Collins, you need to. If you’re cheap, you can read the same content on the author’s website. He explains why most actively managed funds fail to even do as well as an index fund. This isn’t just his opinion. Standard & Poors publishes an annual report of all actively managed funds, and a majority of them always do worse than a low-fee index fund, despite charging much higher fees like the funds offered in the Delta GVUL.
Past performance is not a guarantee of future gains, but the funds currently offered in the GVUL are probably not a compelling value, in and of themselves.
Let’s note that Delta’s pilots should have at least some power here. They, through their union, should be able to advocate for adding some lower-fee funds to the menu of options in the GVUL. This should be an easy sell to MetLife: “If you continue offering these ridiculously expensive funds, nobody’s going to use this feature at all and you won’t get your 2.25% front load. If you offer some better funds, you’ll at least get some takers and make some money. Would you rather have 2.25% of something or 2.25% of almost zero?”
I wish I could stop beating up on the GVUL’s investing options, but there’s still more to do. If you dig into the prospectus for the Delta GVUL you’ll find some hidden gems like this:
This fine print is MetLife admitting that they’re not even telling Delta pilots about all the fees they charge. What are those fees? We have no way of knowing at this time.
I would hope that the Delta pilots’ union reps would insist on getting some more complete information on these hidden fees.
Special thanks to Jesse Reed from Creative Planning for pointing this fine print out to me. If you want his quick take on the GVUL, read it here on LinkedIn. I personally place great value on his financial opinions.
Running the Numbers
At this point, you might think I’m strongly against using the investing side of the GVUL. You’d be wrong.
If you start reading opinions about GVUL investing from professional financial advisors, you’ll hear them say they don’t like the GVUL’s fees…especially those in its limited menu of very expensive funds. They’re 100% correct that those funds are ridiculous. Delta and ALPA should do better for their pilots.
And yet, if we set aside our natural, emotional responses to the bad things about GVUL investing and look at some actual numbers, the results are pretty clear. In many cases, investing through the GVUL beats investing in lower-fee index funds through a regular brokerage account because of the tax advantages the GVUL allows.
Don’t take my word for it though. I built a calculator that takes most of these factors into account and compares returns on a similar investment under both options. (I ignore the $25 fee MetLife charges when you withdraw money. It’s stupid, but piddly). The calculator gives credit for tax savings that you should invest, but does not assume you actually invest them. If you do invest those funds, it’ll sway things even more in favor of the GVUL.
Here’s a video explaining how to use the calculator, how it works, and where to find the key takeaways. Remember everything is based on the assumptions that you put into the spreadsheet. Garbage in will yield garbage out. You can download a copy of the calculator by clicking on this link.
(You should be prompted to save your own copy. Sorry, but this is the only way to safely and effectively post a spreadsheet online. Don’t ask to edit my copy. Use “File -> Download” or “File -> Make a Copy” to get your own, editable version.)
Please, do not make any investing decisions based on this article or my calculator alone. My intent is for you to use this calculator to get an idea of what your situation may be, then take your results to a certified financial advisor. Let them look at your calculations and help you decide what to do.
If that advisor discounts the GVUL out of hand, because of the fees or any other reason, engage them in a more detailed discussion and insist they justify their position with numbers.
I believe that most airline pilots benefit from professional finance advice. However, one of the things I dislike about that industry is that it’s built on a model of funding itself by charging an Assets Under Management fee (AUM). Most financial advisors would rather be in charge of investing your money, rather than leaving you to do it yourself in the GVUL, because they then make 1% per year on your funds. They’ll explain to you that their 1% is far better than the 2.25% front load, plus exorbitant ongoing fees that the limited menu of investment options in the GVUL allows.
Although your advisor will be correct on all those points, don’t let them gloss over the tax advantages of investing in the GVUL.
God’s honest truth is that you should not pay someone else an ongoing fee to pick stocks on your behalf. As we’ve already discussed, most of the people offering to charge you for those services do worse than an index fund. You don’t need to waste 1% of your wealth every year to do better.
That said, I do believe in compensating professional advisors for the value they provide. Ideally, they’d all operate on a fee-for-service model. It would be worthwhile to spend a few hundred dollars to have a professional advisor help you decide whether to invest through the GVUL or not. Then, that pro should leave you to do things on your own and not charge you an ongoing fee.
The worst case scenario here would be that they advise on one direction or the other, let you invest on your own money, but then try to tell you that since they advised you on that decision, that’s all money under their “management,” meaning you owe them an annual 1% anyway. I’ve heard of pilots paying for similar services…paying advisors who charge to tell you how to invest the money in your TSP or 401k. Personally, I would not do business with this type of company.
Beating the Street
Although I assert that you can potentially do better investing with the tax advantages of the GVUL than through a regular brokerage account, there’s a third option with the potential to put your first two options to shame.
There is a whole field of “alternative” investments involving things other than buying stocks, bonds, and mutual funds. This frequently involves what’s called a syndication…essentially a small company set up to invest in a specific real estate project. This could be anything from an apartment complex, to a mobile home park, to self-storage facilities, to oil and gas wells, or more. These funds gather money from a relatively small pool of investors, and usually require a minimum investment of $25K-$50K.
Frequently, thanks to more lobbying and pork barrel politics, Congress has written tax loopholes that provide major advantages to these kinds of real estate deals. Frequently, a syndication involves making some improvements to a property, and then taking a majority of the tax deductions for that expense up front. It gets more complicated, but as an investor the advantages are impressive.
Many syndications are able to generate “paper” or “phantom” losses so large that individual investors will get a tax deduction in the first year of the investment approaching the amount of money they invested into the project. These paper losses will offset returns from similar types of investments, saving you tens of thousands of dollars in taxes.
Then, these projects pay a return over time, either from rents, gas royalties, or selling off portions of a large property. At the end of a specified term, usually in the 3-5 year range, the syndication sells the entire property to a larger operator (think Blackrock). Your syndication will have made improvements to the property, raised rents, increased production, or taken other measures to increase its value. So, at the end of the term, investors typically get all of their capital back, plus some profit…all in addition to the rents or royalties they collected for the past few years and all those sweet tax bonuses.
I’ve invested in a few different syndications. Some were frankly mediocre. Others; however, have provided tax benefits far superior to anything the GVUL could offer and investment returns far better than I would ever expect from any stock market investment.
These kinds of investments are far from a sure thing, which is why the federal government won’t let you invest in one unless you’re “accredited.” This simply means you have a net worth over $1M, or an annual income of at least $200,000 (single) or $300,000 (married). The idea here is that if you make that much money and choose a catastrophically bad investment, it won’t ruin your family financially. Regional captains and most major airline pilots should easily qualify for accredited investor status, so this probably isn’t more than an easy paperwork drill for you.
I hope at this point, you’re intrigued by the idea of investing in something like a real estate syndication. These deals really can offer both tax benefits and investment returns superior to anything invested in the stock market (including the GVUL). That said, you need to get into this kind of investing carefully.
Before you put money into any alternative investment, I strongly recommend you consider maximizing contributions to any tax-advantaged retirement account you have. This includes: IRAs, TSPs, 401Ks, HSAs, 529 plans, etc. These are table stakes for a serious investor. Fill them up first before branching out.
You may hear about investors who don’t contribute to their 401k, opting instead for alternative investments. You may eventually feel the same way. However, until you’re overwhelmingly confident in your investing savvy, keep contributing to the basics.
Then, any time you identify a potential alternative investment, you must conduct due diligence. This means spending actual time to put actual attention on the underwriting documents for the deal. You need reason to believe that the investors are being honest and realistic about the costs they’ll incur in this deal, and the potential upsides. In most cases, you should strongly consider having your fee-only financial pro take a look at the deal for you too.
Part of making these types of investments safe is only trusting people with whom you have a personal relationship. This requires some actual Networking. I got into one recent syndication because an old USAF flying buddy happened to be involved with the project. My wife and I also know his wife…she helped deliver one of our babies. He contacted me directly about the opportunity to invest, and I was able to have some very frank discussions with him about the deal before even starting on my actual due diligence. I was eventually pleased to be able to invest in the deal.
I’ve made two recent investments with another capital fund because I got to essentially spend an entire weekend grilling the guy in charge. We talked money philosophy, the specific types of investments he runs, flying (he’s an airline pilot), and more. At the end of the weekend, I felt confident that we see eye-to-eye on most things finance related, and felt safe investing in his deals.
If you aren’t sure about where to begin, start asking around. You’ll be surprised at how many of your contacts can introduce you to someone in this investing realm.
In the meantime, make sure you start educating yourself on these kinds of investments. If you aren’t already, start listening to the Passive Income Pilots podcast. They cover all the principles you need with some great guests. The two hosts also happen to be pilots who run their own investment firms that offer the kinds of syndications I’ve discussed here.
Another great source of education on these types of opportunities is the BiggerPockets Real Estate podcast. They cover a wide variety of investing types, but syndications come up repeatedly over their 800+ episodes.
Another way to start getting involved in these types of investments is to ask your finance pro to find them for you. Realize that when you do this, any investment you make will be under their management…and that will likely cost you a fee. I’ve invested in a couple deals through a financial advisor that my wife and I use for some of our assets. We’ve had mixed results on those deals. Overall, I think they’ve been valuable, but I believe most pilots are better off building their own network and finding their own way into alternative investing.
As you do this, don’t rush! You should note that I’ve passed on far more deals than I’ve invested in. Take your time to conduct due diligence on any deal you’re considering. Stick your money somewhere useful for the time being. Let it grow and don’t deploy it into an alternative investment until you feel confident that it’s a good deal. Even then, realize these opportunities are restricted to accredited investors because they carry unique risks. Personally, I never invest so much in any given deal that it would cause my family problems if things went wildly wrong and the whole thing fell through.
I’ve been a fan of using a half stock index/half bond index account as a holding pattern for money until I find the right syndication, though vanilla high yield savings accounts are paying a lot due to inflation. You could do worse than making 4-5% in a HYS account right now.
Or, another option would be to sock away your alternative investing money in the investment side of your GVUL. Let the money grow there and use the tax advantages to offset any earnings. The money there is liquid enough that you can withdraw it to invest in a syndication as soon as you’re ready. As you run my GVUL calculator, you’ll note that your effective Return on Investment is highest for the first couple years your money spends in the plan anyway.
Wow, that was a lot of information…plus there’s a video you may want to watch. Thanks for sticking through this, and I hope it’s been useful. Here are my key takeaways:
- The insurance side of the GVUL appears to be a great deal. I can’t find a reason not to participate. If nothing else, it’s the same coverage you used to have, but it adds the benefit of reducing your imputed (taxable) income.
- There are some big downsides to the investing side of the GVUL. The fees are way too high, and Delta pilots should insist their MEC get them some relief. There’s no reason MetLife can’t at least offer a low-fee index fund like VTSAX, FSKAX, or something similar within the GVUL.
- A certified financial planner may have a principle-based aversion to the investing side of the GVUL. They’re not wrong in this. However, if you run the numbers, the GVUL can beat investing a similar amount of money in a low-fee index fund on your own, despite those significant drawbacks.
- Although the GVUL may provide you with an excellent investment vehicle, many alternative investments provide both tax advantages and investing returns far superior to those available in the GVUL or a regular brokerage account.
- You should not jump blindly into alternative investing. Take your time, educate yourself, Network, and do your research for every deal you consider. If you need a place to stash your money until you find the right syndication, the GVUL may be just the place to do it.