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Guest TR1982

OK, I'll play the game you all play here: GUARANTEE IT!!!!!!!!!!!!!!!

 

If you can't guarantee it, don't project it.

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OK, I'll play the game you all play here: GUARANTEE IT!!!!!!!!!!!!!!!

 

If you can't guarantee it, don't project it.

 

TR, TR, TR. Did you read my post? Surely you know that fees have been far more stable than returns. And surely you know that they have in fact declined at V and F. It seems perfectly reasonable to project low fees at V and F.

 

You seem to be trying to place just a bit of doubt in the minds of potential investors that outfits like Fidelity, Vanguard, and T. Rowe Price will perform a volte-face and, after decades of offering low cost funds, will suddenly reverse that policy. Even if that unlikely scenario were to unfold where all three suddenly jacked up fees, I would simply go elsewhere and find outfits that offered low cost index funds.

 

So, I stand by my projection of low fees at places like these. I hardly think that it is going out on a limb to do so. "Continued low fees at Vanguard? Whoa, now THAT is NEWS!" "Low fees continue at Fidelity? You gotta be KIDDING me!" "T. Rowe Price continues to have fees under 1%? No way!"

 

 

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Most 401k plans out there will not be able to pass on the low costs of Vanguard and Fidelity funds. Costs for 401ks usually run anywhere between .25 to 1.5% depending on the size of the company, quality of employees (can they be expected to have high contribution and participation levels?) and type of plan/provider. More often than not, a good portion of these costs are passed on to the employees as an administration fee. Sometimes, the employer will pay all the extra costs for the employees.

 

Unfortunately, since fees are so easy to hide, and so few employees look for fees, the norm is for most of the fees to be passed on to the employees.

 

___

 

 

With that aside, the article makes a lot of sense when referring to people's IRA accounts, but unfortunately cannot provide a very realistic look at the 401k world. Especially when the majority of retirement accounts are held in 401ks.

 

However, even though those plans may not currently be available, we can always hope for lower fees, and lobby our employers to seek low fees and high quality investment products.

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Guest TR1982

AP, AP...

Please guarantee me 20 bp for 30 years!!!!!!!!!!!!!!!! In fact, guarantee me ANYTHING for 30 years!!!!!!!

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Most 401k plans out there will not be able to pass on the low costs of Vanguard and Fidelity funds. Costs for 401ks usually run anywhere between .25 to 1.5%

 

 

LA County Office of Education offers Vanguard and Fidelity directly. Any other school district that does so enables its employees to pay .10 for Fidelity Spartan and .20 for Vanguard index.

 

I cannot speak for most districts or plans, but this is what is available to us.

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AP, AP...

Please guarantee me 20 bp for 30 years!!!!!!!!!!!!!!!! In fact, guarantee me ANYTHING for 30 years!!!!!!!

 

This point of view would preclude anyone from making any fee comparisons at all, which is wonderful for salespeople. That way, prospective clients will avoid inconvenient comparisons that might make high fee/front end load/back end load/12b-1 fee load/surrender fee products pitched by salespeople look rather expensive.

 

Yes, TR, those comparisons would be mighty inconvenient, wouldn't they? Just tell folks that they really cannot make any cost comparisons, and your products are looking awfully good.

 

"5.75% front end load? Well, we can't really be absolutely CERTAIN that they won't disappear, can we?"

"Mortality and expense fee of 1.25%? Who's to say that it won't be lowered or even ELIMINATED down the line?"

"12b-1 fees? Well, heck, as fund assets grow, the ongoing expenses are likely to DECLINE. Just prove that they won't!"

 

Nosirree, just forget about those cost comparisons. They're irrelevant. Just sign right here.

 

 

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Guest TR1982

AP,

You are so funny!!! I catch you in your own game. Look, you can make any cost comparisons you want. You can tell me I'm scum because I don't work for free. Whatever makes you feel good. Fortunately, there are plenty of good people in this business who work for a fair price and provide good advice and service to their clients. I promise you this: none of them can work for 20 basis points.

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AP,

You are so funny!!! I catch you in your own game. Look, you can make any cost comparisons you want. You can tell me I'm scum because I don't work for free. Whatever makes you feel good. Fortunately, there are plenty of good people in this business who work for a fair price and provide good advice and service to their clients. I promise you this: none of them can work for 20 basis points.

 

Thank you for the compliment, TR.

 

You haven't caught me in anything, though. I have explained pretty clearly why comparing costs is far different than comparing stock market returns. You are free to disagree, of course. As always, let this be decided in the marketplace of ideas.

 

I have never referred to you as scum, by the way. Misguided, perhaps :) ...

 

You are probably correct in saying that no salespeople work for 20 basis points. That is precisely why it is to the advantage of folks to invest on their own in order to capture that rate. If people have access to Vanguard, they are paying less than 1/10th of what they would paying if they used a salesperson peddling Value Builder. If people have access to Fidelity Spartan, they are paying less than 1/20th.

 

I know you do not like cost comparisons, but there they are. Those are factual comparisons.

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APteacher,

 

I was referring more to 401k plans, rather than 403b plans (which oftentimes can be even worse unless you can find a Fidelity/Vanguard available.) because those are more available to the general public and provide a more realistic picture of what the "average Joe" faces in the workplace.

 

Here is some material for reference:

 

http://www.dol.gov/ebsa/pdf/401kRept.pdf

 

"Section IV reported results from two plan-pricing surveys suggesting that the annual fees and expenses of a typical small plan of 100 participants would be about 140 basis points." Average cost of a plan with 2,000 participants is about 110 basis points.

 

- this is based of Butler's survey April 1997

 

 

 

 

Most 401k plans out there will not be able to pass on the low costs of Vanguard and Fidelity funds. Costs for 401ks usually run anywhere between .25 to 1.5%

 

 

LA County Office of Education offers Vanguard and Fidelity directly. Any other school district that does so enables its employees to pay .10 for Fidelity Spartan and .20 for Vanguard index.

 

I cannot speak for most districts or plans, but this is what is available to us.

 

 

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Of course, with a 401(k) plan there's hundreds upon hundreds of extra pages of code and regulation to follow, both Treasury and DOL. Form 5500's must be filed including several attachments. The plan must pass, as each of these they may apply: 401(a)(4) testing, ADP testing, ACP testing, top heavy testing, coverage testing, and so on. The most recent big change (PPA 2006) added about 800 pages of new law, which will translate into more pages of new code and a lot more pages of regulation and other guidance.

 

Those regulatory requirements definitely add cost to administer a plan. Only a few of those regulations actually apply to 403(b) plans (like ACP testing if the plan has a match), so 403(b) costs/fees should be lower. Many times this administration cost will come out as basis points, but some employers pay those costs directly instead of from the plan assets. Basis points are like investment charges, like 0.50% of assets, and could be calculated daily or monthly or otherwise and either shown as a fee or"netted" from the gross return, depending on the contract.

 

On top of the admin cost is usually a platform cost (the software that runs the website where you see your account, where contributions are allocated, statements are produced, distributions and tax reporting are handled, etc.) Most of the time this cost is paid by basis points, or somtimes paid directly by the employer.

 

If the plan allows you to invest in mutual funds, on top of the admin cost and the platform cost is a fee to pay the mutual fund company to buy and sell stocks, bonds, etc. - to actually invest the funds and manage the money. They have a stack of Securities and Exchange Commission rules to comply with.

 

The last fee, many times the largest fee, is paid to the registered investment advisor, or broker of record. Their payment is usually to cover their time and expense to provide investment education which helps participants figure which funds to invest in.

 

So far:

1. Administration fees

2. Platform fees

3. Mutual Fund fees

4. Broker fees

 

If one firm bundles all or most of this together (lke a Vanguard or a Fidelity), then the fees are probably not broken down like this. However, it is possible to save money in some cases by unbundling the arrangement.

 

If your 403(b) plan does not allow you to invest in mutual funds, but in annuity contracts, then it might look like this instead:

 

1. Hidden fees (sort of)

 

The cost of purchasing the annuity contract and the cost of having the contract "guarantee" a minimum return all becomes an expense. Usually a good commission is paid based on the contributions (like #4 above, but usually better). Then the actual return made by the investments are offset by several types of costs, like 'mortality costs' to help the company insure at least the guaranteed minimum and to cover the administration costs and overhead. However, the gross return on the investment is usually not disclosed, instead you are normally only shown the net return after those expenses. For example, an annuity may provide a minimum return of 4%, and suppose in 2006 the gross return was 14%, but after their expenses the net return is 10%. You are shown a 10% return which looks good considering that you would have been guaranteed the minimum of 4% if 2006 had been a bad year. However, when considering the 4% that was applied to fees, perhaps 10% no longer looks so good.

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Of course, with a 401(k) plan there's hundreds upon hundreds of extra pages of code and regulation to follow, both Treasury and DOL. Form 5500's must be filed including several attachments. The plan must pass, as each of these they may apply: 401(a)(4) testing, ADP testing, ACP testing, top heavy testing, coverage testing, and so on. The most recent big change (PPA 2006) added about 800 pages of new law, which will translate into more pages of new code and a lot more pages of regulation and other guidance.

 

Those regulatory requirements definitely add cost to administer a plan. Only a few of those regulations actually apply to 403(b) plans (like ACP testing if the plan has a match), so 403(b) costs/fees should be lower. Many times this administration cost will come out as basis points, but some employers pay those costs directly instead of from the plan assets. Basis points are like investment charges, like 0.50% of assets, and could be calculated daily or monthly or otherwise and either shown as a fee or"netted" from the gross return, depending on the contract.

 

On top of the admin cost is usually a platform cost (the software that runs the website where you see your account, where contributions are allocated, statements are produced, distributions and tax reporting are handled, etc.) Most of the time this cost is paid by basis points, or somtimes paid directly by the employer.

 

If the plan allows you to invest in mutual funds, on top of the admin cost and the platform cost is a fee to pay the mutual fund company to buy and sell stocks, bonds, etc. - to actually invest the funds and manage the money. They have a stack of Securities and Exchange Commission rules to comply with.

 

The last fee, many times the largest fee, is paid to the registered investment advisor, or broker of record. Their payment is usually to cover their time and expense to provide investment education which helps participants figure which funds to invest in.

 

So far:

1. Administration fees

2. Platform fees

3. Mutual Fund fees

4. Broker fees

 

If one firm bundles all or most of this together (lke a Vanguard or a Fidelity), then the fees are probably not broken down like this. However, it is possible to save money in some cases by unbundling the arrangement.

 

If your 403(b) plan does not allow you to invest in mutual funds, but in annuity contracts, then it might look like this instead:

 

1. Hidden fees (sort of)

 

The cost of purchasing the annuity contract and the cost of having the contract "guarantee" a minimum return all becomes an expense. Usually a good commission is paid based on the contributions (like #4 above, but usually better). Then the actual return made by the investments are offset by several types of costs, like 'mortality costs' to help the company insure at least the guaranteed minimum and to cover the administration costs and overhead. However, the gross return on the investment is usually not disclosed, instead you are normally only shown the net return after those expenses. For example, an annuity may provide a minimum return of 4%, and suppose in 2006 the gross return was 14%, but after their expenses the net return is 10%. You are shown a 10% return which looks good considering that you would have been guaranteed the minimum of 4% if 2006 had been a bad year. However, when considering the 4% that was applied to fees, perhaps 10% no longer looks so good.

 

 

I move that we abolish 401k, 403b, and 457 plans and just allow folks to invest in individual retirement accounts. Is there anything wrong with simply allowing folks to invest pre-tax dollars directly with funds? Why do we need such complex programs with hundreds and hundreds of pages of rules and regulations?

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Something like that has been proposed: LSA, ERSA, or something like that. I don't think it has any traction in Congress.

 

You must consider the analogy of grasshopper (or was it a cricket) vs. the ant? (something like that) If they both worked for the same employer, the ant would defer from salary and be ready for retirement, where the grasshopper (or cricket) would just goof around until they could not physically work anymore. But, if the employer also provided something under the retirement plan even if they did not defer from salary, the ant could retire early and even the grasshopper/cricket would at least have something for niormal or late retirement.

 

That is why many support an employer-sponsored retirement system. The IRA limits are much smaller than the limits under the 401(k), 403(b), and 457(b) rules. Maybe the following will partly help explain why.

 

In a 401(k) plan with a profit sharing feature, a 50-year old participant can defer $20,500 from their salary in 2007 and on top of that receive a $29,500 profit sharing allocation, for a total of $50,000 (as long as their pay is at least $50,000). The additional administration cost of runnning a 401(k) plan is usually far and away "paid for" by the amount of taxes that are saved (if the plan design is done right).

 

So the IRA rules aren't as generous, let's raise the limits then? Make it an individual-only savings system. Hmmmm, if the IRA limits were raised to $50,000 or more, then you would see the end of many employer sponsored plans. Unfortunately, that in turn, would result in many more employees who choose to save nothing for retirement (being left to save on their own). That's their own choice, but it could be costly for society in other ways.

 

Over the last few years, more small employers than ever have adopted "Safe Harbor" 401(k) plans. Generally under this design, an employee receives a minimum profit sharing contribution of 3% of pay, or under another safe harbor design, they receive a 100% match on the first 3% deferred plus a 50% match on the next 2%. Each of these designs avoid the ADP testing requirements, thereby avoiding the costly deferral refunds (which a failed ADP test could require). Without these design options, many employers would not adopt a plan at all, thus providing 0% of pay for retirement to their employees. Thus, these rules are actually helping employees who work for these employers, even though some expense may be involved.

 

Remember, paying a fee is not a bad thing if the net result after fees gets you to the goal you desire. A lower fee does not mean the goal gets reached quicker. Sometimes a lower fee means that service suffers or that the design was "cookie cutter" instead of customized to fit the exact need of the employer. When it comes to annuity contract fees and broker fees, hopefully you're paying only a reasonable amount for the service and product provided. In a 401(k) plan, the law requires the fiduciary to act prudently to defray costs when possible.

 

Also, some employers plans are providing a 5% minimum contribution or even a 7.5% minimum contribution to employee accounts in order to avoid other costly testing. Again, without these options, many of these employers would simply not adopt any plan.

 

That being said, the ironic twist at the end is that the employees usually have a lump sum option anyway and they blow the whole amount on a boat (ok, maybe not always boat, but you get the idea).

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Guest Sierra

How many school districts operate their own retirement system? They have the legal right to do so but recognize that a statewide system can do it better. The same rationale should apply to salary reduction savings plans ie 403(b). But we already have statewide 457(b) plans and many allow their local public employers including school districts to opt in. You get rid of the 403(b) mess by not using it! School districts throughout the US should make sure that their employees are given the opportunity to participate in their respective state's 457(b) plan. PROBLEM SOLVED!!!

 

Before a school district cleans up its 403(b) act it should at least make sure that the State's 457(b) Plan, like the State's Defined Benefit Pension Plan, is made available to those employees who would like to participate. This is not brain science!

 

Peace and hope,

Joel

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In response to AR Teacher:

 

You said: I move that we abolish 401k, 403b, and 457 plans and just allow folks to invest in individual retirement accounts. Is there anything wrong with simply allowing folks to invest pre-tax dollars directly with funds? Why do we need such complex programs with hundreds and hundreds of pages of rules and regulations?

 

I say: Are you aware that many employers use retirement plans (qualified for preferential tax treatment) as a way to attract & retain employees? And further that the position of the federal government & the IRS has been to promulgate rules (including non-disrimination reules that prevent employers from skewing benefits only to the high-paid & business owners) that such plans must comply with in order to obtain such favorable tax treatment?

 

Do you really think that it would be wise to overhaul the system without first identification of an underlying philosophy as a guide for such radical change? There is a long history here and employers and employees alike have built in expectations as to how the government will provide tax incentives in exchange for a private retirement system that does cover substantial rank & file employees?

 

The system is not built upon a philosophical foundation of low cost & to go to that at this point in the game is (in my opinion) not realistic. I'd be interested in your underlying thoughts regarding your earlier post. Should low cost be the goal at the exclusion of ALL other objectives with respect to a private retirement system???

 

Thanks,

 

Danc

 

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