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  2. Ben Graham's classic The Intelligent Investor (1973) has an entire chapter on seeking advice, he wrote: If the reason people invest is to make money, then in seeking advice they are asking others [Financial Professionals] to tell them how to make money. That idea has some element of naïveté. Businessmen seek professional advice on various elements of their business, but they do not expect to be told how to make a profit. That is their own bailiwick. When…non-business people rely on others to make investment profits for them, they are expecting a kind of result for which there is no true counterpart in ordinary business affairs.” On the other hand, Graham writes this which is out of date in 2020: We take a more critical attitude toward the widespread custom of asking investment advice from relatives or friends. The inquirer always thinks he has good reason for assuming that the person consulted has superior knowledge or experience. Our own observation indicates that it is almost as difficult to select satisfactory lay advisers as it is to select the proper securities unaided. Much bad advice is given free. The best financial information and advice has been FREE for over 20 years when this website 403bwise.com and Bogleheads forums were launched! Numerous tell-all books by everyday investors say that they are better off without an expensive adviser. In 2020 free investment information is everywhere on the internet. Also, index funds were not available until Bogle launched his S&P 500 in 1975.
  3. Last week
  4. It's quite easy to make changes and there are no tax consequences. So if you want to rebalance or adjust your portfolio, you can do it. But trading to catch opportunities in the market is not advisable... academic research shows that trading and timing the market fails in comparison with ongoing regular contributions to a low-cost diversified buy-and-hold portfolio. Of course you will find many people touting market-beating investments or strategies: mostly, these are salespeople who benefit when others follow their advice. A simple unswerving commitment to any of the portfolios you are considering will likely surpass the results of the large majority of investors, including professional investment managers (counter-intuitive as that sounds, it's true). Your problem is not to find the very best portfolio--that's unknowable, since nobody knows the future. Settle on a sound portfolio (your current options are all in that category) and turn away from the many traps, fees and distractions with which the good people of the financial services industry manipulate human nature to their own monetary benefit (that will require some willpower). Keep your contributions high and costs low: you'll reach your goals in time. If you are interested in the research I refer to above, I recommend "A Random Walk Down Wall Street" by Burton Malkiel. Even online interviews with Malkiel (or John Bogle or Charles Ellis) would throw light on the situation. Maybe this is old news to you, since you've looked at Bogleheads' arguments for the three fund portfolio. There are small disagreements between all of these sources, but those are always around the margins: overwhelmingly they share the same message.
  5. I'm not sure, I was just going by the OP's words:
  6. Ed Are you missing something or am I ? The S&P 500 he has available is not the Total Stock Market Index so a 10% allocation in small caps does help make his portfolio a little more diversified. I was not encourage him to tilt. I was encouraging him to try and be fully diversified considering the funds he has access to. I never recommended he go 50% small cap.
  7. 403b and 457b accounts are often available as either Roth or Traditional. 403b and 457b plans are not inherently in conflict with or the opposite of a “Roth.” In fact, there is no such thing as just a “Roth”. A tax advantaged account (401k, 403b, 457b, IRA, etc) can be either a Roth or a Traditional.
  8. I kept my "bond" money in the TIAA Traditional Annunity which doesn't work like most annunities (depending on ther contract your district has with TIAA). It paid a guaranteed 3% for all the years I was with it--never more, never less. In this market, that seems pretty good. I don't recall fees but I think they were minimal. The best thing is that you're starting right away. That will pay off in the future. Looking back, I put too much into my 403b7/457 and wish I'd put more into my Roth. That's good news, though--it means I saved really well but looking ahead my RMD's will be steeper than I expected and I'm having to convert some savings to Roth.
  9. Look, I love the bogleheads and I essentially have a two fund portfolio (domestic and international stock), but this is myth the bogleheads push. Do you get a perk from selling bonds during a crash to buy some stocks? Sure. Is it enough to compensate you for the underperformance of those bonds during the bull market leading up to the crash? No. Bonds will reduce your expected returns. They’re there to reduce volatility so you can sleep at night and so you don’t do something foolish like selling all your stocks at the bottom of a crash and buy back in after the recovery. If bonds had similar returns to stocks, but went up when stocks went down and vice versa, then you’d get that “rebalance bonus” that actually generates wealth. Unfortunately bonds don’t have enough upside to make this proposition worthwhile. Play with one of the portfolio visualizer sites to prove it to yourself. Set up a 20 year window and compare a 100% portfolio against a portfolio with bonds across any number of time frames and you’ll see what I mean. The bogleheads love to tilt, which is ironic because it runs against the ethos of not making bets on sectors of the market. Bogle spoke out against this. I agree with Bogle. However, if you’re going to do it, then pick a percentage to tilt and live with it for life. If you change that percentage over time then I fully expect you to underperform. I’m not trying to talk you out of To y’s suggestion. I am however telling you that you’re making a big mistake in your decision making process. Past performance doesn’t indicate future performance. That isn’t a disclaimer to cover some low probability event, it’s a reality. You should never invest in a portfolio because of past returns. If you want to do that then I can recommend an objectively awful portfolio that blew Tony’s out of the water for a specific time period. You should invest in a portfolio because it has rock bottom costs, is fully diversified, meets your desired risk profile, and you agree with philosophical.
  10. I think you would be wise to keep some small cap allocation because the 500 index is larger cap funds. As far as international goes, I'm not crazy about them and only hold about 20% in my portfolio and they haven't done all that well in the last several years but today's Vanguard ,post John Bogle recommends 30% allocation. The 500 index includes American multi national companies so you are getting some international exposure there. Plus you say you already own some internationals else where. I agree with Whyme about bonds especially if you plan to stay in education and collect a pension/social security. That could count as your bond allocation.. Ultimately you will do fine if you stick with the Vanguard funds.. Let us know how you decide to proceed. Portfolio 3 keep in mind is very aggressive. In down markets that 50% small cap might retreat significantly. If you will be able handle that than it's all good. If losing 40% or more of your portfolio bothers you than I still think portfolio one might be better. You can always lower your small cap exposure when you get closer to retirement.
  11. Thank you so much, tony and whyme! Bonds: I was allocating 10% to bonds since I'm largely trying to stick to the "three-fund portfolio" I've been reading about on bogleheads. I'm still undecided, but I may indeed forgo all bonds. I've read that bonds are good for rebalancing in down-turns, so I figured I was giving myself a little bit of wiggle room to sell bonds when they're high and to buy more equities when they're low. I've never had a 403b, so I'm now sure how hard/easy it is to make trades within these kinds of accounts. International: I currently hold a bit of VT (Vanguards Total World ETF) and a very small amount of VXUS (Vanguard ex-us ETF) in a taxable account -- so I'll likely keep my international exposure there. (I should have mentioned this in my post, sorry!) Small Cap/VSMAX: I hadn't really looked into this fund, but it has had a great track record, so I think I'll change my allocation to "tilt" to small cap, but will do a bit more research. Comparing VSMAX with VFAIX on Portfolio Visualizer was an eye opener! TIAA: Yes, but unfortunately you are correct, TIAA is the only option I have through this school, so not much I can do about it. I will still seek out more information on their fees though, thanks for the suggestion! I created three portfolios on portfolio visualizer: Portfolio 1) tony's suggestion above: 60% VFAIX; 20% VTMGX; 10% VBILX; 10% VSMAX Portfolio 2) my original plan of 90% VFAIX; 10% VBILX Portfolio 3) and a 50/50 VFAIX/VSMAX And was surprised to see the results (link to portfolio visualizer)! I'll definitely change my plan to something closer to tony's suggestion, or even a bit more like portfolio 3. Thoughts, or am I risking too much by basing this decision on past performance?
  12. Welcome aboard, Cranberry. You are definitely on the right track, and if you start contributing as much as you can manage consistently, you'll have a great nestegg to get you through retirement. I think what you're doing is fine, no change is required. But FWIW, a couple of thoughts: 1. Assuming that you are not planning to retire for 25 years or more, I wonder why you want bonds. Those are usually there to buffer volatility and to provide a stable source of income when you are drawing down the account in retirement. Traditionally, the amount of bonds is something to increase as your focus shifts from building wealth to preserving it. At your age, I think there's a good argument for 100% equity, which has the best expected return over multi-decade periods. 2. I agree with Tony that diversification into international equities make sense. But some very successful figures, notably John Bogle and Warren Buffett, think an all-US portfolio is fine, so I can't blame you if you line up with them. 3. It would be good to understand what sort of fees that TIAA is charging you, beyond the fund expense ratio that goes to Vanguard. There are almost always some charges related to the bookkeeping requirements of "qualified" retirement accounts. You probably won't have any control over this, but it would be useful to know when comparing among options in the future.
  13. Cranberry 44 You have some decent choices and you seemed to make a good choice with your selections but they are narrow in scope. I think you would be wise to allocate a portion -atleast 20% to Vanguard Developed Markets(international) Index and at least 10% to the Vanguard Small Cap Index. Something like this might work but keep in mind there is no exact formula for success although sticking to index funds is smart. Diversifying across all assets classes is always a good idea. 60% VFAIX 20% VTMGX 10% VBILX 10% VSMAX I hope I have helped and I wish you my best in your teaching career. I think you will do very well with this allocation long term. Tony
  14. Hi all, First, thanks for the site -- I've enjoyed reading it and listened to one of the 403bwise podcasts yesterday and enjoyed it! I'm 31 and will be starting my first year as a teacher at a private high school in a VHOL area. I'll be starting in two weeks, and will have no pension. I'm coming from another job that did not offer a retirement account (I have a Roth IRA that I've maxed out of 2020 and 2019); this is my first employer sponsored account. This school offers Roth and Traditional 403b through TIAA, and I plan to max out the contributions whenever I can. The school matches up to 1% of the employee's salary for the first three years, and then increases the percentage by one each year thereafter until a max of 8% match. Here are the options provided, with name, ticker, and expense ratio: TIAA Traditional Annuity - Retirement Choice: (TC1IO# ) AllianzGI Mid Cap Value Fund Institutional Class (PRNIX) 0.64% American Funds New Perspective R6 (RNPGX) 0.42% BlackRock Total Return Fund K (MPHQX) 0.44% CREF Social Choice Account (R2) (QCSCPX) 0.32% CREF Stock Account (R2) (QCSTPX) 0.39% Federated MDT Small Cap Core Fund Class R (QLSCX) 0.96% JPMorgan Large Cap Value Fund Class R6 (JLVMX) 0.52% MassMutual Select Mid Cap Growth Equity II Fund Class I (MEFZX) 0.71% T. Rowe Price Blue Chip Growth Fund Class I (TBCIX) 0.56% TIAA Stable Value - [[Company Name Redacted]] C RETIREMENT PLAN TIAA-CREF Lifecycle Index 2045 Fund (Institutional) (TLXIX) 0.19% TIAA-CREF Lifecycle Index 2050 Fund (Institutional) (TLLIX) 0.19% TIAA-CREF Lifecycle Index 2055 Fund (Institutional) (TTIIX) 0.22% TIAA-CREF Lifecycle Index 2060 Fund (Institutional) (TVIIX) 0.33% ((**There are also earlier Lifecycle funds, starting in 2010, if that matters**)) TIAA-CREF Lifecycle Index Retirement Income Fund (Institutional) (TRILX) 0.28% Vanguard 500 Index Fund Admiral (VFIAX) 0.04% Vanguard Developed Markets Index Fund Admiral (VTMGX) 0.07% Vanguard Intermediate-Term Bond Index Fund Admiral (VBILX) 0.07% Vanguard Mid-Cap Index Fund Admiral (VIMAX) 0.05% Vanguard Real Estate Index Fund Admiral (VGSLX 0.12% Vanguard Small-Cap Index Fund Admiral: (VSMAX) 0.05% I signed up for 90% to VFIAX (Vanguard 500) and 10% to VBILX (Vanguard Intermediate Bond). Any advice I should be aware of as this will be my first account of this type? Thanks!
  15. Oh wow, I have never seen so detailed comparison between Roth and traditional, including math, thank you very much! Makes a lot of sense! Thank you guys all for all the points, I am so glad I found this forum. Yeah, it is hard to predict the future, so I think the safest approach is to contribute more to traditional accounts and maybe invest a bit to Roth as well, just in case. By the way, I have discovered an interesting thing about 403b and 457b which I did not know about. Maybe it is a public knowledge here. Some providers allow creating nested brokerage accounts within 403b and 457b which dramatically expand the type of investments allowed in these accounts. They almost become like IRAs, but with much higher contribution limits. Amazing deal in my opinion.
  16. Here is my update: After exhaustive questioning of all parties, here is the definitive answer. I CANNOT DO A ROLLOVER OF MY PREVIOUS 403b account unless I meet distribution age of 59.5 or leave the employer. I CAN ONLY EITHER LEAVE THE MONEY WHERE IT IS OR PERFORM A PLAN EXCHANGE AND CONSOLIDATE MONEY FROM MY PREVIOUS 403b into the current one at Fidelity. (See below) What is the difference between a contract exchange and a rollover? A contract exchange allows you to move your investments to different service providers under the same employer (in this case the Employer Retirement Savings Plan accounts). A rollover allows you to move your investments out of the Employer Retirement Savings Plan accounts and into another account either through another employer plan or an IRA. You can only do a rollover if you meet certain criteria. Thanks everyone. Thanks DK for your correct assessment.
  17. To decide between Roth and Traditional you have to understand the progressive nature of our tax code. Let's use the 2020 tax code for a hypothetical single person who has the most simplistic tax situation imaginable... The first $12,400 they earn is taxed at 0% due to the standard deduction. The next $9,875 they earn is taxed at 10% The next $30,250 they earn is taxed at 12% The next $45,400 they earn is taxed at 22% ...and so on until they reach the 37% tax bracket where every additional dollar is taxed at 37%. A lot of people incorrectly believe that if they're in the 22% bracket then all of their income is taxed at 22%. In reality, every dollar you earn has its own tax rate. Your effective tax rate is equal to your total tax paid divided by your total income. Your highest tax bracket is called your marginal tax rate. Traditional vs Roth Qualitative Explanation When you contribute to a Roth account those dollars are taxed first, which is based on your (high) marginal tax rate. When you eventually withdraw that money, no taxes will be owed since they were already paid. When you contribute to a Traditional account those dollars go into the account tax-free, which means you get to avoid that (high) marginal tax rate. When you eventually withdraw that money, it will be taxed, but it'll fill up your lower tax brackets before you get to your highest tax bracket. This is why the Traditional account is very likely to be superior for most folks in most situations. Traditional vs Roth Quantitative Explanation Just for fun let's put this into mathematical terms. Suppose you invest P dollars in each type of account for N years and you get an annualized 7% return: Traditional Value = $P * (1.07)^N * (1 - TaxRateInRetirement) Roth Value = $P * (1 - TaxRateWhileWorking) * (1.07)^N You can see there are common terms in those equations so let's get rid of them: Traditional Value = 1 - TaxRateInRetirement Roth Value = 1 - TaxRateWhileWorking We know the TaxRateWhileWorking is equal to your (high) marginal tax rate while you were working. We know your TaxRateInRetirement will be based on that money filling up the lower tax brackets during retirement. So if TaxRateInRetirement is less than your TaxRateWhileWorking then the traditional account will generate more value. What if my retirement income is greater than my income while working? First of all, if you fall into this case then you've got nothing to worry about in retirement, but it is true that a Roth may become more appealing since you'll find yourself in higher tax brackets in retirement. However, even in this case a 100% Traditional may still be better than 100% Roth because you'll get to fill up the lower tax brackets even if your marginal tax bracket is higher, which may make your effective tax rate lower with a Traditional than it is with a Roth. The most important thing to say about this case is that you made a big mistake while planning for retirement because you oversaved significantly. You would have been better of retiring earlier or spending more money during your working years. What if other income fills up my lower brackets during retirement? If you have social security income or income from a pension then that'll fill up your lower brackets first, making a Traditional less appealing. Notice that I didn't say it makes a Roth superior. The odds are the effective tax rate associated with your Traditional withdrawals will still be appreciably less than your marginal tax rate while working because you will likely still take advantage of some of the smaller tax brackets and your marginal tax rate in retirement likely won't be higher than your marginal tax rate while working anyways. This scenario just reduces the appeal of Traditional, it doesn't eliminate it. What about Roth conversions? Suppose you saved a bunch of money in a Traditional and when you retire you aren't taking social security or any other forced income like pensions. Well you can convert that traditional money to a Roth account, which means the first group of dollars won't be taxed at all, the next group of dollars will be taxed at the lowest rate, and so on. This is a best of both worlds scenario where you can avoid your (high) marginal tax rate while working and pay rock bottom tax rates to convert it to a Roth later in life. This increases the appeal of using Traditional accounts. What if tax rates change? I commonly see people destroy their portfolios by making decisions based on their personal politics. My advice to you is to simply not engage with this thought pattern at all. Taxes may go up when you retire or they may not. If you indulge in this scenario it is often the Liberals who are most apt to increase tax rates, but remember their philosophy is about raising taxes disproportionately for the wealthy. If you're wealthy you'll be fine regardless. If you're not wealthy, then even in this scenario (which may or may not come to pass) your taxes may not increase too much. Again, just don't even engage in this line of thinking. Nobody knows nothing as they say. My Thoughts I view this Traditional vs Roth discussion as an optimization that ultimately won't have a huge impact on you. If you haven't already figured out how to minimize your spending, maximize your saving, and reduce costs to as close to 0 as possible then you shouldn't even be thinking about Traditional vs Roth. However, if you begin to think about Traditional vs Roth just know that nobody can give you a definitive answer because it depends on future tax rates, market performance, when you'll die, when you'll take SS, if you have a pension, if your pension will be cut due to poor funding, and so on. Most people in most scenarios are probably better off using a Traditional account for the reasons described above. In an ideal world you'd invest exactly enough in a Traditional account such that every dollar you withdraw is taxed less than or equal to your marginal tax rate while earning that initial investment and every other dollar should go to a Roth account. Again, nobody can tell you that magical number because we can't see the future. Another rule of thumb, if you're in the beginning of your career and making almost nothing, but you'll quickly climb the income tax brackets (like a young doctor for instance) then a Roth is your friend early on...or if you're temporarily in a low income situation (maybe you got fired, maybe you took a couple years off to raise a kid, whatever) then a Roth may also be great for you. But generally, I think Traditional is best. If you want to address these unknowns by investing in both, that sounds reasonable to me too.
  18. EdLaFave


    Testing to see if I can refer to a variable named or use the word ation or . ...failed.
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  20. ScottO


    Cheers for board support!
  21. Admin


    Hi All, We just upgraded board to newest version. This is a test.
  22. tony, I don't know what happens in that case because Lincoln is not part of the plan anymore. Just wanted to let everyone know to be careful of what is actually happening (contract exchange, rollover, etc) and to make sure that it's coded correctly so you don't have any trouble later on in the future. Judging from the original poster, it is not a rollover so do not do a rollover unless you have a qualifying event for distribution. The contract exchange, i believe, can happen as long as the investment provider that the money is moving into is part of the approved vendor in the plan and there's an Information Sharing Agreement. So, you can move money into an approved vendor but not into a vendor that's not approved anymore. Check with your plan administrator to see if its part of their rules for contract exchange. But based on what I see, it's definitely part of a contract exchange because no other type of transaction applies to your situation. Rollover must have a distributable event: age 59.5, separate from employer, disability, or death. Transfer is from one employer to a new employer. Anyway, double check with an expert to be sure. But I feel pretty certain though but double check.
  23. Sorry Tony but I don't know if or how Reg can get his balance out of Lincoln Life. Hopefully Fidelity will be able to figure it out? If I were Reg, I would present this problem to the Boglehead forum. Alan S. is a highly respected expert on IRS regulations and on this sort of problem. Also Spirit Rider has amazing depth of understanding IRS regulations. They both participate in other forums used by professionals. https://www.bogleheads.org/forum/viewforum.php?f=1
  24. Pardon me DK if I'm missing something from your excellent explanation . Seems like your explanation is about improper coding . You say a contract exchange is when you move money from WITHIN the plan from one vendor to another. So Reg can't do this because Lincoln Life is NO LONGER IN THE PLAN, it's been eliminated. This sounds like a basic "Transfer " that most school systems allow. But Reg says Lincoln is no longer in the plan. Now a plan to plan transfer would only apply to Reg if he was moving his money from a previous employer so that doesn't apply to him either.? So it seems to me this won't solve his problem. Somebody mail me an aspirin:) I'm confused. KROW?????
  25. Excellent advice, DK! I once had a similar issue with a rollover between IRA accounts. As I learned later, that should not have triggered a 1099, though I got one. The outgoing custodian mis-coded it such that the IRS interpreted it as a taxable withdrawal, and in a year or two I got a surprise tax bill. I was able to resolve it without cost by sending various records, but it was quite a scare.
  26. DO NOT do any rollover if you don't meet the distribution requirements. If you do, you will have really bad tax consequences. What you need to do is either a "contract exchange" or "plan to plan transfers". A contract exchange is when you move money within the plan from one vendor to another vendor in the plan. There is no tax consequences for this as long as you follow the rules. All that happens is that the money is moved from one vendor into another vendor and no tax form is generated. A "plan-to-plan transfers" is usually when you move your 403b money from one employer into another's employer's 403b plan. If you are with the same employer, you are most like doing a "contract exchange." Make sure that the transfer is coded correctly. Lots of vendors are not knowledgeable about it. My friend did a contract exchange from one vendor into another vendor in the same plan with the same employer. I told him to make sure that they know it's a contract exchange and NOT a rollover. The vendor that he transfer his money out of said that it will be a contract exchange. Guess what, months later and when 1099 forms went out, he got one. It was coded as a rollover. Contract exchange does NOT produce any 1099 form. Now, because of what happened, he would be on the hook for paying taxes on all that because he was not eligible for any rollover. I helped him and we talked to the vendor he moved the money out of. We talked to the supervisor and we told him that he did a contract exchange but they have it as a rollover distribution. They said that we were wrong and they were correct and that they did a contract exchange which is consider a rollover. We told them that if it was a contract exchange, that why was a 1099 form created? He said it gets created because we did a contract exchange and that's the just name for moving money from one account to another. We fought with him and told him that we will make sure that they are liable for any tax consequences. We repeatedly told this supervisor that he was wrong and he better go check with someone who has knowledge of contract exchange. Anyways, he got back to us in a couple of days and left a voicemail all apologetic. He said he consulted their tax attorney and that we were right and he was wrong. He said their attorney said that because the 1099 form was already generated, they will send a correction 1099 with all $0 so that rollover was $0. Then they went and corrected the coding so that it's consider a "contract exchange." This all happened before he did his taxes and they knew once he did his taxes, the IRS would come after him for the taxes on the distribution. Another thing, the form he filled out to do the "contract exchange" was a "contract exchange" form too. I don't think lots of people know about "contract exchange" since it doesn't get done as often as rollover.
  27. Did you know about this Ed? Good stuff and it's about time! \ SEC Charges VALIC Financial Advisors with Failing to Disclose Payments to Promote Services to Florida Educators SEC Also Charges VALIC Financial Advisors in Separate Action for Mutual Fund Selection Violations FOR IMMEDIATE RELEASE 2020-164 Washington D.C., July 28, 2020 — The Securities and Exchange Commission today charged Houston-based VALIC Financial Advisors Inc. (VFA) in a pair of actions for failing to disclose to teachers and other investors practices that generated millions of dollars in fees and other financial benefits for VFA. In the first action, the SEC found that VFA failed to disclose that its parent company paid a for-profit entity owned by Florida K-12 teachers’ unions to promote VFA and its parent company services to teachers. In the second action, the SEC found that VFA failed to disclose conflicts of interest regarding its receipt of millions of dollars of financial benefits that directly resulted from advisory client mutual fund investments that were generally more expensive for clients than other mutual fund investment options available to clients. VFA agreed to pay approximately $40 million to settle the charges in these two actions. In the first action, VFA agreed to cap advisory fees for all Florida K-12 teachers who currently participate (and, in some cases, those who prospectively participate) in its advisory product in Florida’s 403(b) and 457(b) retirement programs. This will result in significant savings for thousands of teachers. VFA Failed to Disclose Payments Made in Exchange for Referral of Teachers VFA is a financial services vendor in nearly every school district in Florida. According to the SEC’s order, VFA’s parent company, The Variable Annuity Life Insurance Company (VALIC), for 13 years made payments to an entity owned by the Florida teachers’ unions in exchange for that entity’s exclusive endorsement of VFA as its preferred financial services partner and the entity’s agreement to not promote or endorse VFA’s competitors. VALIC also provided the entity owned by the teachers’ unions three full-time employees to serve as “member benefit coordinators.” These coordinators – who deceptively presented themselves as employees of the entity owned by the teachers unions – promoted VALIC and VFA to Florida K-12 teachers, including at benefits fairs and financial planning seminars, and referred teachers to VFA for investment recommendations. The order finds that the member benefit coordinators increased VFA’s access to K-12 teachers in Florida, and that VFA did not disclose that the for-profit entity was paid to make VFA its preferred financial services provider. VFA (together with VALIC) earned more than $30 million on the products it sold to Florida K-12 teachers during the period covered by the SEC’s order. “Teachers need and deserve our attention, and we are dedicated to ensuring they receive all of the information they are entitled to when making decisions about their financial futures,” said Chairman Jay Clayton. “Too often educators are targeted with misconduct related to their investments. Our nation’s educators, and our Main Street investors more generally, are entitled to full and accurate information about the incentives and conflicts affecting their financial advisors.” “By failing to disclose to teachers that it was making payments to and providing employees for the union-owned entity in exchange for that entity referring teachers to VFA, VFA took advantage of the trust teachers placed in that entity,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. “Like all investors, teachers need full and fair disclosure.” “Financial relationships and affiliations in the K-12 teachers’ retirement sector can impact teachers’ financial interests,” added Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “It is critical that teachers get the information they need to make informed decisions about their retirement options.” The SEC’s Office of Investor Education and Advocacy today issued an Investor Bulletin with tips to help teachers make informed investment decisions, including about retirement plans. The agency offers resources for teachers and investing and provides outreach and education to teachers through its Office of Investor Education and Advocacy, Retail Strategy Task Force, and its San Francisco Regional Office. VFA Failed to Disclose Millions of Dollars in Financial Benefits It Received for Investing Clients in Certain Funds The SEC separately charged VFA for making false and misleading statements about, and otherwise failing to disclose, conflicts related to its receipt of millions of dollars of financial benefits from client mutual fund investments. According to the SEC’s order, VFA’s wrap agreements with its clients provided that the advisory fee the client paid to VFA included the costs to execute securities transactions. The order finds that VFA either directly invested or instructed its primary sub-adviser to select new mutual fund investments for clients that were part of VFA’s clearing broker’s no-transaction fee program (NTF Program), and thus would not incur a transaction fee VFA would be responsible for paying. The NTF Program mutual funds were generally more expensive than other mutual funds available to VFA clients, including instances when a less expensive mutual fund share class for the same fund was available outside the NTF Program. The order finds that VFA’s participation in the NTF Program generated three key financial benefits to VFA, and that VFA not only failed to provide disclosures regarding these conflicts, but also provided false and misleading disclosures concerning the conflicts. The order sets forth that VFA received both 12b-1 fees and revenue sharing from the clearing broker for client investment in mutual funds within the NTF Program. In addition, according to the order, for clients with wrap agreements in which VFA was responsible for client execution costs, VFA financially benefited by not having to pay any transaction fees for mutual funds in the NTF Program. Despite being eligible to do so, VFA did not self report its receipt of undisclosed 12b-1 fees as part of the Division of Enforcement’s Share Class Selection Disclosure Initiative announced in February 2018. “Investment advisers must disclose conflicts between their financial interests and those of their clients,” said Mr. Peikin. “Here, VFA for years reaped million in benefits at its clients’ expenses while not only failing to disclose the conflicts, but while providing false and misleading information.” “VFA misled clients by telling them that their advisory fee would cover execution costs without also telling them that VFA would put them in more expensive mutual fund share classes and thus avoid paying those costs.” Ms. Avakian added. “By not disclosing these practices as well as the other financial benefits VFA received, the firm deprived its clients of essential information about their relationship with their adviser and violated core fiduciary obligations.” Investors can find additional information about how fees and expenses may impact their portfolios at Investor.gov. Summary of Settlement Terms The SEC’s order concerning Florida teachers finds that VFA willfully violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-3 and 206(4)-7 thereunder. Without admitting or denying the SEC’s findings, VFA has consented to a cease-and desist order, a censure, and a civil penalty of $20 million. VFA has also agreed to set advisory fees for all Florida K-12 teachers who currently participate in its advisory product in Florida’s 403(b) and 457(b) retirement programs, or who currently or may within the next five years own certain other VALIC Financial Advisors products, at its most favorable rates in the Florida K-12 market. The SEC’s investigation leading to this order was conducted by Heather E. Marlow and supervised by Jeremy Pendrey, both of the Asset Management Unit and the San Francisco Regional Office, and supervised by Monique C. Winkler, Associate Regional Director, and Erin Schneider, Director, of the San Francisco Regional Office and C. Dabney O’Riordan, Co-Chief of the Asset Management Unit. The investigative team appreciates the assistance of Jill Persson of the San Francisco Regional Office Teacher Investment Outreach Team and Charu Chandrasekhar, Chief of the SEC’s Retail Strategy Task Force. The SEC’s order concerning VFA’s mutual fund fee disclosure practices finds that VFA violated Sections 206(2) and 206(4) of the Investment Advisers Act and Rule 206(4)-7 thereunder. Without admitting or denying the SEC’s findings, VFA has consented to a cease-and desist order, a censure, disgorgement and prejudgment interest of over $15.4 million, and a civil penalty of $4.5 million. The over $19.9 million in monetary relief will be placed into a fund for distribution to investors affected by this conduct. The SEC’s investigation leading to this second order was also conducted by the Asset Management Unit, including industry expert John Farinacci, senior counsel Frank Goodrich and senior trial counsel Jennifer Reece of the Fort Worth Regional Office, and supervised by Barbara Gunn and Ms. O’Riordan.
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