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EricJ

Just Went To 403(b) Meeting, Have A Couple More Questions...

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I attended an informational session last night that explained the reason for the 403(b) changes, and introduced our four options. Here are some impressions and questions I had.

 

Fees

Ameriprise, for example, offers a Variable Annuity (RAVA 4 Access) with an M&E fee of 1.25%, with no annual fee. Question: Is that the only fee involved in an annuity?

 

Each vendor also had mutual fund options. Fees were listed such as ".25% annual participant recordkeeping fee", or ".50% annual asset based management fee".

 

Question: These are how the vendor makes their money, right? But the mutual funds themselves will have additional fund management fees as well, right? I just wanted to clarify.

 

Fidelity Direct

I was pleased to hear one of the vendors mention a familiar name, Fidelity, my current provider that I believed I'd have to move away from. The vendor's name is Educators Financial Services. They have a few options for investing - Security Benefit SFR, Fidelity, TD Ameritrade, or Fidelity Direct. With Fidelity Direct, it sounds like I can keep my current Fidelity account, and continue with no financial adviser and pay EFS no fees. Does this sound plausible? If you want them to contribute their services, pick any of the other three options and tack on 1% annually in fees.

 

Two questions:

 

1. How does EFS make any money offering Fidelity Direct? Is this just a side-perk of them dealing with Fidelity as one of their managed mutual fund options?

 

2. Of course, the sales rep at the table afterward cautioned against Fidelity Direct, as he claimed that "on average, self investors don't even beat inflation". He attributed this to investors chasing the fund of the day, and ending up worse off in the long run. While this may be true, I've gathered that a properly allocated portfolio with ultra-low fee index funds at the heart will typically fare well. In fact, I've heard quite the contrary - that the majority of managed funds don't beat the index. Thoughts on this? Just sales talk?

 

Thanks in advance for the great insight you all provide.

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Of course, the sales rep at the table afterward cautioned against Fidelity Direct, as he claimed that "on average, self investors don't even beat inflation". He attributed this to investors chasing the fund of the day, and ending up worse off in the long run. While this may be true, I've gathered that a properly allocated portfolio with ultra-low fee index funds at the heart will typically fare well. In fact, I've heard quite the contrary - that the majority of managed funds don't beat the index. Thoughts on this? Just sales talk?

 

Eric,

 

I think he is being truthful to a degree but also protecting his self interest.

 

 

Inexperienced investors will probably mess up here and there by choosing wrongly but its the best option for someone like you who understands that Fidelity offers some low cost index options. On the other hand ,plenty of advisers have royally screwed up too and charge an arm and a leg while doing it. Better to go your own way, learn from your mistakes, educate yourself and move on without an adviser/ salesman.

 

 

I think index funds beat the majority of managed funds but not all. If you are savvy enough to think you can beat the index year in and year out then go for it. There are funds out there that do that . But If I were you I would do the index funds since you have the smarts and the funds are available to you hopefully at a low cost.

 

I don't hold a high opinion of commissioned salespeople. They are working for themselves and not you.

 

Keep up the good work .

 

Tony

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EricJ, I am also in MN and want to offer my two cents. I am hoping you have Fidelity Direct with no middle-man but if it is through Educator's Financial Services I am almost sure you will be getting hit with close to a 1% "consultation fee." Just something you may want to check on. I can't believe they will be doing it for free, unless the district has Fidelity as a vendor than you wouldn't need to go through EFS.

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EricJ, I am also in MN and want to offer my two cents. I am hoping you have Fidelity Direct with no middle-man but if it is through Educator's Financial Services I am almost sure you will be getting hit with close to a 1% "consultation fee." Just something you may want to check on. I can't believe they will be doing it for free, unless the district has Fidelity as a vendor than you wouldn't need to go through EFS.

 

Thanks for the reply.

 

EFS mentioned that I could choose to go with their other Fidelity option, which sounds like they'd be more involved -- and they mentioned there's a 1% fee for that. He made the Fidelity Direct option sound like there'd be no additional fees... but it wouldn't hurt for me to verify that. Thanks for the tip.

 

I suppose the biggest upside to all of this is that there are no surrender fees for any of the 4 providers, which I think means I can try any of them out with no worry about switching anytime I wish.

 

Tony:

Thanks Tony. I was getting the same general impression - that any vendor will suggest you use their services and that any fees are well worth it -- but of course they will say that. That's why it's hard to get sound advice from anyone but people that have no interest whatsoever in your money -- like the helpful folks on this site.

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Update:

 

I talked with EFS just now, and they said that Fidelity Direct is a self-investment option where you can go straight to Fidelity. EFS makes no money off the deal. There was so much demand for this type of option, that they agreed to provide it. I believe they are banking on you thinking positively about their company because of this, and considering them in the future for other investment services. Or whatever... I'm just glad it's as good as it sounds!

 

Thanks everybody.

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Eric,

 

This is a slam dunk. If you can get Fidelity Direct without the middleman charges (and if it's "Direct," how can there be a middleman?), you will have access to Fidelity Spartan Index funds, with expenses as low as .10. My wife and I both have accounts with Fidelity Direct and have been very pleased. You can build a portfolio of index funds that is even cheaper than Vanguard, which is also excellent.

 

EFS will make its money by pawning off its more expensive products to those who don't know any better. Fortunately, you do.

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Eric --

 

You were absolutely correct when you thought that a well diversified portfolio of low cost funds beats managed funds, and as a matter of fact, a low-cost fund will beat a similar managed fund every time -- given enough time. Over a period of time, the difference in return will equal the expenses.

 

You are on the right track.... if you read Bogle's "The Little Book Of Common Sense Investing" and Swensen's "Unconventional Success......." no salesman will ever again be able to get your shorts in a knot. You will know more than the salesman 99% of the time. These also make fine holiday gifts just in case someone asks what you would like!

 

You go, guy!

 

JudyS

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Thanks Judy! I did pre-order Bogle's new book, so I'm looking forward to that. Thanks for the tips on those other books. I started down this path a couple years ago inspired by the book "The Automatic Millionaire" by David Bach. It covers basics like saving and investing off the top of your paycheck so it's automatic - and praises low-fee investing with realistic asset allocation.

 

I'll definitely have to check out those other books. Thanks!

 

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