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detailgal

New Broker/403b American Funds

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Hi All,

 

Latest, and nearly final installment in long-term (posted here) story of getting out of ING annuity and into something else.

 

The cfo found a broker. We, (she, exec dir. myself and fellow employee/interested investor and broker) met about 6 weeks ago. He offered to put together a small plan (we are a very small agency, 400k in plan assets) with 60% American Funds and about 10-12 funds. I pushed for an average fund fee of .90. (I know this is higher than Vanguard, but Vanguard will never be an option and it's a whole lot less than the 2.10 average with ING.) He's meeting with us again today to finalize things. However, he's saying that he can't offer the kind of diversification that co-worker and I asked for in the form of more funds per asset class AND lower fees. I don't have the actual numbers yet. He says he looks at what the best performers are in an asset class, offers those and tracks them. We had 85 funds with ING. Too much. But to go to 10 with 60% of them American Funds??? Please give me some input on the argument. The cfo just wants to be done with this and the exec dir has no clue about investments. I we should get the 29 American funds and then the 7 other funds, at the very least.

 

Details: The broker's take is a fixed .25 regardless of fund.

 

If you would, please just address my concern here. I know there are lower options out there, but that is not going to happen. The meeting today is. THanks very much.

 

DG

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Guest TR1982

DG,

That's a good deal. You don't need 30 funds. In the Morningstar style boxes you have 9 different asset classes on the equity side and 9 on the fixed income side. You don't have to have a fund in each area. Remember, the more options you have, the higher the admin costs. That's a fact of life everywhere. The average 401k plan with 5 million in assets is getting this same deal with American funds. I would say that an AVERAGE expense ratio of 100 to 125 basis points is very fair given the assets in the plan. Most employees will end up with weighted expense ratios that are much less.

 

Good luck,

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Thanks TR1982. What are you suggesting would be a good number of Am funds or total funds in the plan?

 

Also, the broker says he'll be serving as an investment advisor as well as the manager of the managed funds. I feel "ok" about this because his cut is the same regardless, though I probably won't use him for my specific picks. But, what do you all think?

 

thanks again,

DG

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DG,

That's a good deal. You don't need 30 funds. In the Morningstar style boxes you have 9 different asset classes on the equity side and 9 on the fixed income side. You don't have to have a fund in each area. Remember, the more options you have, the higher the admin costs. That's a fact of life everywhere. The average 401k plan with 5 million in assets is getting this same deal with American funds. I would say that an AVERAGE expense ratio of 100 to 125 basis points is very fair given the assets in the plan. Most employees will end up with weighted expense ratios that are much less.

 

Good luck,

 

 

TR1982: I get the non-pay Morninstar info, am assuming that you are, as I didn't find this info. Or maybe you could point me in the specific direction?

 

Thanks, DG

 

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Guest TR1982

DG,

The only thing I might add is a fund or 2 in the small/mid cap area and another fixed income fund-maybe a Ginnie Mae. Those areas are the weak spots for American Funds. Otherwise, they are an excellent fund shop with outstanding research and good plan administration. You will have a difficult time finding a better overall plan arrangement.

 

Regards,

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Hi DG,

First off, I admire your persistence in trying to get the best plan for the employees. They don't know how lucky they are. Most staffers at my employer don't give a flying you know what about 32,000 district employees and their 403b plan. It’s very refreshing to see that there is a God somewhere and you reflect the ethical and decency of what can be done when staffers have a conscious like you. Thank you for being a tiny beacon in the very dark and unethical world of 403b plans with K12 school districts.

 

American Funds are a great family IF and that’s a big IF, IF you can get the loads waived. Their loads are huge, up to 5.75%! If you can't get them waived, I suggest that you keep shopping around. I have heard this rather funny quip that one of John Bogle's nightmares is that American Funds changes to a no load!

Best of luck to you and happy holidays.

Steve

 

Click here to get more information on American Funds at Morningstar. Scroll down to the bottom to take a look at all their fund offerings. Also, click on the fees and expenses and that will show the very low expense ratios AND the front end loads. Watch out!

PS if this link does not work, you need to register with Morningstar (Its free) to get their excellent information.

 

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Thanks Steve. And, at the risk of further despair...I don't work for a school; I'm at a small non-profit agency. In our meeting today when I questioned why the same American fund outside the retirement plan cost .25 less than inside, one of the things our cfo said was that I should realize how unusual it was for an employee to have a say (not exactly her words), citing examples from much bigger agencies. In response, I noted that the very size of our agency helped to make it possible for an employee to question and ultimately make a difference. Even then, it took 3 years! (The broker did say he would research the answer to my question. And no, no front loads, so the higher fees don't feel like I'm being eviscerated (sp?) as it did with ING.)

 

Thanks also for the link info. And, keep plugging!

 

Best,

DG

 

 

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If American Funds will be the only choice for your company you can qualify to have ALL of the accounts count toward achieving the breakpoints. This should completely do away with the loads in short order. The rep would get paid for the up front work he does setting up the plan and then you would be buying American Funds at NAV. American Funds at NAV would be hard to beat - I would be happy with that as a choice.

 

In addition to the additional choices that TR1982 spoke about, I would also pay attention to fund correlation when building your portfolio with American Funds. Most of their Growth and Growth and Income funds are highly correlated and many investors with 5 or 6 American Funds are much less diversified then they think.

 

Sounds like your on the right path...now the trick is to get the other employees to actually take advantage of the plan!!

 

Edit: In re-reading your previous post it seems that what your agency is getting is an R share which has the front end load waived and an additional .25 bps added to the back end. Not as good in the long term as the scenario that I mentioned above - but still a really fair deal for your group. In my opinion the rep is doing a good job for your agency by waiving the up front and earning his fee each year.

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American funds is an incredible fund company and if you look at the track record of some of their growth and growth & income funds you really can't go wrong. Just pick out a few funds and let the money managers start working for you. We get caught up in this load game. pay the managers for doing thier work. because 20 years down the line with a couple hundred thousand dollars in your account, would you be upset that the money manager made a few dollars helping you make few thousand.

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Weathbuilder,

You said: "American funds is an incredible fund company and if you look at the track record of some of their growth and growth & income funds you really can't go wrong. Just pick out a few funds and let the money managers start working for you."

 

Here is my rebuttal:

 

Obviously, we can only look forward. You are saying that just about any AF fund will make you money in the future. Is that a guarantee? I thought that past performance is no guarantee of future performance.

 

If past performance can guarantee future performance, I will put my money in those funds that you recommend, ASAP.

 

Seriously, I know you are not saying that. But what else can you say about past performance...? It’s COMPLETELY worthless.

 

And, YES, we do make a big deal about costs and loads on this site because that is about all you can control in the future is fund costs and diversification.

Steve

 

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American funds is an incredible fund company and if you look at the track record of some of their growth and growth & income funds you really can't go wrong. Just pick out a few funds and let the money managers start working for you. We get caught up in this load game. pay the managers for doing thier work. because 20 years down the line with a couple hundred thousand dollars in your account, would you be upset that the money manager made a few dollars helping you make few thousand.

 

Oooh, I can hardly wait for the response to this one. Steve?

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Hi apteacher,

Mr. WealthBuilder will either get an education or he is setting us up for another go around. One has to be positive and hopefully he will see and understand our POV about loads and managed funds. There are more pros and policy makers who are beginning to see that things are changing with the age old 403b policies with K12 school districts and 403b. The 403b survey from my district (see my post) and the total change at my union leadership (more on this later) are two big issues that we have been fighting off and on for years. 2006 is going to another small step forward for real changes.

Steve

 

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"We get caught up in this load game." (Wealth Builder)

 

Well, yes, we do. Why on earth should I pay a 5.25% load on every investment I make? For every $100 invested, I would only have $94.75 working for me.

 

Having said that, AF is, indeed, a fine family of funds if you have a plan that waives the load. Their portfolio managers are very, very experienced, and their management fees are relatively low. Still, I'll take index funds from Vanguard or Fidelity any old day.

 

 

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very true that past performance cannot predict future performance but when you are looking to invest money for the long term should'nt you have some type of legs to stand on. 1. past performance in a good and bad market.2. money managers experience in a good and bad market. AF does have the high front end fee with 5.75 but Af has 8 funds with a track record of 12% ROR with 30+ year track records. 3 funds with 20 year track records and 12% ROR. Now lets not forget were talking about long term and not short term and AF does have low annual expense fees. How many companies out there are teaching the Rule of 72 and how to get there total financial picture together. Remember there is no free lunch and these companies are getting paid to make people money, no load or not.

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