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Open Letter To California State Insurance Commissioner

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I'm a northern California teacher.

I'm struggling to understand it all and where to start (I did read your letter, but did not quite follow all of it. I'm afraid.  I did want to give you a baseline for where I'm at). The list of vendors is daunting.  I think they do it on purpose so whoever comes to your school and explains something that sounds logical, you go for it. 

I currently put some money into a Roth-IRA and some into a 403b account. Both are managed by VALIC.  I've been with VALIC for almost 10 years and am in my mid-30s. For the past couple of years, I've been thinking of getting out of VALIC because they are  subsidiary of AIG. 

From reading other forums (though most are not specially about California, which is why I started here)... it seems like Vanguard and Fidelity are both highly recommended.  Do neither of them have a "real" person?  Is there a vendor with a representative that is recommended?

Can I get my money out of VALIC? How hard will that be for me to do by myself compared with a representative?

Saving for retirement is important to me and I want to be doing it the right way. Most books that I've found are not for our sector.

Thanks for any help.

Kiwi

 

 

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Hi Kiwi,

I am both surprised and pleased that I have gotten a few emails from teachers about this letter.  While it is not groundbreaking, it signifies that perhaps California teachers are starting to become aware that there is a problem with our state Insurance Commission, and the why 403(b) has been primarily an insurance product since 1961. The silence on this issue is deadly for us. No one talks about it except a few of us within our teacher ranks here on this website, and at our advisory meetings at Los Angeles Unified, where I am a member.  Your comment about not fully understand the issue is my responsibility. Sorry, this topic is complicated for a reason, to turn people off about its consequences. Not understanding how the 403b is administered and politicized here in California is what keeps the billions of dollars of teachers money flowing into the insurance industry without any disruption for decades. We have published many, many media reports, but our colleagues still have not gotten the message. So, I remain hopeful because you responded! 

This is the 25 word (or a little more :-)) of why you and so many teachers have Valic, or some other large insurance company for your 403(b), instead of investing your money in genuine stock and bond investments such as our pension plan does. Unlike all of the high cost, low-interest rate insurance products, Vanguard and Fidelity have no "real" persons that will come to your house or school to deliver a product. You can talk to them on the phone.

Answer your question about vendors with a representative. Of course, all vendors have representatives you can talk to. The huge difference between the high-cost insurance products that you want to avoid like the plague and the Fidelities and Vanguards of the world is the telephone. Heck, I talk with my Vanguard adviser frequently, and because I have a certain amount, I also get a fiduciary financial adviser who will help me with taxes and distributions to fund my retirement (I am 70 years old and retired with a comfortable nest egg that you will have too!). 

But in order to help you, we need to know what vendors are available. Do you have a 457(b)? Do you know about CalSTRS Pension2? 

Yes, you can get your money out of Valic, and the faster the better! Be aware of surrender costs. I did the same thing paid the hideous costs just to get my money out of two insurance companies. To me, it was the principle of the thing, I did not want those companies making money off of my money! 

I have two books that I wrote that ARE about our sector because it's my story of how I went from annuities to a broadly diversified stock and bond portfolio over two of the biggest stock market crashes in history, and how I survived. 

You are doing the right thing by coming here. You are already 1000 miles ahead of our vast majority of our colleagues.

PM me, and I will send you both books as a PDF file. 

In the meantime, you can stop contributing to VALIC and start researching if you have and post it here to all of the smart people here can evaluate the choices. 

Steve

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I'm a northern California teacher.

I'm struggling to understand it all and where to start (I did read your letter, but did not quite follow all of it. I'm afraid.  I did want to give you a baseline for where I'm at). The list of vendors is daunting.  I think they do it on purpose so whoever comes to your school and explains something that sounds logical, you go for it. Please copy and paste the list and show it to us.

I currently put some money into a Roth-IRA and some into a 403b account. Both are managed by VALIC.  I've been with VALIC for almost 10 years and am in my mid-30s. For the past couple of years, I've been thinking of getting out of VALIC because they are  subsidiary of AIG. I had a VALIC 403b account also and regret I didn't get out sooner. It was a Fixed Account and payed about 3-5% back in the 1970s to 1990s when inflation was higher. The reason you should get out is to avoid VALIC's high fees. 

From reading other forums (though most are not specially about California, which is why I started here)... it seems like Vanguard and Fidelity are both highly recommended.  Do neither of them have a "real" person?  Is there a vendor with a representative that is recommended? As Steve has explained, the "real" person is expensive. The money to pay his salary/commission comes out of the 403b plan he sells you. By using a DIY internet/telephone based plan such as that of Vanguard or Fidelity, that money goes to your retirement plan. 

Can I get my money out of VALIC? How hard will that be for me to do by myself compared with a representative? Yes you can move your VALIC 403b to another vendor that is on your school district's list. Again, show us the list and we can help you pick the best vendor. Both Vanguard or Fidelity are excellent. Once you've decided on the new vendor, you fill out their application form and send it in. Once the account is set up, you can fill out any forms required by your district and its Third Party Administrator. It's not difficult to move your VALIC Roth IRA to another vendor. You get to choose the vendor so you can use the same vendor as your 403b account if it's Vanguard or Fidelity. 

It's not hard. The forms can be tedious to fill out, but we can help you if you ask. It takes patience and the 403b transfer often drags on for weeks or even months. The Roth IRA should be quicker. 

Saving for retirement is important to me and I want to be doing it the right way. Most books that I've found are not for our sector.

Thanks for any help.

Kiwi

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Here are all of the approved vendors for my district.  I couldn't find the list on the district intraweb, so asked payroll... who sent me to billing... who sent to benefits who sent me to a website, which is why it took so long.

Thanks

Approved Vendors

Below is a list of 403(b) vendors approved by your employer. You must contact a vendor from this list to open an account before initiating contributions. Select a Vendor Name to view details about the vendor and a list of available products. 
 
Vendor ID Vendor Name
1164 American Century Investments
1062 American Fidelity Assurance Company
1057 American Funds Distributors, Inc. (AFD)
1128 American United Life (AUL), a OneAmerica Financial Partner
1035 Americo Financial Life and Annuity Insurance Company/Great Southern Life Insurance Company
1041 Ameriprise Financial Inc.
1021 Athene Annuity and Life Company
1067 AXA Equitable Life Insurance Company
1073 Brighthouse Financial
1097 CalSTRS Pension2
1184 Cambridge Investment Research
1926 CTA Voluntary Retirement Plans for Educators, LLC
1133 Fidelity Investments
1077 First Investors Funds distributed by Foresters Financial
1025 Franklin Templeton Investments
1148 FTJ FundChoice, LLC
1018 Global Atlantic Financial Group
1817 GLP Investment Services, LLC
1096 Great American Insurance Group (Annuity Investors Life Insurance Company)
1113 GWN Securities, Inc
1014 Horace Mann Life Insurance Company
1108 Jackson National Life Ins. Co.
1052 Legend Group; The
1068 Lincoln Investment, LLC
1029 Lincoln Nat'l Life Ins Co (Lincoln Financial Group), The
1024 Metropolitan Life Insurance Company
1043 Midland National
1015 Modern Woodmen of America
1036 National Life Group through member company Life Insurance Company of the Southwest
1174 National Planning Corporation
1144 Nationwide Life Insurance Company
1083 New York Life Ins. & Annuity Corp.
1472 North American Company for Life and Health
1121 Oppenheimer Funds Distributor, Inc
1130 Pacific Life Insurance Company
1718 Pentegra Retirement Services
1030 PFS Investments Inc
1127 PlanMember Services Corp
1145 Putnam Investments
1022 Security Benefit
1038 Thrivent Financial AKA Thrivent Financial for Lutherans, Thrivent Mutual Funds
1023 TIAA-CREF (Teacher's Ins & Annuity Assoc of America)
1076 Transamerica Fund Services, Inc.
1160 Transamerica Life Insurance Company
1142 USAA Investment Management Company
1053 USAA Life Insurance Company
1117 VALIC
1102 Vanguard Group, The
1060 Voya - ReliaStar Life Insurance Company
1042 Waddell & Reed, Inc
1162 Western National Life Insurance Company

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Either Fidelity or Vanguard are excellent choices. Have you decided on an asset allocation--a stock to bond ratio? Perhaps something around 60/40 is reasonable for your age, at least to start with? It's a personal decision that only you can decide, and 70/30 and 80/20 could also be considered reasonable. How did you weather the 2008/2009 downturn?

Both Fidelity and Vanguard have Target Retirement funds that include both stock funds and bond funds. They are labelled with the approximate year of retirement but you can ignore the date and pick one that has your desired asset allocation. These funds slowly get more conservative by adding more bonds and reducing stocks as the retirement date approaches. If you decide to use Fidelity, be sure to pick one of their "Freedom Index" funds, not one of their more expensive "Freedom" funds. 

You can also choose 3 individual funds to mimic the Target Retirement funds at either Fidelity or Vanguard. These funds have lower expense ratios than the TR funds, which is an advantage. You could start out with a TR fund and decide later to use the 3 separate funds after you learn more about investing. 

Total Stock Market Index fund

Total Bond Market Index fund

Total International Stock Market Index fund

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OMG! Vanguard, Vanguard and more Vanguard. Problem solved!

I agree 100% with krow36! Listen to him! You are smart enough to come here and ask questions, so now you have it!

I like krow36's first suggestion is to start with a target date fund, just to get started. And when you know a little more you can invest directly in those three funds he also suggested. I have 80% of my retirement nest egg which is a comfortable 7 figure nest egg in Vanguard and I own those three funds too. The three fund portfolio is very famous and a common portfolio among us do it yourselfers, all from the Bogleheads.org forum (read more about the 3 fund portfolio here: https://www.bogleheads.org/wiki/Three-fund_portfolio . Co-founder of Bogleheads.org, Taylor Larimore,  has been preaching this simple portfolio for 20 years on their forum. 

This might be a sample portfolio asset allocation for anybody under 40 years old. Asset allocation depends on your risk tolerance, which can get a little complicated. Since you have been with Valic for ten years, you may not have experienced any loss to your portfolio in 2008, perhaps this allocation is too risky (volatile) for you (unless you had a variable annuity which invests in mutual fund sub-accounts). 

image.png.c665ce843f58847efa9c7917963e0b1b.png

If you need a little more hand-holding, our CalSTRS Pension2 is also an excellent choice. 

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It is funny, I was just going to ask about the CalSTRS Pension 2 plan since I got a flyer for it in the mail with the regular CalSTRS.

How does it compare with Vanguard? (Which seems to be highly rated).

Thanks again everyone who has chimed in. 

It is overwhelming, but important.

 

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Fidelity has a custodial fee of $24 per year and is the least expensive of the 3 providors.
Fidelity® Total Market Index Premium, FSTVX, ER 0.04%
Fidelity® International Index Premium, FSIVX, ER 0.06%
Fidelity® US Bond Index Premium, FSITX, ER 0.05%

Fidelity® Four-in-One Index, FFNOX, ER 0.11%
Fidelity Freedom® Index 20XX Investor, ER 0.15%
https://www.403bcompare.com/products/68#/fees

Vanguard has a record keeping fee of $5 per month. 
Total Stock Market Index Admiral, VTSAX, ER 0.04%
Total Intl Stock Market Index Admiral, VTIAX, ER 0.11%
Total Bond Market Index Adm, VBTLX, ER 0.05%

Vanguard Target Retirement 20XX, ER 0.16%
https://www.403bcompare.com/products/164#/investmentoptions

The CalSTRS Pension2 403b has an administration fee of 0.25% per year. This makes it the most expensive of the 3 providors.
Funds include 10 Vanguard index funds, mostly institutional and Admiral class. 
Vanguard Total Stock Market Idx Institutional, VITSX, ER 0.04%
Vanguard Developed Markets Index Institutional, VTMNX, ER 0.06%
Vanguard Total Bond Market Index Adm, VBTLX, ER 0.05%
https://www.403bcompare.com/products/61#/fees

I would use Fidelity because Vanguard is having problems with service, especially with their 403b accounts which they are using Newport Group for record keeping and compliance. The service will probably improve in the future.
 

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I have used all three (Fidelity, Vanguard and Pension2) for 403b accounts.  I recommend Fidelity, so long as you only buy their low-cost index funds (Fidelity also offers many actively managed funds which could easily eat up your cost savings).  The desirable Fidelity funds have the designation "PR," for "Premium Class."  (Weird name, as these are straight cap-weighted index funds with no premium attached; they used to call these "Spartan" funds.)  Fidelity's customer service, to the limited extent I've dealt with it, is excellent.

Vanguard, sadly, seems to have become an inferior choice for 403b accounts.  (Though they are still great for most other types of account.) 

Calstrs Pension 2, run by Voya, has one feature that you can't get at Fidelity which may be attractive: a stable value fund.  Currently, that pays 3% annually, minus the .25% admin fee. I hold part of my 403b there. I can say more about that on request, but most likely Fidelity alone will be the simplest and best choice.

ADDED COMMENT:  I just noticed above where you say you are in your mid-30s.  I'd skip the stable value idea, and open a Fidelity account.  Unless you can't sleep at night when the account balance goes down, I'd advise a heavy percentage of your contributions (maybe even 100%) go into equity funds (e.g., the total US market and the total global funds).  When you get within fifteen years of retirement, start to shift toward (less volatile) bond funds.  But at your age, market volatility is your friend, so long as you don't sell or stop contributing; when you continue to contribute steadily, recessions or even market crashes become a great opportunity--it's as if you a getting the shares on sale.

Edited by whyme

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