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Adam

Quick Question 4 You...

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Hi,

I'm 23 and work for the NYC Board of Ed. They offer a 403(b) at fixed rate of 8.25%. Is this a good rate? I also have a Roth IRA and a moderate risk mutual fund with T Rowe Price which has returned 22% this year so far. I'm wondering if I should bother investing in the 403(b) or should I put all my $ in with my T.Rowe price account?

 

Thanks - Adam

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Guest Peter

Hi Adam,

 

A fixed rate of 8.25% is indeed good but is usually attached to a fixed annuity product to attract new clients, and is usually only for a temporary period once you first open it. This means that this current rate can be lowered at anytime, usually after a year. Of course, it could go higher, but not likely. What is the minimum guaranteed rate or the lowest your rate can go? Check your contract from the company, and it will tell you. You don't identify what kind of a 403B product this is, so I am assuming it's a fixed annuity of some sort.

 

However, contributing to fixed annuities at your age is NOT the better route to go. Although you are assured of at least a minimum rate of interest, you can do far better contributing within your 403B to various mutual funds and their families if they're offered by your school system. T. Rowe Price is a good family of mutual funds. I would suggest you diversify your contribution to several different funds within this family that emphasize different companies of varied size and world focus. You can find out which funds might offer you this variety by calling them and asking for a "prospectus" on each of their funds which they'll send you free of charge. These prospectuses will also tell you how well each fund has done over time. At the age of 23, you have many years to ride out the economy's ups and downs and will more likely fare better in total accrual by the time you reach 59 1/2 by investing in varied mutual funds through a good family.

 

I would also maximize your contribution to your 403B's before contributing to a Roth....If you have maximized to the limit you can contribute each year to your 403B's, then a Roth makes good sense for addition retirement savings.

 

Good luck.

Peter

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Adam,

 

This is one of the anomalies in the country and the city is taking a major loss on this. The 8.25% is an incredible rate and you would be foolish to put your money anywhere else in my opinion. Most people will be hard pressed to get 8.25% in a variable account over the coming years. You still need to do some research, I believe the 8.25% is only good for another year or so, but I think the minimum guarantee is also quite high. I haven't been on the NYC site for awhile, but do your research and report back to us the details. this is not investment advice as I don't know your personal situation. 8.25% Guaranteed by the City of New York is a rather sweet deal and will not be matched anywhere that I have seen.

 

ScottyD

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“There You Go Again.” Once again the UFT (United Federation of Teachers)TRS Trustees is guilty of disseminating misinformation as well as not telling the whole story. On page 3 of the October 2003 issue of “Pension News”, a Bulletin of the UFT Pension Committee they state: (“In addition, TDA participants with at least 15 years of service who contributed an average of $5,000 or less per year can make “catch up” contributions of up to $3,000 per year for five years to their TDAs—but not to their 457s”.)

 

Answer: In fact, the Citywide 457 Plan has a catch up provision that is nearly three times greater than the catch up provision of the TRS TDA. The 457 Plan’s Website says: “It (the catch up) permits you to increase the maximum amount you may contribute to the 457 in each of the three years before the year in which you reach your “Normal Retirement Age. Normal Retirement Age (NRA) is any age designated by you in the range of years beginning with the earliest age at which you may retire with full pension benefits up to age 70.5. This provision only allows you to catch up on contributions for previous years in which you were eligible to participate in the Plan but did not contribute the maximum amount. The absolute maximum deferral for each of the three years is twice the applicable regular contribution limit for the year. This means that total 457 Plan deferrals (regular and catch up) may not exceed $26,000 for 2004, $28,000 for 2005 and $30,000 in 2006. If you wish to take advantage of the catch up provision, you should contact the 457 Plan’s Administrative Office.”

 

The TRS TDA catch up provision is capped at $15,000 ($3,000 5) while the City’s 457 Plan’s catch up provision is capped at $42,000 ($13,000 + 14,000 + 15,000) for the three-year period ending in calendar year 2006 (2004, 2005, 2006)

 

The UFT TRS Trustees go on to say: “Please don’t get confused on the Deferred Compensation Plan Website (www.nyc.gov/deferredcomp), which also discusses a different plan, known as a 401(k), that would not allow you to double your savings.”

 

Answer: This is not true. The Deferred Compensation Plans’ Website is quite clear on this. It states: “The City of New York Deferred Compensation Plan consists of two plans: a 457 Plan and a 401(k) Plan. Employees contributing to the 401(k) Plan and to a TDA plan within the same tax year must aggregate contributions to both plans. The maximum contributions to the 401(k) Plan and a TDA plan combined cannot exceed $12,000 for year 2003. Employees who are contributing to the 457 Plan and the 401(k) Plan are eligible to contribute the maximum annual amount to each plan.”

 

Apparently the UFT TRS Trustees fear that if they included the above quote in their Bulletin, as I have, the TRS TDA participation rate will fall precipitously. So be it! That’s the price for not being competitive over the last 33 years. TRS members no longer need the TRS TDA. You can maximize your savings by contributing the maximum annual amount to both Citywide Deferred Compensation Plans: the 457 and the 401(k).

 

They continue to say: “Nor does the 401(k) offer any additional investment choices, since its options are the same as those in the 457 Plan.”

Answer: In my view seven investment options and four pre-arranged portfolios comprised of those options gives the employee ample opportunity to be more or less aggressive with the 457 Plan and more or less conservative with the 401(k) Plan. Moreover, you can move your money among the choices as often and in any amount you desire while with the TRS TDA Plan it takes 12 monthly installments to move your money from one investment option to another.

 

Having two plans with identical investment options is not necessarily a bad thing. The TRS itself has, since 1970, offered two plans with the same investment options: Its TDA Plan and its Variable Annuity Plan. What makes the two TRS Plans vastly inferior is not the duplication of investment options but the lack of a meaningful number of investment options. The TRS TDA Plan and the TRS Variable Annuity Plan sport only two viable investment choices with no prearranged portfolios. A third choice, Variable Annuity B is a meaningless investment and, as such, is the issue in a multi-billion dollar Class Action lawsuit against the UFT TRS Trustees.

 

It’s a no-brainer: The plan of choice is the City’s 457 Plan, if for no other reason than for the fact that withdrawals made prior to age 59.5 are not subject to the 10 percent penalty tax.

 

Peace and hope,

Joel L. Frank

 

 

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The 403(b) Adam is referring to is offered by the Teachers' Retirement of the City of NY. It is the only 403b carrier teachers have. The interest rate floor is 7 percent. The current rate of 8.25 percent expires on June 30, 2004 at which time a new two year rate will be set by the Legislature.

 

Additionally, the teachers have two other plans for tax deferred savings: the 457 and the 401(k) which are Citywide Plans offered by the Mayor's Office of Labor Relations. IS THIS A GREAT CITY OR WHAT??

 

Peace,

Joel L. Frank

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