Delta recently started offering their pilots a new type of life insurance: a Global Variable Universal Life (GVUL) policy. This policy has some intriguing new options for pilots to invest their money. I’m going to run an experiment to determine whether the potential benefits of GVUL investing outweigh some significant drawbacks.
You should refresh your memory on GVUL basics by reading two posts I wrote about the policy (here and here).
The two key advantages of this policy are:
- Unlike the legacy term life insurance plan, most of the premiums that Delta pays into the GVUL on behalf of the pilot are not counted as imputed income. This represents a big tax savings for every participant.
- The GVUL has an attached, optional, investment account. It’s not a very good way to invest, but government policy allows insurance premiums paid by Delta to offset gains from GVUL investments. Over the course of my career, this should represent roughly $250,000 in tax-free investment gains!
These advantages come at some significant costs:
- The GVUL only allows investments from a very limited menu of funds. Most are even actively-managed funds (barf!)
- MetLife (the GVUL provider) charges pilots a 2.25% fee, called a “front load,” on every dollar invested. The domain of shady Wall Street wolves of the past, front loads of any percentage are virtually unheard of in modern retail investing. This fee is a bad deal.
- The investment fund options on the GVUL menu each charge very high ongoing fees themselves. These expense ratios range from 0.23% to 0.63%. While those might seem small, they’re at least 16 to 42 times higher than the 0.015% fee available for excellent, passive, broad-based index funds available in the Delta pilots’ 401k plan. In fact, the Delta pilots have access to FZROX, a zero-fee total market index fund. MetLife’s fees are unreasonably high.
There are even more drawbacks to the investing side of the GVUL, but let’s focus on moving forward.
Harnessing Collective Bargaining
The first way I started addressing the drawbacks of GVUL investing was to write a resolution for my union council, Local Executive Council 66 of ALPA’s Delta MEC. My resolution noted that getting the GVUL was a great victory overall, but highlighted the shortcomings noted above and directed the union to work on ways to eliminate or mitigate those problems. I even suggested some concrete fixes.
My resolution passed with flying colors at a recent LEC meeting and will be carried up to the MEC for inclusion in our overall negotiations with the company. I’m not holding my breath, but it does seem like a straightforward ask.
Devising an Experiment
In the meantime, I figured it might be informative and entertaining to conduct an experiment that should illustrate my concerns.
I decided to invest some money using the GVUL, while investing the same amount of money in a more traditional (and drastically lower-fee) brokerage account as a control group. I planned to leave the money invested for a year, reporting irregularly (because I’m too lazy and/or busy to post consistently) on the progress of each pot of money.
I figure that over the course of a year, we should be able to see the effects that MetLife’s fees have on investment dollars.
So, I logged on to MetLife’s GVUL website to transfer some funds and start my investment. Are you surprised to hear that things started going haywire right away?
What Century Are We In?
It took a lot of clicking to find anything about my GVUL investment options. I throw MetLife a bone here. They’re not normally a customer-facing investment firm…they’re a life insurance company. Still, it was frustrating that I had to dig so hard to find what I needed.
When I finally got to a menu that gave me the option of making a lump-sum deposit (because there’s no way I’m doing monthly payroll deductions yet) I got the oddest message:
Yes, MetLife instructed me to mail them a check, promoting me to ask myself: “What century am I in again?”
Baffled, I clicked around the website for another 10 minutes before giving up, picking up my phone, and calling the customer service number. I didn’t like many of the answers I got, but you’ll see shortly why I’m so glad I called!
Thankfully, the phone tree at the number provided had pathways specifically for pilots from my airline, meaning I got to a human far more quickly than when I call USAA or try to reach the schedulers at my airline.
The nice lady confirmed that, yes, I did need to mail in a check to invest money in my GVUL.
Early in this conversation she gave me a surprisingly emphatic warning: MetLife charges a 2.25% front load on all investment funds!
I know ma’am, it’s so crazy! I don’t know of anyone else in the investing industry still doing that!
Honestly, I was surprised that she volunteered the information. It almost felt like the company didn’t want me investing through them.
Allocate Investments BEFORE Sending Money!
As our conversation progressed, she mentioned another critical point that narrowly averted disaster. She asked whether I’d designated where I wanted my money to be invested yet.
I replied that I hadn’t…because I hadn’t been able to get any money into my account yet. Their crazy website wanted me to send in a physical check…. At every other brokerage I use, all deposits go into what they call a settlement account, and I can only use money in that account to buy shares of equities.
She explained that MetLife’s GVUL investing works backwards (my word, not hers). You have to specify your asset allocation (on the website) before sending in your money (not on the website).
She noted that my account had the default designation for 100% of my money to go into their “Fixed Fund.” Advertised as a good deal because it guarantees investment returns of at least 1.5%, this fund currently returns something above 4%, though they don’t tell us how your money is actually invested.
With high yield savings accounts all over the internet also returning more than 4%, MetLife could safely offer a guaranteed 1.5% by doing as little as investing this money in an high yield savings account of their own. They can pass the full 4-ish percent onto us pilots, or they could return less and keep the difference.
I have zero desire for my money to sit in this fund, so I told the nice MetLife rep that I’d definitely transfer my money to some other investment once my funds got deposited…at some unknowable future point after UPS (and not FedEx anymore) delivered my paper check to St Louis.
She replied that I needed to be careful with that. It turns out that MetLife has a rule restricting us to only being able to transfer a maximum of 1/4 of our Fixed Fund dollars out of that fund per year.
Seriously?
Yes.
Again, what century are we in?
I’m sure glad I called! I would have never noticed this disastrous, and more than a little silly, loophole without the phone call. So, your first major takeaway from this post is:
If you’re going to invest money in your GVUL, log in and set your asset allocation BEFORE you send them any money!
And if you’re considering the Fixed Fund, think long and hard about the fact that it’ll apparently take you four years to get your money out of there. Don’t choose that fund unless you’re certain you won’t need your money in a rush.
GVUL Asset Allocation
The nice rep on the phone didn’t seem to have any other news to shock me with, so we concluded our call and I went to the investing menu to pick my funds.
Originally, my vision had been to invest $1000 each in two GVUL funds…the ones with the lowest and highest expense ratios. As it turns out, the lowest fee option is the Fixed Fund. (Yes, they want to charge 0.23% to to put your money into something less liquid and lower-performing than an Ally savings account.)
I think this experiment is worth accepting high fees and possibly low returns on a couple thousand bucks for the sake of amateur journalism, but even I can’t stomach this option.
So, for the lower-fee condition of my experiment I decided on the Brighthouse Funds Trust II MetLife Stock Index Portfolio. You won’t find a standard ticker symbol for this fund, because it only exists for things like GVUL investing. It states that its goal is to track the S&P 500, and it has an expense ratio of 0.26%…slightly higher than the 0.23% fees on the Fixed Fund.
Note that just because this fund aims to track the S&P 500, that does not make this a passive index fund. Financial Times notes that: “The fund normally invests at least 80% of the Portfolio’s net assets in stocks included in a particular stock index. The S&P 500 Index consists of the common stocks of 500 companies, most of which are listed on the New York Stock Exchange. It may also invest in real estate investment trusts. The advisor may rebalance the Portfolio due to, among other things, cash flows into and out of the Portfolio or changes in the S&P 500 Index.”
Basically, it’ll be difficult, at best, to know what my $1000 are actually invested in. This appears to be an actively-managed fund, meaning it’s part of the group of funds that overwhelmingly underperforms the index they purport to track. (See this article, and the source data from the S&P website supporting this assertion.)
Great.
Next, I wanted to pick the highest fee fund to see whether they earned all that extra money they charged.
I went with the Brighthouse Funds Trust II BlackRock Capital Appreciation Portfolio. BlackRock is a big name in investing, and they appear have at least 5 different classes of this fund. I honestly can’t tell which one we’re getting through the GVUL, though some information on the MetLife website seems to match this entry on Financial Times.
A friend sent me a prospectus for MetLife GVUL that places the expense ratio for this fund at 0.63%. The Financial Times page lists a net expense ratio of 0.78% for their similar-looking entry. The information I’ve been able to find on the secure MetLife website doesn’t provide any clarity, so I guess part of this experiment will be a test to see if I can figure out which class of this fund we get access to, based on any info provided after my money gets invested.
As far as I can tell, this is definitely an actively-managed fund that invests primarily in companies worth more than $1B. You’d think these would be pretty safe bets, but then look at how Elon Musk has singlehandedly destroyed the social network formerly known as Twitter….
Let’s repeat our mantra: most actively managed funds fail to match the market average.
External Asset Allocation
Now that we have two test conditions for our experiment, we need some control conditions.
My first control will be investing $1000 in FXAIX. This is Fidelity’s S&P 500 index fund. It’s a passive index fund with no transaction fees or front load, and an expense ratio of 0.015%.
I believe this is fairly direct competitor for our Brighthouse Funds Trust II MetLife Stock Index Portfolio. Both aim to track the S&P 500 index. As a passive index fund, Fidelity accomplishes this goal by purchasing one share each of the 500 largest companies in the S&P. Once they have one share each, they go buy another. They repeat this for as much money as they can raise. There’s almost no telling how the GVUL fund does this.
Yes, with an expense ratio of 0.26%, the MetLife fund has 17.3x the fees of the Fidelity option, not including the GVUL’s front load, withdrawal fees, or anything else. (I didn’t say this would be a fair fight. I’m not the one who assembled MetLife’s menu of fund options.)
I’m going to run this test case within my 401k, simply because it’s convenient. I’ll use Fidelity’s Brokerage Link service to put a buy order for $1000 worth of of FXAIX as close as possible to the equivalent funds hitting my GVUL investment account.
I think it’d be fair to only run a single control condition, but I like the idea of also comparing a total stock market condition to the GVUL funds. As such, I also plan to place a buy order for $1000 of VTI, Vanguard’s Total Stock Market ETF, within my existing Vanguard brokerage account. This is a passive, whole-market fund with an expense ratio of 0.03%.
Yes, that expense ratio is double my Fidelity option, but it’s only 1/21st as much as the best case expense ratio for the more expensive BlackRock fund we picked.
I would have preferred to use VTI’s traditional mutual fund sibling, VTSAX, for this experiment. However, I already own a lot of that fund and don’t want to take the massive capital gains tax hit I’d suffer from selling most of it. I could set up a separate account at Vanguard specifically for this experiment. If that seems easy and simple, I may do it. If not, it’s easy to just buy some VTI and hold it in an existing account.
Let’s note briefly that I could have chosen FZROX, Fidelity’s Zero-Fee Total Stock Market Index Fund, as a control condition as well. On one hand, I feel like this wouldn’t be fair. I don’t mind paying a nominal fee for a good investment. I hope to illustrate that the magnitude of the fees matters, and FZROX would mean a lot of useless divide-by-zero errors, so I’m leaving it out.
Summary
Let’s summarize our experiment:
Null Hypothesis (Ho): Investments of equal dollar amounts in four separate funds will provide roughly equivalent returns, after accounting for all fees.
Alternative Hypothesis (Ha): The funds in the GVUL will provide lower overall returns than external passive index funds.
I presume, but won’t be running statistics to test that if the GVUL funds show worse performance it’ll be because:
- The GVUL funds are actively managed.
- Fees associated with GVUL investing are significantly higher than the options at the more traditional brokerage services.
Duration: One year, minimum. I hope to publish updates as often as monthly. I may choose to continue running this experiment beyond its first anniversary, but make no promises.
Discussion: The primary advantage of GVUL investing is the ability to deduct life insurance premiums against investment gains. I already demonstrated that this advantage alone more than makes up for these higher fees, assuming equal investment returns.
The primary purpose of this experiment is a direct comparison of fund performance while accounting for fees. I’ll do my best to include tax treatment considerations in my results, but that gets complicated, so please don’t expect the world here.
Bias acknowledgement: In case you can’t tell, I’m not impressed with MetLife’s setup so far. I think they should provide lower fees and a more modern, user-friendly interface for a large enterprise customer like us.
That said, I’m genuinely interested to see the results of this experiment.
I was also strongly against Delta’s new Market Based Cash Balance Plan (MBCBP) until I actually ran the Pilot Math on it. In the end, I chose to participate in that plan and will simply use the $345,000 income loophole to exercise control over most of my money each year.
I intend on letting the numbers do the talking with this experiment.
Thanks to Randy Fath on Unsplash for this post’s featured image, depicting the technology level of MetLife’s funds transfer system.
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