Jump to content
Stephanie

Dealing With Poor 403b Offerings

Recommended Posts

Hi all :)

 

I have a 403b with Hopkins run through Lincoln Financial Group.

I'm currently only meeting the match because they match 50% of 2% of my salary.

Pretty sure it is an autmatically rebalanced "lifecycle" fund.

My profile is currently aggressive since I'm 28, unmarried (tho engaged) and no kids.

 

The portfolio is as such:

 

10% Lincoln Fixed Annuity - no expense ratio available - 3.85% current earnings; 5 year: 4.27%

10% PIMCO Total Return Admin (expense ratio: 0.68%); 5 year 6.25%

15% American Century Small Company Inv (expense ratio: 0.88%); 5 year 21.04%

20% American Funds American Mutual A (expense ratio: 0.56%); 5 year 6.91%

15% American Funds Growth Fund of America A (expense ratio: 0.62%); 7.15%

5% Scudder / DWS 500 Index (expense ratio: 0.25%); 5 year 3.71%

10% American Funds EuroPacific Gr A (expense ratio 0.83%); 5 year 11.41%

15% Oppenheimer Main St Opportunity A. (expense ratio: 1.17%); 5 year 11.12%

 

I'm calculating a 5 year average yield of 9.59% but an average expense ratio of 0.676% and I would think a net of 8.914%? Is this correct?

 

If I read my 403b plan correct tonight - I think I can withdraw from my lincoln fixed annuity free of charge. I'll talk to them tomorrow.

 

My thought is that using the information that I read about: I can do better elsewhere. I'm considering putting all of my contribution into my 403b in to the fixed annuity part and then transferring (tax free?) into a Fidelity Freedom Fund or Vanguard Target Retirement Fund. (Vanguards website actually lets you compare the 2 and recommended that my longterm earnings with the Fidelity Freedom Fund over 35 years would be potentiall greater than the Vanguard Fund - but I'm guessing this doesn't take into account capital gains taxes? But if I'm transferring pre-tax and reinvest my earnings, I could bypass this? I just really want to avoid the 20% tax and the 10% penalty tax (at the very minimum).

 

We don't have a Roth 403b or a 403b(7) option here - so I'm debating how much I should put into the 403b to start with. I'm a grad student and was sickened that I had not "maximized" opportunity and lost loads in ed tax credits this year because I "made too much money." Should I put in just enough to put me under that ceiling and then put the rest of the money in the IRA and something else ... but it would be after tax?

I have enough money to fully ($15,000) fund a 403b AND an IRA every year. (I'm under the income ceiling so i can still do a Roth.)

 

Will eventually buy a house in 2-5yr - which putting some money into the fixed annuity or a money market account will help with down payment too.

 

Can you please help me refine this thought process?

 

Thanks :)

 

-Stephanie

 

Share this post


Link to post
Share on other sites
Guest TR1982

Stephanie,

 

The average weighted 5 year return is 9.63%. The weighted expense ratio is .67%. That is net of fees. Fidelity Freedom Fund 2040 has an expense ration of .79% and a 5 year weighted return of 6.69%.

 

Please forgive me, but I am having a difficult time understanding how you would be better served in the Fidelity Fund as opposed to what you are doing now.

 

You have a good deal now in your current plan. I would suggest that you continue using it. I think it will serve you well.

Edited by TR1982

Share this post


Link to post
Share on other sites

Stephanie,

 

The first thing that I would do is to slow down a bit. You have all kinds of things going on here, so before you do anything, I would suggest the following:

 

1) Start to learn about investing by reading books by folks like Bogle, Ferri, Armstrong, Swedroe, and Otter (featured on the main page of this site). To get you started, you might try The Coffehouse Investor: http://www.coffeehouseinvestor.com/

 

2) Once you have acquired some background, spend a good deal of time on developing an Investment Policy Statement. This is crucial. Go to the following site for an explanation of how to put this plan together:

 

http://news.morningstar.com/article/articl...=79486&_QSBPA=Y

 

3) After you develop the plan, THEN you can go about the task of fund selection. Right now you may be putting the cart before the horse by looking for investment alternatives before really learning about investing and developing a plan. First things first. You are young, and you have plenty of time to learn.

 

4) In the meantime, if you absolutely insist upon getting started, be sure to check on surrender fees if you transfer money! And be very careful when you look at past investment returns: past returns are no guarantee of future results. This is one of the lessons that will be driven home in the books listed above.

 

Good luck! Keep us updated on your progress!

Share this post


Link to post
Share on other sites

Hi,

Stephanie, you stated: "...but I'm guessing this doesn't take into account capital gains taxes?"

 

If your money is in a 403b account, then you will pay ordinary taxes when the money is taken out of the account. If you transfer your 403b funds to another 403b account, then there are no taxes paid on the transfer. However, you may have a surrender fee that you will have to pay when you transfer the funds. Your contract with the vendor will have that information.

 

"I'm calculating a 5 year average yield of 9.59% but an average expense ratio of 0.676% and I would think a net of 8.914%? Is this correct?"

 

If a fund says that it has a return of 5%, then it has already taken the expense ratio into account so don't subtract it again.

 

"...so I'm debating how much I should put into the 403b to start with."

 

If your employer is giving you a match, then put enough into your 403b to take advantage of that "free money."

 

"I have enough money to fully ($15,000) fund a 403b AND an IRA every year. (I'm under the income ceiling so i can still do a Roth.)

 

Will eventually buy a house in 2-5yr - which putting some money into the fixed annuity or a money market account will help with down payment too."

 

I like the Roth IRA and fully fund it every year. Go ahead and do it if you have the funds for the 403b, Roth IRA, and the house. Don't forget to have an emergency fund for the unexpected. Best Wishes.

 

Joe

Share this post


Link to post
Share on other sites

Thanks everyone for helping me make sense of it :) I guess I'm running on a little bit of information overload trying to make sense of all the stuff on my coffee table. I'm definitely going to fund the IRA. The 403b will at mimimum help me get my ed tax credits. Good call on the cush fund. Thank God Excel cells are cut and paste as the plan (which is a work in progress) starts to come together.

Thanks again.

-S

Share this post


Link to post
Share on other sites

Stephanie,

 

I feel that AP and Joe, who are fellow investors like myself gave very good advise, especially obtaining financial education at this stage in your investing.

 

It appears to me that you already figured out that Hopkins run thru Lincoln Finacial group is a dog. I wonder, what other vendors are available to you through your employer for investing?

Share this post


Link to post
Share on other sites

Good call on the fidelity freedom fund as far as what it's making now. I might pick another fund through fidelity that is doing better ... which requires some research. As far as the fee that fidelity is charging - what is on their website may not be up to date (3/31/0-five) since Vanguard is quoting 3/31/0-six information of 0.08 that they obtained from morningstar when I did the comparison shop thing.

My concern with my 403b is that I do not have the option to work outside of Lincoln Financial Group unless I pay $50 to work with Wilmington Trust and do it myself. Although - I looked at Wilmington Trust on the internet and at first glance, it appears that their choices are WORSE.

Johns Hopkins distinguishes between the health system and the university. I'm in the health system - but the university folks CAN choose to work with fidelity, vanguard, and a few others.

Thanks : )

-S

Share this post


Link to post
Share on other sites

I do not know the details of Fidelity managing a 403b program VS being one of the funds available under an annuity structure. My wife has the usual miserable 403b offerings from Los Angeles Unified, the only saving grace was the availibility of the Fidelity Contrafund. I believe this fund is closed to new retail customers but may be available to you if they manage your 403b program. No one knows how long a fund can outperform but this one has done pretty well for the 12 years my wife has been in it. My wife will be retiring in a few weeks and we are arranging to move her account over to Vanguard over the next 1 1/2 years to avoid some fees. The ONLY thing I will miss from her 403b variable annuity is the Contrafund.

Share this post


Link to post
Share on other sites

TR, Hi again,

 

I'm sure that you are an excelent salesman, since you are very persistent in presenting information that benefits you the salesman, rather than the investor.

 

We have had this discussion with you on numerous occasions, where we have shown you that as AP just posted, "And be very careful when you look at past investment returns: past returns are no guarantee of future results. This is one of the lessons that will be driven home in the books listed above." ONe of the main factors that we are able to control in our investing is COST. When Stephanie , as you know is paying various high loads for her investment, as well a probably 12b-1 fees, and other extra costs , the cost is significantly higher that for a typical no load, low expense fund such as Fidelity or Vanguard. For example the expense ratio of a VAnguard Retirement fund which Stepanie mentioned is about 0.25. As you know the difference in cost each year, over several years is cumulative and cuts the total investment return by say 30 percent over say a a 25 year period.

 

I can understand that Stephanie is a novice, and doesn't understand this yet, but you should know better and not mislead Stephanie and other new posters that come to this site.

 

Frank, I didn't check, but even if the contrafund beat its index, once again past performance ,as stated in the prospectus ,is no indication of future success, but COST can be controled.. Also Frank, the Contra fund used to be a small cap and now has changed its benchmark to a large cap fund.

 

Stephanie.........I suggest that you read one of the books that AP recommended before making any decisions about investing in any mutual funds. Common Sense on Mutual Funds by Mr. John Bogle, founder and former CEO of Vanguard. The knowledge will be of great value to you.

 

Ira

 

 

 

 

Share this post


Link to post
Share on other sites
Guest TR1982

"The average weighted 5 year return is 9.63%. The weighted expense ratio is .67%. That is net of fees. Fidelity Freedom Fund 2040 has an expense ration of .79% and a 5 year weighted return of 6.69%."

 

"ONe of the main factors that we are able to control in our investing is COST."

 

Ira,

Which one is cheaper, Lincoln at .67% or Fidelity at .79%? I THOUGHT YOU SAID COST WAS IMPORTANT! Well if it's important then why should she consider a fund that is more expensive? That's all I was pointing out.

BTW, there are no loads in the plan she has now. That's the problem with you guys. You don't pay attention to the facts. You assume, assume, assume, assume, assume. Well, you know what happens when you assume.

Share this post


Link to post
Share on other sites

I actually emailed fidelity this morning because the fee they have on their website does not match any information that I have obtained from sources using morningstar. It is certainly a point of confusion ... which could hurt their marketing. I pointed this out to them and they wrote me back saying that they had passed "my" observation onto their "senior management" ... ie... they probably yelled at the person who operates the website ... :) ... but hopefully there will be less confusion on what fidelity's fees actually are! :). Thanks all. :)

Share this post


Link to post
Share on other sites

TR, Your mentioned something about assuming (and what it means). So, I did not assume that you gave correct information about the cost of Fidelity Freedom 2040, and below information is what I found on the internet.

 

I wonder, how did you get the annual expense rate for Fidelity Fredom 2040, that you mentioned? It looks like you came up with wrong information.

 

Apparently, Fidelity published .79 as the annual expense on their website, and internet sources 0.08 annual expense. Since Fidelity and Vanguard are in fierce competition expecially among some of their index funds, the Freedom 2040 fund may be subsidized by Fidelity marketing dept. At any rate, both Fidelity and Vanguard are promoting low expenses, which many investors look for.

 

 

Are you willing to change your position on this thread?

 

 

The Fidelity Freedom 2040 has an expense of .08, no 12b-1 or sales load when you invest on your own.

 

Here's some additional information, there are Fidelity ADVISOR 2040 funds as well, when a salesman is "HELPING". Anyway there is a Advisor 2040A with 0.33 expense and a 12b-1 fee of 0.25, there is an Advisor 2040B with an exp of 1.08, a 12b-1 fee of 1.00 and a deferred sales load of 5.00, there is a 2040c with an exp of 1.08 and a 12b-1 fee of 1.00 and a deferred sales load of 1.00, there is a 2040I with a .08 fee, and a Advosor 2040T with a front end load of 3.5, an expense of .58 andc a 12b-1 fee of 1.5

 

Since you are the professional "SALES advisor" here, and familiar with these different classes of product that are sold to the investor, you can explain the expenses that I mentioned and any other expenses hidden in these different classes of mutual funds. Also, can you tell us, how much of the load goes to the salesman, how much to the salesman's company. Now, as I understand the 12b-1 fee is extra expenses for marketing and sales. Is it money used to motivate the sales force by sending brochures, and toadvertise the fund, etc. Does any of this money go the sales force in some sort of rebate?, I just wonder, because we know that the investor is PAYING this extra money, and does not receive any of it. It's just another extra expense that the "salesadvisor" gives to the investor.

 

Edited by ira

Share this post


Link to post
Share on other sites
Guest TR1982

Ira,

 

Here's where I got the information: http://personal.fidelity.com/products/fund...shtml?315792101

 

"Expenses & Fees

Expense Ratio: as of 03/31/2005 0.79%"

 

I guess if Fidelity's website is wrong that's their problem, not mine.

 

"Apparently, Fidelity published .79 as the annual expense on their website, and internet sources 0.08 annual expense. Since Fidelity and Vanguard are in fierce competition expecially among some of their index funds, the Freedom 2040 fund may be subsidized by Fidelity marketing dept. At any rate, both Fidelity and Vanguard are promoting low expenses, which many investors look for."

 

So if somebody tells you the cost is different than what they publish on their website, you believe your source not the company. OK.

BTW, in Morningstar's Principia Pro as of 4/15/06, the stated expense ratio is .80%.

 

Would you care to change your position now? As for all the other stuff you were asking, I'm not selling anything here so I suggest you go ask someone else.

Share this post


Link to post
Share on other sites

"As for all the other stuff you were asking, I'm not selling anything here so I suggest you go ask someone else."

 

Since TR would not answer Ira's question about 12b-1 fees, I will. These fees are to be used by a fund for marketing purposes. The theory was that additional advertising of a fund would bring in more money, and therefore drive down fund expenses. What a crock! Funds raised fees in order to drive down fees! What a one that was!

 

In truth, many companies that charge 12b-1 fees simply distribute these fees to agents who sell their products. In effect, they are thinly disguised sales charges. But actually, they are worse than that. A front end load is charged one time, but 12b-1 fees are recurring. They are a constant drag on returns.

 

TR, you don't sell funds with 12b-1 fees, do you?

 

 

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

×
×
  • Create New...