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Usual And Customary Fees

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I am new to the world of the 457(b). My employer has little information on the plan, other than the contact information of the approved broker.

What would be the usual and customary fees associated with participating in a 457(b) plan?

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Guest Sierra

I am new to the world of the 457(b). My employer has little information on the plan, other than the contact information of the approved broker.

What would be the usual and customary fees associated with participating in a 457(b) plan?

 

 

A non-profit or government entity using a commissioned broker for a voluntary salary reduction savings plan. I'M BEGINNING TO HAVE CHEST PAINS. Oh God Please help me.

 

I hvging trubbble sining ogf

 

jeol

 

 

 

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Joel is attempting to say that when a middleman (e.g., VALIC) runs a 457 plan, it charges higher fees than would be the case if the employer went straight through a mutual fund company. It adds another layer of profit that must be paid for by employees.

 

For instance, in my wife's 457 plan, a .25% fee is charged above and beyond the normal mutual fund expenses. On top of that, if she were to choose a Vanguard, American, or Dodge & Cox fund, there would be yet an additional .40% fee above and beyond that.

 

So, rather than pay the normal fee of .22% for Vanguard Growth Index, her plan charges .87%, thus defeating the purpose of having a low cost provider such as Vanguard in the first place.

 

My own 457 plan is even worse: NEA Value Builder, brought to you by Security Benefit, which pays NEA Member Benefits $2 million per year for the rare privilege of gouging the heck out of teachers with fees. With Value Killer, teachers pay a sales charge of 5.25% just to acquire the shares. Or, they can forego the sales charge and then get reamed by higher ongoing expenses. It is difficult to assemble a decent portfolio without paying more than 2% in fees. This is why I am lobbying my employer to provide Vanguard or Fidelity.

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Guest Sierra

A few of us regulars received the following from a former regular. HOW TRUE IT IS!!

 

Joel

=====================================================================

 

 

 

 

Bequeathing Your Assets to Your Broker

(Thank You, Paine Weber)

 

 

by William J. Bernstein

wbern@mail.coos.or.us

 

 

A hoary piece of stockbroker lore has a young broker asking a senior partner at the firm about

his proudest accomplishment. The reply:

 

 

"Over the years I've gradually transferred the assets of my clients to my own

name."

 

 

Awareness of investing expense has heightened in recent years, and it is instructive to

examine the truth of this old joke. Imagine for a moment that you inherited $100,000 at age

25. Not long after an enterprising broker at a "full service" firm calls and offers you his

services. He is quite personable and always seems to have a snappy explanation for the

behavior of the market; you engage his services. Considering your conservatism, he invests

your portfolio in a 50/50 mix of common stocks and bonds. What can you expect in the way of

long term return? What will become of his commision ######? The first question is easy to

answer. Assuming that he is of average ability, this mix will produce a long term return of

about 8% . (The long term return of common stocks is about 10%-11%, of long term

corporates about 5%-6%.).

 

 

Unfortunately, your return will not be that high. Whether you use a "wrap" account or employ

a straight comission basis, fees will reduce your returns by approximately 3% per year -- to

about 5%. This is only 2% greater than the long term inflation rate of 3%.

This is discouraging enough. Now consider what the broker accomplishes with your

comissions. He now has a steady income ######, consisting of 3% of your assets each and

every year, to invest. He should also earn the same 8% return, but his investment return will

not be substantially reduced by comissions and fees.

 

The above graph shows that in 24 years the brokerage will have parlayed your comissions into

a sum equal to your own. When you retire at 65 you will have amassed $704,000. Your broker

has done far better; he has produced $1,542,000 with the comissions from your account.

The above calculation is somewhat artificial. The grim reality is actually much worse. Since

your broker will be turning over the assets in your account with some regularity to earn

comissions and/or justify their fees, this will generate significant capital gains. Taxes on these

gains, as well as your bond coupons, will reduce your investment yield about 3%, just keeping

up with inflation. In contrast the broker will most likely manage his assets with little or no

turnover, further widening his asset advantage.

 

 

For the full service brokerage customer, then, the old broker's remark is no joke -- eventually,

your broker will wind up with more of your own assets than you do. For the no load fund

investor, things are a little brighter, but still fairly grim. Assume Fidelity charges you 1% in

expenses to manage your portfolio. Under the above 40 year scenario, this leaves you with

$1,479,000, but Uncle Ned still earns $722,000 for himself. Vanguard should be able to invest

your assets in their index funds for about 0.25% -- the numbers here are $1,980,000 for you,

$169,000 for them.

 

 

Obviously, Paine Weber, Fidelity, and Vanguard do not get to keep all of their expenses.

Fidelity will use a large part of their management fees for advertising, enabling them to

manage an even greater portion of the wealth of Western Civilization. Vanguard's expenses

are so low that it is doubtful that there is much profit margin. In any case, Vanguard is actually

owned by its funds' shareholders; John Bogle is not getting terribly rich at your expense.

So, keep an eye on those expenses. Thank you, Paine Weber (Merrill Lynch, Smith Barney,

etc., etc.).

 

 

William J. Bernstein

wbern@mail.coos.or.us

 

 

 

 

 

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