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gdh22

403(b) Allocation

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I'm curious what the breakdown of assets in all 403(b) plans is, nationwide.

How much is in fixed annuity vs. variable annuity vs. mutual funds?

Is there inherantly more in annuities because they are called "Tax Sheltered Annuities" compared to

401(k) plans?

Any help would be greatly appreciated.

 

Thanks.

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Guest Chuck Yanikoski

I am pretty confident that there are no reliable statistics on this subject -- though there are some unreliable ones. My own guess is that about 2/3 of all funds are in fixed annuities -- not so much because of the name of the plan as because the oldest accounts are likely to have the biggest balances, and for about the first 30 years, only fixed annuities were available for 403(b) plans. I would further guess that the remaining third is split about evenly between variable annuities and mutual funds. A negligible amount is in life insurance. But these guesses could be way off.

 

Fortunately, help may be available soon. The National Tax Sheltered Accounts Association (www.ntsaa.org) is sponsoring a survey among product providers that will answer this and many other questions. Its validity, however, will depend in large part on the willingness of providers to complete the survey, which remains to be seen (returns are just starting to come in now). My company, Still River Retirement Planning Software, is an industry sponsor of NTSAA and we have agreed to do the statistical analysis of the results -- but we haven't seen enough data yet to form a reliable sample.

 

 

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Guest Guest_gdh22

Thanks for your input, I'll check out the ntsaa site. BTW: I thought 403(b) legislation became law in 1962 and was amended to allow 403(b)-7 custodial accounts in 1978, thereby, it was 15 years, not 30, that you could not purchase mutual funds. Can you help me out with this discrepency?

Thanks,

gdh22

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Haven't seen the figures you are seeking...but here's what my wife's 457 plan has to say about asset allocation by ICMA-RC particpants[suggest Google ICMA]:

 

All Fairfax County Employees enrolled All IMCA-RC Participants Nationally (AGe 56-65

in ICMA-RC

 

55% Domestic Equities................................41% Domestic Equities

41% Fixed Income.......................................53% Fixed Income

2% International....................................... 2% International

2% Cash Management.............................. 4% Cash Management

 

You probably can't go too far astray with a 40% fixed income/60% equites allocation before retiring

Then upon retirement when you might be withdrawing, rebalancing so about 1% of

your portfolio is shifted from equities into fixed income.

 

Youngsters starting out good saving habits and with good risk tolerance and an understand of the possibility of a bear market, might have a portfolio allocated 20% fixed income/80% equities.

 

Morningstar Vanguard Diehard conversations at

http://www.morningstar.com/conversations can provide advice

 

Ted

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Hi gdh22,

Just a small clarification. 403b(1) was created by the IRS in 1958 and the (7) was added by congress in 1974, which meant mutual fund companies custodial accounts could by used. However, there has been such a monopoly by the insurance industry over 403b that we think the future is in 457s. After 30 years, largely because of the monopoly of aggressive and expensive sales TSA force backed by legislation and disinterested districts and unions, the vast majority of educators still do not know that low fee or no load mutual fund companies are also available. 457s circumvents much of the legislation written and created by the insurance industry.

Chuck is about right with what I have been reading. 80-85%% in some kind of rip off annuity with large insurance companies and the rest in mutual funds. I look forward to the results of that study he mentioned.

Steve

 

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Just a further clarification. Section 403(b)1 was enacted by the Congress (PL 85-866) in 1958 to allow employees of 501©(3) organizations to purchase TSAs. It was unclear as to whether or not public school personnel qualified so in 1961 the Congress enacted PL 87-370 making section 403(b)1 applicable to employees of public schools. As a part of ERISA (1974) section 403(b)7 was added as a second funding medium for 403(b) arrangements.

 

Chuck: Am I correct in saying that the NTSAA is dominated by high cost investment providers along the lines of Valic, ING, SunAmerica, Oppenheimer, Dreyfus, Evergreen? Isn't its primary mission to promote the interests of these high cost providers of investment products and the broker/dealers that sell them? Is it not simply a trade group?

 

Peace,

Joel

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Dan said: "457s circumvents much of the legislation written and created by the insurance industry".

......................................................................................................................

 

403(b) is not a "Plan" because the assets in the contract/account are owned by the individual. This is why a 403(b) 'plan' as such cannot be dissolved or terminated. The only employer involvement is to remit the salary reduction to the investment provider. 457 is a "Plan" because substantial employer involvement is required. I.e Plan Document, Summary Plan Description, Plan Administrator. The employer is resposible for all of this. Their legal structures are as different as day is to night.

 

Peace and Hope,

Joel

 

 

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Guest Chuck Yanikoski

Hi, Joel --

 

NTSAA is "dominated" by "high-cost" providers in the same sense that the market in general is: most of the providers fall into that category. In the case of NTSAA, the balance may be further tipped, in that the lowest-cost providers do not, pretty much by definition, spend much money supporting outside organizations (by becoming sponsors or by exhibiting at conferences, for example).

 

However, I know a lot of the leaders of NTSAA pretty well, and their purpose is to promote 403(b) and 457 plans, and professional knowledge concerning such plans, across the board. Unlike 403bWise, their target audiences are providers and financial representatives (and, to some extent, plan sponsors), rather than participants, so their focus is different.

 

But low-cost providers are not only welcome to participate, they are encouraged to, and many do. Companies like TIAA, Fidelity, and Vanguard often send people to the NTSAA conferences. In fact, a couple of years ago, NTSAA changed its name from the "Nat'l Tax Sheltered ANNUITY Assoc." to the "Nat'l Tax Sheltered ACCOUNTS Assoc." mainly in recognition that providers other than those that used to dominate the market were gaining strength, and to explicitly welcome them into the organization.

 

As far as I can tell, the consequence is that there is a little more tension now among some members of the organization, and on rare occasions there have been heated discussions at NTSAA conference sessions as different (unpopular) points of view are expressed -- not unlike what happens on 403bWise sometimes. To me, this is a healthy sign, and I hope for more of it in the future.

 

In the meantime, the NTSAA itself tries to stay above the fray, most of the time. The fact is, even in the old days, when all of the key members of the organization were insurance companies, they were also still all competitors with one another. When competitors meet in professional organizations, they tend to focus on their common interests rather than their mutual opposition. As more low-cost providers get involved, the same dynamic should continue.

 

As a not-for-profit, NTSAA is not allowed to get involved in promoting or opposing legislation, and it does not, therefore, have or try to have any clout with Congress or with state legislatures -- there are other organizations in the insurance and securities industries that serve as lobbying organizations. Instead, NTSAA tries to focus mainly on educational activities, and in that regard its goals are rather complementary, I think, to 403bWise.

 

If there is any kind of official "propaganda" against low-cost providers, coming out of NTSAA in its newsletter, website, or training materials, then it's something I have never seen. I'd be very surprised to find that something along those lines exists. Like all organizations, it is made up of human beings, so it isn't perfect -- but it really does try to professional and, as far as I can tell, succeeds quite well.

 

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Chuck,

I find your comments comparing some of NTSAA’s vision to 403bwise a stretch. If I understand you correctly, you said that NTSAA educational program is "complimentary" to 403bwise educational goals. Oh really? So NTSAA goal is to have most of the educational community invest their 403b and 457s in TIAA CREF and/or the Coffehouse investor index funds with an annual or semiannual slice and dice strategy in Vanguards’ funds? Of course not! In case you forgotten (again), this site recommends a passive index investment model for diversification and long term growth with very low fees.

Your pollyanna idealism about NTSAA and comparison to this site as well as your general defense of the insurance industry is getting tedious and misleading (this is little or nor comparison of NTSAA to this site’s education goals or anything else period). NTSAA has done nothing to educate nor reform 403b. They are changing only in response to pressure from the outside and then its only window dressing at best. Three or four ethical plan administrators and managers are taking this site seriously because they get information that is truly looking out for employees' best interests. NTSAA is about taking care of their clients. I shutter to think about the kind of information the vast majority of plan administraters get from the likes of NTSAA.

Steve

 

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Guest Roberta

Steve,

 

 

"In case you forgotten (again), this site recommends a passive index investment model for diversification and long term growth with very low fees. "

 

Does this official viewpoint mean that non-indexers like myself are not welcome here. Has this become an outpost of the Diehard's where only ONE viewpoint is accepted or permitted?

 

Roberta

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Roberta,

You took my statement out of context and labeled it as some kind of official viewpoint. I don't know if I should be flattered or insulted. Let me repeat,....”this site RECOMMENDS a passive index investment model." I was responding to Chuck. Now that you asked your off the wall questions, where have you been? Last I heard and read around here, we have been preaching for years about investing in low fee companies. I don't have to tell you that low fee companies mean TIAA CREF and Vanguard. If you like paying commissions and high fees because your fund beats the indices, we all want to hear it. Heck, the Diehards want to hear it too, but there aren't any funds that beat the indices for long periods of time.

I know you like American Funds. Heck, John Bogle likes them too because they resemble more like index funds than managed funds, very little style drift, hardly any turnover, investors buy and hold them for long periods of time and their annual expense ratios are just above TIAA CREF’s fees. I just don’t like paying somebody commissions.

Index investing is spreading to Pension funds also. My pension plan CalSTRS has adopted the Russell 3000 index just last year. Why? To save money on fees. If its good for my pension, its good for everybody's portfolio. Indexing should always be a part or all of everybody’s portfolio.

If you have another point of view, lets hear it. To think that I have some kind of control over the flow of information in and out of this website is ridiculous. As for your last comment, I would only hope that this site would become an "outpost of the Diehard's 'forum' where only one view point is accepted.” It just happens to be the right one with research and data to back up their claims.

When it comes to investing, emotions cannot be ignored and I happened to agree with the Diehards indexing model. There are some very well informed people over there and I have learned a lot. Yes, they have a bias. Fees matter. Of all the workshops that I have given to my colleagues, there was always somebody who said thanks for letting them know how their advisers get paid.

Steve

 

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Guest roberta

I don't like paying commissions. Commissions are better than annuities. You work with the choices you have.

 

I don't debate indexers. It is no debate. They are true believers.

 

Hasta la vista.

 

Roberta

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Guest Chuck Yanikoski

Hi, Steve --

 

It's been a while since you've bashed me. I was starting to think you didn't care any more !

 

Anyway, you are absolutely right that 403bWise and NTSAA have different goals and approaches. That's why I said that they are "complementary" rather than "the same."

 

403bWise is geared toward educating the consumer. NTSAA is geared toward educating financial professionals -- both professional advisers and the people in the home offices of financial firms who support them.

 

Most of the contributors to 403bWise seem to be coming from your standpoint, or someplace close to it, when it comes to recommending particular products or companies. NTSAA, despite the fact that the majority of its membership comes from the insurance industry, is simply not in the business of recommending products or companies. Really, it just could not do this and continue to represent and help the 403(b)/457 industry as a whole. Instead, they are trying to set up a big tent and encourage some of your favorite providers to be part of the party as well.

 

I never meant to suggest that NTSAA is out there to represent your interests, which you are doing a very good job of representing without them. What they ARE trying to do is to increase the professionalism and knowledge of the people who are in business in this market, and this can only be a good thing for consumers.

 

Not everything has to be adversarial. Sometimes two things that are different fit in well together. I think this is one of those cases...

 

--Chuck

 

 

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Chuck,

How do you know that perhaps I would be the one bashed by you and Roberta for taking such a narrow stand favoring passive versus over active management. Another fellow is now very curious about active management and wants to Roberta to explain more.

At first I was also turned off by the ranting and raving on the DH forum. Because I have an open mind, yes I do, I just kept reading the posts and asking a question occasionally.

I was more convinced when I did a little reading. I read some of the recommended books such as a John Bogles Book "common sense on mutual funds" and Larry Swedroe's "What wall street does want you to know" Jerimy Segals "stocks for the long haul" Bernstein's "the complete story about risk" and the basics behind the Efficent Market Theory (the authors won the nobel prize in 1993 for this) and the Modern Portfolio Theory. Slowing I began to realize what I really have been thinking for a long time why the investment management profession is the most lucrative and profitable business in the world. They make money off us while trying to beat the indices with all of the theoretical and technical odds in favor of them and against the investor. This profession makes money whether the market goes up or down and whenever they decide to make a trade. The investor takes on the risk and the manager takes on NONE. They make money talking the big talk whether is on CNBC, Louis Rukisor or any of the other business shows or financial magazines. One of the biggest mistakes I made as an investor was that my buy and hold strategy tanked in an environment of a managed no-load company. Buy and hold works best when everybody else is also buying and holding or when the expenses are very low as in a index fund. When everybody is buying and selling especially in a no load fund, the buy and holders will pay the trading and other fees associated with commissions and sales, etc.

The world is full of investment managers who have all the time and resources at their disposal to predict the future, that is, research and pick those companies for their fund that will beat the market. Time and again, the fees will eventually drag down the performance because no one manager or fund can keep beating the market year after year. They cannot keep picking the right companies over and over again. The market is too complex and dynamic and the data doesn't support it. So if the managers cannot predict the market, how in the hell can I?

It is the above books that will explain why passive investing will produce more long term growth than active investing. While Bernstein's book is a hard read, all of the others are very easily read and comprehensible. What passive investing entails is that the individual investor is truly investing in the economy, NOT some manager’s idea or prediction. When the economy goes up, your index will go up and when it goes down it will go down but it will NEVER go above the average or below the average. Over long periods of time, the index will beat the managed funds because of the low fees. Heck, if the economy doesn't grow over long periods of time, we are all in trouble and capitalism is in trouble. I don't think there will be a long period of no growth. The longest, of course, was the Great Depression. We are nowhere near that now. I know its hard to believe but it’s the fees. Managed funds are all over the place, some beat the average and most do not and you have to pay the fees and commissions all the way up and all the way down.

Anyway, did not mean to carry on like this. I know you know about this stuff. I am still learning.

 

Roberta: Just want to hold out the olive branch. I have always respected you comments, independent thinking and helpful advice to our colleagues here on this and other forums. I hope we can respectfully disagree on this. To cut off dialog can imply that you are as guilty as the DH forum people.

Steve

 

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