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For example:

 

" •Schoolteachers have 403(b) plans that are dominated by expensive insurance-based products. They often cost 2.5 percent a year. This expense takes 24 percent of the return in the first year, assuming an index return of 10.4 percent. It reduces their accumulation by 32.6 percent by the 10th year. The reduction is a whopping 42.6 percent by the 20th year. So a career schoolteacher pays an investment management "tax" that is far higher than anyone, at any income level, pays."

 

And NEA endorses a product like Value Builder which can do this sort of damage to its own members.

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Guest Sierra

For example:

 

" •Schoolteachers have 403(b) plans that are dominated by expensive insurance-based products. They often cost 2.5 percent a year. This expense takes 24 percent of the return in the first year, assuming an index return of 10.4 percent. It reduces their accumulation by 32.6 percent by the 10th year. The reduction is a whopping 42.6 percent by the 20th year. So a career schoolteacher pays an investment management "tax" that is far higher than anyone, at any income level, pays."

 

And NEA endorses a product like Value Builder which can do this sort of damage to its own members.

 

 

And let's not forget the AFT whose State affiliate, the New York State United Teachers, did it for nearly 20 years with Opportunity Plus/ING.

 

Joel

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Guest TR1982

I read this and confess that I am confused by his math. Maybe this is journalism math. If you are charging someone 2.5% a year to manage an investment, how does 2.5% of the return equal 24% of the annual return? 2.5% of the investment is 2.5% of the return.

 

Example:

 

$10,000 investment

10.4% return

Investment plus return equals $11,040

Investment return is $1040.00

2.5% of that amount is $26

$26 equals 2.5% of the annual return

 

Maybe the moral of this story is don't believe everthing you read in the newspaper.

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I read this and confess that I am confused by his math. Maybe this is journalism math. If you are charging someone 2.5% a year to manage an investment, how does 2.5% of the return equal 24% of the annual return?

 

 

It is the cumulative effect of such a heavy load.

 

Setting aside the specific numbers given in the article, please allow me to present my own:

 

Assume a 10% return on a $5000 per year investment over 30 years.

 

- With .2% expenses (certainly possible with Vanguard), the return after 30 years is $791,953

- With 2.5% expenses, the return after 30 years is $516,997.

 

That is a difference of $274,956.

 

The main point of the article is that the cumulative effect of high costs imposes a huge drag on returns. Not surprisingly, a fund with expenses more than 10x greater than another fund, for example, is at a serious disadvantage. That is not journalism math; that is merely common sense.

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TR

 

They did the math this way.

 

the 2.5 % reduces the original 10.4 to 7.9. So instead of your original 10000 ###### 1.104=11040 (1040) you would get 10000 ###### 1.079= 10790 (790).

 

1040-790= 250.00 the difference between the returns. (250/1040)###### 100=24 percent

 

 

That is how they came up with 24 percent of the return

 

Rich

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TR

 

They did the math this way.

 

the 2.5 % reduces the original 10.4 to 7.9. So instead of your original 10000 ###### 1.104=11040 (1040) you would get 10000 ###### 1.079= 10790 (790).

 

1040-790= 250.00 the difference between the returns. (250/1040)###### 100=24 percent

 

 

That is how they came up with 24 percent of the return

 

Rich

 

Rich,

 

You are a mathematical star! Take a bow!

 

Well, TR? How do you respond to my post and Rich's post? Do you agree that the cumulative effect of high fees is a substantial drag on returns?

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Great Work AP and Rich,

 

Why isn't surprising to us that the pros, in this case, TR, not understand the effects of costs over long periods of time. Well, he DOES understand perfectly because he knows where his annual salary originates. Multiply this one example with the many clients these people have and you have an annual salary many times the amount of a teacher's salary.

 

This is a great lesson for educators to understand how that nice TSA sales person sitting in the cafeteria and the union halls and manage to pay a visit to you at home, get paid. And the primary reason why they defend these outrageous practices and the status quo 403b system here in this forum.

 

Have a nice day,

Steve

 

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Guest TR1982

Steve and AP,

I certainly understand the effect of fees since this is how anyone who works in this business is paid. What I think is misleading is the way in which this information is presented.

 

1) No one can invest in an index. Indexes by definition are unmanaged and cannot be purchased.

 

2) Investment returns can and should be reported as net of management fees. To suggest that someone got a return equal to the market and then discuss fees is ultimately false and misleading. Your performance is ALWAYS net of investment costs.

 

3) If the "market" returned 6% and investment fees were 1% then my net return would be 5%. Why not invest in a CD at 5% with no investment cost?

 

4) This is the same old drumbeat about high costs. No one makes anyone invest anything in anything. Consumers have a choice. BTW, please show me anyone you know who has invested any amount of money in a tax deferred account for 30 years at 20 basis points. To suggest that as a comparison is absurd.

 

5) Finally, 403 contracts have always been individual contracts and that is why their pricing is always higher than group sponsored retirement plans. When that changes, pricing will change.

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Guest Sierra

5) Finally, 403 contracts have always been individual contracts and that is why their pricing is always higher than group sponsored retirement plans. When that changes, pricing will change.

 

And that is why the 403(b) should be canned in favor of the statewide 457 Plans!!

 

 

Great Work AP and Rich,

 

Why isn't surprising to us that the pros, in this case, TR, not understand the effects of costs over long periods of time. Well, he DOES understand perfectly because he knows where his annual salary originates. Multiply this one example with the many clients these people have and you have an annual salary many times the amount of a teacher's salary.

 

This is a great lesson for educators to understand how that nice TSA sales person sitting in the cafeteria and the union halls and manage to pay a visit to you at home, get paid. And the primary reason why they defend these outrageous practices and the status quo 403b system here in this forum.

 

Have a nice day,

Steve

 

 

Steve: I could not have said it better myself!!!!

 

Peace and hope,

Joel

 

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And that is why the 403(b) should be canned in favor of the statewide 457 Plans!!

 

 

 

 

I understand that states are all in different scenarios when it comes to the strength or weakness of their districts. However, by definition of a 457 plan, the money is in Trust, in the name of the school district. This is why you can't access them until after separation. That being said, the monies are subject to the creditors of the District should it ever go belly up. Like I said, it may be different where you are, but in Michigan we can't trust the solvency of our school districts.

 

Why don't more of you ask your preferred providers for their TSCA's? ...... Tax Sheltered Custodial Account..... otherwise known as a 403b without the annuity, thus no annuity fees. I'm all for staying out of the TSA's, but there are only so many possibilities withing the IRS codes.

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Ok, as for the title of this post, please dial 911.

 

For BCinMI, regarding 457 plans you stated " That being said, the monies are subject to the creditors of the District should it ever go belly up."

 

A 457(b) sponsored by a government entity is required to be in a trust where it is protected from creditors. This did not used to be the case, but after the problems Orange County, CA had, legislation now requires the protected trust. If you work for a private school, then the 457(b) cannot be protected.

 

Public school: 457(b) = protected trust, catch-up of $5,000 for over age 50

Private school: 457(b) = employer asset only, NO $5,000 catch-up

 

 

I do agree that a custodial account can do a lot better from a fee standpoint since it generally pays less commission, sometimes they are called 403(b)(7) plans, but it's just a 403(b) plan that uses subparagraph 7 (custodial accounts) instead of annuity contracts for investing.

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BTW, please show me anyone you know who has invested any amount of money in a tax deferred account for 30 years at 20 basis points. To suggest that as a comparison is absurd.

 

 

TR,

 

My example was a projection, and not a look back. I stand by it. If an investor has access to Vanguard, that investor can pay fees of .20. If the investor has access to Fidelity Spartan, it is even better: .10. To compare these with the high fee products that salespeople pitch is not absurd, it is essential.

 

My son is using Fidelity Spartan, and if I have taught him well, he will be doing so for at least 30 years. Some of the younger teachers at my site are starting to do the same thing. Judging from posts on this forum, others are, too. As more people learn about investing, I suspect that it will not at all be unusual for folks to invest their tax deferred dollars in low cost index funds for 30 years or more.

 

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Guest TR1982

AP,

To use a cost projection like what you are using is as ridiculous as what some here accuse advisors of: projecting into the future what they know today.

 

You can do it but it's not realistic or fair. 20 basis point investment fees are not anywhere near what retail investors pay on average or what plan sponsors pay on average. To PROJECT into the future and suggest that someone will pay that over 30 years is as unrealistic as me saying you will average 10% stock market returns over the next 30 years.

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AP,

To use a cost projection like what you are using is as ridiculous as what some here accuse advisors of: projecting into the future what they know today.

 

You can do it but it's not realistic or fair. 20 basis point investment fees are not anywhere near what retail investors pay on average or what plan sponsors pay on average. To PROJECT into the future and suggest that someone will pay that over 30 years is as unrealistic as me saying you will average 10% stock market returns over the next 30 years.

 

To the extent that folks have access to V or F, it is both realistic and fair to expect that they will pay far lower fees than those charged by the usual list of suspects.

 

You are making a false comparison between returns and fees. Stock market returns are far more volatile than fees. Stock market returns are up and down all over the place. By contrast, V and F fees have been consistently low, and in fact have been declining.

 

 

 

 

 

 

 

 

 

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