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allegory

Need help choosing 403b Vendor

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I'm 26 and I have been working in a public school for one year in Florida, which makes me eligible for a 403(b), a Roth 403(b) and a 457.

Do you have any recommendations from those options? Finance is far from my area of expertise and I’m having trouble deciphering the chart that compares the vendor’s fees, including expense ratios: http://www.broward.k12.fl.us/benefits/services/docs/financial planning/SBBC TSA Vendor Charge Comparison 010117.pdf 

Does anybody have positive or negative feedback on any of these vendors?

  • AXA - 403(b), 457(b) & Roth Plans
  • Life Insurance Company of the Southwest (National Life Group) 403(b), 457(b) & Roth Plans
  • MetLife - ROTH & Mutual Fund
  • Valic - 403(b), 457(b) & Roth Plans
  • Voya/ING - 403(b) , 457(b) & Roth Plans

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I documented Florida’s best plans, but Broward doesn’t use any of them. You’re in the position of having to pick the least bad option. I don’t currently have the time to look closely enough at the data to provide my opinion.

With these options, I’d first make sure I was maxing out my IRA (where you’ll have access to the best investments at the lowest costs). Another consideration, if you have a spouse, is to maybe max out their retirement account (assuming it is a better option)...but of course that hits on personal marital/trust issues.

If you think you’ll be moving to another school district or retiring relatively soon then investing in a “bad” plan is more manageable because when you leave you can roll it over into a “great” IRA. 

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19 minutes ago, EdLaFave said:

I documented Florida’s best plans, but Broward doesn’t use any of them. You’re in the position of having to pick the least bad option. I don’t currently have the time to look closely enough at the data to provide my opinion.

With these options, I’d first make sure I was maxing out my IRA (where you’ll have access to the best investments at the lowest costs). Another consideration, if you have a spouse, is to maybe max out their retirement account (assuming it is a better option)...but of course that hits on personal marital/trust issues.

If you think you’ll be moving to another school district or retiring relatively soon then investing in a “bad” plan is more manageable because when you leave you can roll it over into a “great” IRA. 

I was afraid that all the options were bad. I don't have a spouse but I just opened a Roth IRA through Vanguard and I plan to max it for 2017 and 2018.

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...I forgot to mention that you can always push the district to add quality vendors. I’m in the middle of doing this in Orange County Public Schools and I’d be happy to share information and help if you wanted to go down the same road. 

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3 minutes ago, EdLaFave said:

...I forgot to mention that you can always push the district to add quality vendors. I’m in the middle of doing this in Orange County Public Schools and I’d be happy to share information and help if you wanted to go down the same road. 

That would be great! Please share the information with me when you have the chance.

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allegory, welcome to the forum! 

Have you checked out those vendors on 403bcompare.com? Although it is accurate for CA K-12 districts, 403bcompare is very useful if not completely accurate in other states. I suggest you check out VALIC, which offers 2 mutual fund based 403b plans. https://www.403bcompare.com/vendors/1117#/productlist
In both cases, there is a management/wrap fee that is specific to your school district, between 0% and 1%. I think it’s determined by the total of all the investments in this plan in the district. You’ll have to ask the VALIC rep for that number and then add that to the expense ratio of the funds you use. In both options you should avoid the extra fee charged for an advisor. I would use the following funds which have the lowest ERs on the lists. 
Group Mutual Fund Product, Management/Wrap Fee of 0% to 1%
Dreyfus S&P 500 Index, PEOPX, ER 0.50%
Vanguard Developed Markets Index Inv, VDVIX, ER 0.17%
Dreyfus Bond Market Index Inv, DBMIX, ER 0.40%

Profile Retirement Program, $20 to $40 Custodial Fee plus the Management/Wrap Fee of 0% to 1%
VALIC Company I Stock Index, VSTIX, ER 0.34%
VALIC Company I International Eqs Idx, VCIEX, ER 0.45%
VALIC Company II Core Bond, VCCBX, ER 0.77%

As an example, if your asset allocation is 60% equities and 40% bonds, with 20% of equities in international, that works out as 48% domestic equities, 12% int’l equities, 40% bonds. If you multiply these percents by the ERs, the sum of the products is the weighted ER of the account. It works out to 0.42% for the Group Mutual Fund Product, and 0.44% for the Profile Retirement Program—not much difference. The non-ER fees will determine which plan is a better choice in your district. 

I agree with Ed that working to get a low-cost vendor added to your district's 403b list is a great idea! Unfortunately that can take a number of months, so in the meantime, you might consider the above. 

What state are you in? Many states have a 457 plan that is available to K-12 teacher and has very low fees. A 457 plan can be as good if not better than a 403b plan, depending on fees and the funds available.

Edit:  Ooops! I see you are in FL. I don't think there is a state-wide 457 plan available to you.

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I missed the link to the actual plans available to you. Haste makes waste I guess! Sorry. It looks like you have zero mutual fund based options. That sucks. Ed will be your guide in improving your district's offerings. Good luck!

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3 minutes ago, krow36 said:

 It looks like you have zero mutual fund based options. 

Does that mean I shouldn't invest in any of the options available to me for now?

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7 minutes ago, allegory said:

Does that mean I shouldn't invest in any of the options available to me for now?

Others may disagree, but I think you should consider saving for retirement in a taxable account at Vanguard. As a young single teacher you are probably not earning enough yet to be in a high income tax bracket, which reduces some of the 403b tax-deferral benefit. You can automate a transfer from your bank account to your Vanguard taxable account. You can buy tax efficient funds such as Total Stock Mkt and Total Int'l Stock Mkt. For bonds you could buy iBonds, use longer-term CDs, or use Total Bond Mkt.

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Again, I haven’t had time to dive into any details, but a taxable account should absolutely be considered. However, that’s a relatively complex calculation with several unknowable variables. My gut tells me the tax advantaged account is, more likely than not, still the best option (but I’m far from certain). I vaguely recall a person from bogleheads (user name starts with a g) who supposedly did the math to see if an expensive 401k was worth it...same basic premise here.

allegory, are you participating in the pension? I believe the alternative to the pension is something called FRS Investment Option (google it), which is effectively just like a 403b or 457b and has amazing investments at rock bottom costs. You’re a few years younger than my wife and I’m told she was right at the cut off where they made the pension far less attractive. It may be in your best interest to use the FRS Investment Option in favor of the pension. Determining if this is true depends on how long you plan to remain an employee of the state, what your career path will look like (i.e. how much money you’ll earn), and so on. If this is something you’ll consider then I can help you try to figure this out, my wife and I made a spreadsheet to help her figure it out a few years ago.

Also, since you said you weren’t a financial expert, you may find the Investing 101 page I wrote for teachers to be helpful. 

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On 1/6/2018 at 3:32 AM, EdLaFave said:

It may be in your best interest to use the FRS Investment Option in favor of the pension. Determining if this is true depends on how long you plan to remain an employee of the state, what your career path will look like (i.e. how much money you’ll earn), and so on. If this is something you’ll consider then I can help you try to figure this out, my wife and I made a spreadsheet to help her figure it out a few years ago.

Also, since you said you weren’t a financial expert, you may find the Investing 101 page I wrote for teachers to be helpful. 

Thank you for the link. I'm interested in finding out whether the FRS Investment Plan is a good option for me. What kind of information do you need? By default I was put in the pension plan and the VALIC rep recommended it even though it takes 8 years to vest. I'm not sure if I plan to work for the state of Florida that long but I do have one chance to switch to the Investment Plan.

At the moment, I'm  not sure about my career path. As a speech-language pathologist working in a public school, I'm paid on the teacher's salary schedule  but I have the option of working in other settings such as private practices, hospitals, and skilled nursing facilities. However, I'm not too keen on working in the medical setting. 

What made the pension plan less attractive for your wife?

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Sorry for the really long reply. I didn't have time to make it concise, so you're getting my strėam of conscience.
 
FRS Pension

I didn't have time to look this stuff up and my memory is a bit foggy so I may make an error, but the general idea will at least be correct.

  • You have to contribute 3% of your paycheck to the pension.
  • The pension is calculated using a fairly simple formula...your average salary over your highest paid fiscal years * years of creditable service * percentage value.
  • If you enrolled in FRS before July of 2011 then the number of years salary you have to average is 5 years, otherwise it is 8 years.
  • If you're a "special" kind of employee then your percentage value will be higher but "regular" people have a 1.6% percentage value.
  • So if you were hired in 2008, worked 40 years, and your 5 highest fiscal years salaries averaged to exactly $100,000 then $100,000 * 40 * 0.016 means you'd get a $64,000 payout from the pension.
  • I believe the portion of your pension attributable to time served before July of 2011 will receive a cost of living adjustment each year, I think it is 3%. The other portion of the pension will remain constant...so it will be worth less and less each year.
  • If you began before July of 2011 then the pension vests after 6 years of service, otherwise it takes 8 years. I think "regular" employees who began before July of 2011 have to wait until 62 to receive the full benefit, otherwise you have to wait until 65. If you don't wait that long the benefit will be decreased by 5% for each year you came up short.
FRS Investment Option
  • Earlier I had the notion that you could contribute to the investment option in a way that is similar to a 403b, but I now think I was wrong. I think the contributions are fixed; you contribute 3% of your salary and the employer adds 3.3% of your salary on top of that.
  • Your contributions are always vested from day 1, but it takes a year for the 3.3% employer contribution to vest...I think.
  • You pick the investments, they're awesome!
  • Beyond that, I think it is pretty straight forward.
 
Pension vs Investment Option
I actually can't remember why my wife thought the pension was a better deal for older people than younger people (July of 2011). After thinking about it for a few minutes, I could only come up with the different vesting schedules and the number of years of salary you have to average. I no longer think younger people have a lower "percentage value", which is what I thought at one point (double check me).
 
The big risk with the pension seems to be that the legislature can change things at anytime. For example, I think they have the power to wake up one morning and cut the "percentage value" in half which would cut your pension in half.
 
If you don't expect to be an FRS-eligible employee for very long then a pension really isn't the best thing for you. It takes years to vest and I think even if you  transfer it to the investment option, that portion is still held to the longer vesting schedule of the pension. Again, fact check me on this.
 
Here is a link that compares the pension vs the investment option.
 
Roth vs Traditional
I really don't think this is a big deal and you'll find opposing arguments, but for most people I argue that a traditional is your best choice.
 
When you earn 5.5k you pay tax based on your highest marginal bracket before it goes into a Roth.
 
However, for a Traditional you don't pay tax up front. Instead when you pull it out you pay tax on it as if it were regular income, which means you get to fill up the lower tax brackets first.
 
So if you imagine a contrived example where your real (inflation adjusted) income remains constant throughout your working years and retirement...then putting money into a Roth would be a mistake because your "effective" tax would be exactly equal to your highest tax bracket, but with a Traditional your "effective" tax would be lower because you got to fill up the lower brackets before you hit the higher bracket.
 
Pushing for Reform
I am not an expert, but this is what I've learned (we can always chat more if you go down this road) in my experience...
 
  • Spend the time to fully understand your district's plans. That's what I did here.
  • Spend the time to fully understand some of the best plans in the state. That's what I did here.
  • Spend the time to clearly layout what improvements you'd like to see and what constitutes a win for you. That's what I did here. In my view, there is nothing more ineffective than a lobbyist/activist who simply complains about the problem and has no solution.
  • Here at OCPS we have a "Retirement Services" department, whatever the equivalent of that is for your district, reach out to them. Get an in person meeting if possible and explain why the current plans are so bad and explain why other plans are great. Tell them about the nearby districts that are using those plans. Offer to connect them to people at those companies to get things setup. It is highly likely that these people don't understand investing, so teach it to them in the nicest, non-condescending way possible. It is also highly likely that these people don't want to do work, so do everything you can to shoulder the load yourself.
  • Go to your school board members and make the same arguments. I've got a blog where I've documented some of the speeches I've given at our school board meetings.
  • Reach out to the union and try to convince them to lobby with you or let you reach out to their membership in one way or another. Lots of unions are corrupt, operating with conflicts of interest. Lots of unions have huge turnover so they're fairly ineffective. Our union has a seat at the table in selecting the vendors so if you can get them to do their job, it is powerful.
  • Reach out to media outlets to see if anybody will do a story on how badly teachers are being hurt.
  • Your district has 100% of the decision making power. However, it is likely that your district simply does whatever their Third Party Administrator (TPA) tells them to do. It is a weird relationship where technically the TPA has none of the power, but the district is incompetent/afraid (which the TPA leverages), so the district relies on them to make decisions. The TPA is almost certainly operating with egregious conflicts of interests...they're generally not your friend.
  • Organize all of the teachers in your school and schools throughout your districts to do the same thing you're doing. If you guys overload Retirement Services with phone calls and the school board meetings and do it respectfully, they'll want to cave just so they can go back to peace and quite.

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allegory, you're welcome. I hope you have success. My entire K-12 education was in Broward County (Hunt Elementary, Forest Glen Middle, and Coral Springs High) so I'd really like to see those teachers get better options. Let me know if I can help.

tony, thanks!

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