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MoeMoney

What 10 -15 things should teachers know about 403b's

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I am excited and once again, I am turning to you for advice and help and feedback!

I have a potential interview planned with a top-notch personal finance podcaster about the atrocities of the 403bs. There are so many more experts in this space here, but I was in the right place at the right time. I need to put together a list of things that teachers ought to know about 403b's. Now this is exciting but like you, I was very excited and hopeful when Tara Siegel Bernard and Ron Lieber wrote in depth about our struggles. At best, I can hope we are making gains and alerting teachers to wise up and take control of their finances. 

So what do we want teachers to know?

1) Choosing where to put your money can be learned in an afternoon and is not any harder than choosing an appropriate hook or an assessment for your students. 

2) Relying on a professional to manage your retirement contributions does not soften the hit your account will take in a down market. Putting your grown-up pants on will allow you to take personal responsibility. It is ultimately your responsibility anyway.

3) Most sales rep earn commissions for every dollar you contribute to your plan, somewhere along the line. 

4) Costs of 403b are masked and evasive. They are like sugar, printed on the nutrition facts label's ingredient list as maltodextrin or evaporated cane juice, meant to allude you. The difference is, there is no 403b equivalent of a nutrition facts label ingredient list for expenses and fees. 

5) The seemingly small expense charge of 1% over time erodes your money without the equivalent gain in earnings. It can easily add up to hundreds of thousands of dollars ($200,000+) in a teacher's career from an annual contribution of $5500 over 35 years. Whose retirement are you trying to fund, your's or your financial advisors?

6) Everyone deserves to earn a living. I value my health and I value my money. BUT, I don't pay my doctor $200,000+ in bonuses over my 35 years of check-ups. I am willing to pay a tutor for my children, or I am willing to tutor someone else's child for a stated fee. $50 - $400 depending on location, demand and subject matter. I'd be more than happy to pay my FA $400 or $500 to help me select the best funds and check in with me yearly. What's reasonable to you? 

7) Laws governing 403b plans are NOT in place to protect you, the participant. They are currently still written to favor the institutions selling the plans in the form of profits. Think corporate interests.

I know I'm asking for help again, and I can only hope to help even one teacher... I am grateful for whatever suggestions of 'things to know' you can offer.

 

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MoeMoney,

Re "what teachers ought to know", I have one suggestion. It is absolutely IMPERATIVE that a teacher (investor) learn to differentiate a life insurance company from a mutual fund. This, alone, will eliminate most bad apples. Bob

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Thanks Bob! How would a teacher know how to tell the difference? If it's within a 403b plan, and they are buying a mutual fund, how would the teacher know to ask?  What would you say are the red flags?

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MoeMoney,

"How to tell the difference".....GENERALLY SPEAKING

1. The company employs a sales force and calls them financial advisors.

2. The company name is patriotic or uses words like security, benefit or trust.

3. The company website is annoying and hard to navigate; the Prospectus requires a magnifying glass.

SPECIFICALLY

1. Google: Is Valic a life insurance company?

Unfortunately,  these companies are relentless in their efforts!!!! Bob

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As relentless as teachers are second-guessers! It's set up to work that way. Thanks Bob.

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When talking about keeping expenses low, it is helpful to know what “low” is.  I had a conversation with a friend who was considering transferring to a different contract because the rep told him about Funds he would have access to that had expense ratios under 1%.  The expense ratios were .75%, .80%, .70% etc.  Still too high when compared to Funds that were available to him in a self-directed plan.

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I agree with jebjebitz, define low. For me:

  • 0.07% is a fair price for a 3 fund portfolio you have to manage.
  • 0.16% is a fair price for a single all-in-one fund that you don't have to manage.
  • Anything over that and you're overpaying.
  • If you start to approach 1%, you're really overpaying.
  • If you start to approach 2%, you're overpaying so much that it may offset the tax benefit of the retirement account.

I like to explain to people that you can't think of fees as a percentage of your entire portfolio, which is how fees are stated. You're investing to grow your portfolio in inflation-adjusted terms. So if your portfolio returns on average 6% per year and inflation is 3% then your real return is 3%. Now if you end up paying 1% in fees then you've just given away a 1/3 of your real return to people who didn't take any of the risk to get the return! On top of that, had you not given away a 1/3 of your real returns it would have remained invested and earned you even more money. So it is a double whammy, no thanks.

I also like the Gotrocks allegory from Buffett, which explains in understandable terms exactly why advisers hurt investors. I believe that helps to counter the idea that "my investor can overcome his fee with excellent performance." I like to pair this allegory with the stats Bogle provided that list exactly how many funds under-perform in the long term (I don't have those on hand, but you can search my post history).

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On 6/28/2018 at 1:01 PM, jebjebitz said:

When talking about keeping expenses low, it is helpful to know what “low” is. 

 
  • If you are managing your portfolio as a retired individual like me, then anything less than .10% or ten basis points is low. I pay .07%. 
  • If you hire a fiduciary financial fee-only financial adviser, if you can get the adviser to charge .25% AUM, with no hourly fee or retainer, that would be good. But FA would be hard pressed to charge that low when clients don't take any responsibility. If you only pay by the hour $250 would be low. Retainers are complex and can be automatically expensive. If you pay $1000 a year retainer and your portfolio is $100,000, that 1.0%! Yikes, that's way too high. 
  • If you work and your employer offers a tax-deferred retirement plan, a low-cost third-party administration at .24% is low. That's what our 457b plan TPA charges. But the mutual funds have to be added to his fee too. 

Remember on top of all these fees there will be a fee for the indexed and managed funds. It may not be much but add the fees up to get an accurate picture. 

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jebebitz,

You might take a look at a lengthy discussion, and somewhat repetitive and thoroughly uninteresting discussion but SOOO IMPORTANT to know how the person who sits behind the desk thinks about costs and advice. Dave is one of the genuine fiduciary, fee-only, 403b financial advisers who is listed on this website. Fee-only can be misleading as he (and most FAs) defends the AUM and the retainer.  I would like to believe that there is room for just a fee-only by the hour for some DIYers. 

 

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So, would it be fair to say that the only way to keep fees “low” is to be in a self-directed plan?  Could you say to a teacher asking about fees, “If your using a rep from one of the available vendors, I know without even researching your investments, that you’re paying too much in fees.”?  

I know that this is true for my district after researching all available vendors.  But, is this true for everyone?

If so, one of the main things teachers need to know is that they must research and choose their own investments, without assistance from a rep, if they want to keep fees as low as possible.  This is where I lose people.  They freeze when they hear research and choose investments.

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Well that is a subjective question that depends on the “worth” somebody assigns to an “adviser”.

I can confidently say that every adviser is paid something and investing is really simple. So for me, I can confidently say every plan that is NOT self-directed charges too much in fees because even a “small” fee is too much.

...and the fees usually aren’t small and the advice given by advisers usually isn’t good.

But there are people on this board who will argue that there is a place for advisers. I strongly disagree except for perhaps extremely rare corner cases. 

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