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#16 EdLaFave

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Posted 20 June 2017 - 09:18 AM

What are you thoughts on telling people about Self Directed 403b plans?  I feel like when I tell people I choose my own funds they instantly decide this is something they are not capable of.  I think a lot of people need, or think they need, that "financial" person that will come to their house and tell them their money is safe and sound.  I suppose when telling people about choosing the three fund or one fund approach it's important to deliver the message in a way that says, "this is the way I did it, this is what I was comfortable with, here is some information on three fund portfolios and index funds," versus "you should pick these funds here".


I don't know what the perfect solution is but I'll share my thoughts. At a high level here are the three main points I like to cover right off the bat:

1. Did you know that virtually all of our vendors charge fees so high that they consume the majority and sometimes all of our real investment returns?
2. If they show interest then I'd suggest that advisers are able to do this because we all assume investing is too complicated to understand but all we need is a single all-in-one fund or 3 individual funds (US stock, international stock, and bonds), which is in fact what most advisers own themselves!
3. If there is still interest then I'd explain I use Security Benefit's NEA DirectInvest to implement the 3 Fund approach and the fees are so low that after 30 years they're expected to cost me roughly 3% of my real returns.

From there I'm prepared and enjoy getting into all of the dirty details if they push it in that direction. Otherwise we can keep it high level (fees = bad, 1-3 funds = fully diversified, index > active). Either way I volunteer to walk them through anything and everything. I'll go to people's houses, call, text, email, facebook, walk them through the steps to enroll, make 3-way calls to vendors with them, whatever they want, whenever they want.

I do make a point to tell them that I don't fully understand the law and I have a vague impression it is illegal for a "normal" person to provide financial advice. So I can't advise anybody but I can tell you exactly what I did, why I think it was the best choice, and what I'd do in hypothetical situations.
 

I just felt like an idiot

You don't sound like you suffer from this the way a lot of people do but I'm pretty adamant about shutting down that emotion/thought process. Nobody is an idiot for getting taken advantage of when it comes to investments. Only a very small minority weren't taken advantage of and they probably had somebody more experienced to guide them. We're not idiots, they're immoral financial predators.
 

There are only seven vendors offered by my district.  It might be worth it to take the time to call through that list and see what is being offered.

7 vendors will take a while to work through, but I encourage you to do it. Start with the ones your coworkers use the most and work your way down the list.

Here is some advice, when they explain all of the details ask to see the official documents to verify what they've said is 100% accurate. Don't accept their requests to call you back or to email it to you. Tell them you've got all day and want to work through it right now with them. Otherwise that official information will probably never find its way to you. Remember when you're dealing with reps, it isn't just about honest vs dishonest, it is also about knowledgeable vs poorly trained and ill-informed. It is easy to want to attribute everything to malevolence but incompetence is a highly probable reason for their behavior too.
 

This was a great way to break down the cost of each plan.  I know there was at least some interest from the union and the B. A. about Security Benefit.  I'll have to talk with my union leader again and see if she can get an open discussion started with the B. A. about adding this vendor.


You'll find there are mixed views on Security Benefit. NEA DirectInvest is objectively awesome, no grey area there. However, adding security benefit means you're adding a vendor that will viciously go after employees and try their best to put them into other explo¡tative plans. I spent countless hours on the phone with Security Benefit transferring from one person to the next and nobody would confirm that NEA DirectInvest was a valid option for me to enroll in. I believe only 3 or 4 people in the entire state of Florida are enrolled (include my wife).

If I had to pick the single best vendor for a generic school district with generic employees, it would be Vanguard because:

1. They offer the cheapest 1 fund portfolio (and who knows, some day they might offer admiral variants of those funds), which is probably what is best for the vast majority of educators. People like me who prefer the 3 fund portfolio will wind up paying an extra 0.10% than we'd have to pay at Fidelity or Security Benefit's NEA DirectInvest but it is a sacrifice for the common good.
2. Every time I or anybody I've known has spoken to Vanguard they've gotten EXCELLENT financial advice. I know that wouldn't be the case at Security Benefit and I'm not sure about Fidelity but they worry me because they offer a ton of really awful funds in addition to their excellent low cost, total market index funds.
3. I believe in rewarding THE company who has fought for investors. I think that company culture is more likely to take care of educators than not.


Navigate and reform OCPS' 403b and 457b.

#17 EdLaFave

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Posted 20 June 2017 - 09:37 AM

I know you despise TIAA.

That is too strong of a statement, they're the 6th best vendor I've analyzed and on my site I've credited them for being direct, honest, and easy to work with. The problem is the fees.
 

TIAA is a million miles higher than your low bar analyses when compared to AXA!

I agree but allow me to quantify it. If I followed AXA's advice, I'd be paying 1.75%, which would consume 65.37% of my real profits over 30 years. If I built a 3 fund portfolio at TIAA, I'd be paying 0.63%, which would consume 26.20% of my real profits over 30 years.

...assumes 6% returns and 3% inflation.

...obviously much better than AXA but it is flat out unacceptable that I'd give up a quarter of my real investment returns to somebody taking on 0% of the risk and offering me absolutely nothing.
 

Please don't paint a broad stroke over one fund that costs 0.58%.

Their funds are actually priced perfectly, 0.04% - 0.08% for Vanguard's total market index funds. The problem is the 0.58% fee is an annual fee for the pleasure of having a TIAA account! Ugh!
 

Their philosophy is very similar to Vanguards.

From reading your excellent book I now know that but I don't know how they square it with a 0.58% annual charge. Their rep claimed it was OCPS' fault, maybe the rep was right. I don't know the details of how they got where they are.


Navigate and reform OCPS' 403b and 457b.

#18 sschullo

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Posted 20 June 2017 - 11:35 AM

Hi Ed,

We have a spirited debate over a company that I have had a long and good history. Nobody except the annuity agents and my union officers all hated TIAA for years. 

 

I disagree about you listing TIAA as "inferior"  along with: 

 

Ed, are you serious? What am I missing? Your math is accurate but when you say that TIAA cref doesn't take any risk, well that's true of EVERYBODY, even Vanguard!  You rate TIAA CREF as inferior as with National Life Group!!??? There are extra fees with all employer sponsored tax deferred plans. In our award-winning plan, our fees are about .60% (range from .25% to .90%). Yeah some of the investments are high but considering the alternative, .60% is a bargain, and they are all genuine investments not fixed annuities. 

https://educatorsfig...03b-457b-plans/

 

Wow! the 403b large insurance company TSA annuity people are laughing all the way to the bank with your analyses. I bet they are using your list to show naive teachers who ask about TIAA. 

 

TIAA is not inferior. I have money in TIAA! right now, and my fees are 0.0%. Zero. NADA, Nothing. And I pay no management fees, no commissions, no trading costs moving it from Vanguard to TIAA. What I do pay is the usual gap between what TIAA gets for their investments and what they credit me. 3.0% if fine with me. 

 

I don't know about Florida, but here in California 403bs are BAD. The only two good options for the 403b in my old district is TIAA and CalSTRS Pension2. They are much easier to enrolled than the direct invest NEA plan. People need help enrolling, and here in California, nobody talks about this stuff, so I can see teachers giving up and get talked into NEA's horrible high priced products instead.

 

So, TIAA is a good option for our 403b, our teachers can get help with a phone call. 2nd, like all tax-deferred retirement plans, when one retires, people roll it over so that investors do not pay the fees for the employer's plan record keeping. That's why I rolled my TIAA money over into Vanguard, to get the lower fees. It's obvious you have low-cost choices in Florida and your math is fine. But I did not have my money in TIAA for 30 years, it was only 6 years. 

 

I think it's great that you have not experienced the absolute horror of annuities with k12 403b plans. I have, and I will always like TIAA because they were available when I needed them, and they were available for my needs today. I believe you read my story in Fighting Powerful Interests, it was bad 20 years ago. Today, if you can get better choices than TIAA, go for it. I am leery of NEA's direct select because teachers will not even get help enrolling. SB will claim that they know nothing about it. You are strictly a mathematician which is great, but I think of the teacher who simply wants help getting enrolled. It reminds me of the pushback I got 20 years ago from my district when I ask a simple question. What are the no load funds? You would have thought I was threatening Western Civilization. I was treated by my district staff like a pariah. I have never been treated badly by TIAA. 

 

So TIAA may not be perfect, but you know what Talyor says about perfect portfolios, there ain't any. There are good and bad portfolios, good and bad companies, but there are never perfect companies (Vanguard comes very close). TIAA is a good company, not an "inferior."  They are a highly respected pension plan for higher education for 100 years, started by industrialist Andrew Carnegie who wanted to help academia and research centers have a comforable retirement. 

 

Have a great day,

Steve


Steve Schullo

Author and Co-Author of two books:

1. Late Bloomer Millionaires: A Financial Story and Investment Guide for the Late Starter (2013)

2. Fighting Powerful Interests: Educators Challenge Tax-sheltered Annuities and WIN! (2015)


#19 tony

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Posted 20 June 2017 - 11:46 AM

When we were trying to get better choices TIAA came up years ago. We rejected them because they asked for a $4,000 initiation fee to just have the privilege of having them as a vendor. That was a deal breaker for us. The school system wasn't willing to put the money up for that. I didn't blame them. I don't know if years later that requirement has changed or not.

 

I know Steve is fond of them as are many folks in higher education but to be honest I am not that impressed with them and probably would not invest with them. Still at that time before the self direct option was available, when all we had was insurance annuity 403b's.,TIAA offered fairly low expenses and better annuity options than the insurance companies. Tiaa is not inferior though. They are competitive. A mile better than all the other crap on so many provider lists.



#20 EdLaFave

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Posted 20 June 2017 - 01:35 PM

Ed, are you serious? What am I missing? Your math is accurate


The connotation of "inferior" may simply be too strong for your liking? I'm simply saying it costs roughly this much (per year) to own a fully diversified portfolio:

Security Benefit's NEA DirectInvest = 0.07%
Fidelity = 0.06%
Vanguard = 0.14%
ASPire = 0.21%
PlanMember Services Direct = 0.41%
TIAA = 0.63%

So at OCPS your best 403b is NEA DirectInvest and your best 457b is PlanMember Services Direct so by definition every other plan is "inferior"...some far more inferior than others.
 

when you say that TIAA cref doesn't take any risk, well that's true of EVERYBODY, even Vanguard!


Agreed. Over 30 years I'm not thrilled about giving Vanguard roughly 3% of my real profits either. I want that number as low as possible and each year they keep making it so!

But if we're talking about giving away a quarter of my real profits then I personally would expect them to do some tax loss harvesting for me, handle my re-balancing automatically, provide some kind of guaranteed risk mitigation, and do some light house work on the weekends :)
 

You rate TIAA CREF as inferior as with National Life Group!!???


Nope. I haven't been able to get enough info on National Life Group to write up a full analysis.

 

Remember, my list of inferior vendors is ordered alphabetically. Despite having an opinion, I haven't made any claims about which "inferior" vendor is more "inferior" than another. My view is that if you aren't the "best" then it isn't worth my time to rank how good/bad you are.

However, in my discussions with the district I haven't targeted TIAA as a vendor who needs to be dropped. AXA certainly has been in that discussion :)
 

I have money in TIAA! right now, and my fees are 0.0%. Zero. NADA, Nothing.


This isn't an option available to OCPS employees.
 

So, TIAA is a good option for our 403b, our teachers can get help with a phone call.


As my TIAA review states, "TIAA deserves credit for conveying all relevant information quickly and in a way that was relatively easy to understand." So I don't doubt what you've said.
 

I think it's great that you have not experienced the absolute horror of annuities with k12 403b plans.


As I've said in another post, I think some of the 403b/457b veterans (justifiably) roll their eyes at me when I complain about 1/2 a percentage point because they've seen and continue to see far worse. I imagine I might even annoy some of the veterans (hope not). I some times get the impression that the veterans are happy to accept "mediocre" because they've seen "horrific"...who knows I may quickly wear down and join them.

My view is, take "mediocre" in the mid-term and temporarily celebrate it, but lets not act like it is "good". We need to call a spade a spade and keep pushing until every 403b/457b is equivalent to taxable and ira accounts in terms of fees.

 

I am leery of NEA's direct select because teachers will not even get help enrolling.


I share that fear, which is why I've documented exactly how I enrolled and make myself available to help people through it. As I've said earlier, I'd recommend Vanguard as a sole provider in part because of their helpful/ethical behavior...even though it would personally cost me an extra 0.10%.

...bottom line, I like you and value what you've done quite a bit. You put in more work and have done more good for people than I ever expect to. We're both pushing for low costs. We're on the same team but with slightly different perspectives.


Navigate and reform OCPS' 403b and 457b.

#21 tony

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Posted 20 June 2017 - 06:55 PM

As I've said in another post, I think some of the 403b/457b veterans (justifiably) roll their eyes at me when I complain about 1/2 a percentage point because they've seen and continue to see far worse. I imagine I might even annoy some of the veterans (hope not). I some times get the impression that the veterans are happy to accept "mediocre" because they've seen "horrific"...who knows I may quickly wear down and join them.

My view is, take "mediocre" in the mid-term and temporarily celebrate it, but lets not act like it is "good". We need to call a spade a spade and keep pushing until every 403b/457b is equivalent to taxable and ira accounts in terms of fees.

 

 Ed

 

I can't  exactly disagree with anything you have said here but I do think you need to realize that 403b Nirvana will never exist. Your youthful idealism is a spark for good!! However,this is a capitalist economy and people do not work for free. The profit motive is very much part of the financial industry.Its unrealistic to think that every 403b vendor can be made to offer the same deals as Vanguard offers in terms of its fees and corporate culture. I believe the best we can do is make sure we educate the 403b populace so that they can identify the best choice among 403b choices available to them. We should push for that. I do believe every school system or non profit employer owes their employees at least one (more would be better of course) very low cost non annuity/insurance 403b invest option. To me thats all you can really expect.Also not every taxable or IRA account is always cheaper than an equivalent  403b account. The investor has to pick and chose wisely in that investment realm too . You can get overcharged just as easily in taxable and IRA accounts too. What I wish would happen is to see  the employer removed  from the 403b process so that an employee can invest in any choice that person wants and still maintain  the tax deferred options as the IRS allows. Even then you will have folks fall prey to investment sharks because they will always be there offering pizzas and candy bars. 

 

Since I started frequenting this board (probably too much) I have seen steady progress in the 403b arena. But it has often been one step forward and then one step back which is frustrating but I am pleased to see posters here who are getting it in terms of fees and what constitutes a good 403b plan. I see hope for optimism going forward.