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Time To Kill The 403(b)?

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Is it time to kill the 403(b)?

 

The headache and heartache that the new regulations have spawned for most employers and employees only underscores what a dysfunctional plan the 403(b) really is. Outside of high-income earners with access to quality investment firms, who has the 403(b) really benefited? Sure a handful of knowledgeable participants with access to decent investments have done quite well. However, it's doubtful that most rank and file employees (read those who don't frequent this and similar sites) have down well with this plan.

 

Several years ago the IRS floated the idea of something called a Lifetime Savings Account, a Retirement Savings Account and an Employer Retirement Savings Accounts to replace the 401(k), the 403(b) and other such plans. Here's the IRS press release from 2004. We even devoted an entire section to this proposal.

 

I am not saying these accounts are the answer. I am just saying that the 403(b) may be unfixable.

 

Dan Otter

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Is it time to kill the 403(b)?

Dan Otter

 

Yes.

 

Bush did not get many things right, but the idea of eliminating any sort of 4xx plan with a single retirement savings plan made, and still makes, lots of sense.

 

Can we also kill the IRS (as presently constituted), as well? A simple, single flat tax would be wonderful. Your income multiplied by whatever factor = your tax bill.

 

While we're at it, can we also kill off the current incumbents in Congress, to whom we owe so much of our financial misery? Bring on term limits.

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Is it time to kill the 403(b)?

Dan Otter

 

Yes.

 

Bush did not get many things right, but the idea of eliminating any sort of 4xx plan with a single retirement savings plan made, and still makes, lots of sense.

 

Can we also kill the IRS (as presently constituted), as well? A simple, single flat tax would be wonderful. Your income multiplied by whatever factor = your tax bill.

 

While we're at it, can we also kill off the current incumbents in Congress, to whom we owe so much of our financial misery? Bring on term limits.

 

 

AP,

I agree, the flat tax is a wonderful idea, but can you imagine wealthy individuals and their corporations actually paying a tax? It will not happen with our current system, there is too much self interest, fear and greed and the finances to influence our elected to keep it that way.

Steve

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Admin --

Kill the 403b? I thought you were convinced that it would get worse before it gets better -- are you no longer willing to wait for the better?

 

What would be in its place? If we could get the Thrift Savings Plan, now that would be an idea! But replacing it with ANY plan that allows financial services firms (brokerages, insurance companies and such) to manhandle all of us makes no sense. Just another wolf in another sheep's clothing.

 

Genuine education could be such a great idea. However, I have had to conclude that few people are interested enough to spend their own time, effort and/or money. If there were a plan where the DISTRICTS were mandated to give GOOD education and the teachers were mandated to attend -- now that might have some benefit. Can you imagine a way to make that happen?

 

JudyS

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I have to chime in because I am one of those knuckleheads that has spent countless hours advocating for good 403(b) choices in my district.

 

While it has been extremely rewarding to get Vanguard into my district, and educate enough people so that we now have over 80 people with Vanguard, it has been a tremendous time committment, and I really don't even like to think about the amount of time I have put into it. I consider it my charity work for the year.

 

We all know the 403(b) system is a joke and the way it's run should be illegal. We all know the Insurance Companies have gotten rich off teachers and that selling Variable Annuities inside a tax-deferred account should be some sort of SEC violation, but it isn't.

 

The real crime is that the Federal Government has it's Thrift Savings Plan (TSP) and we're stuck with Variable Annuities. HEY FED, THANKS FOR LOOKING OUT FOR US!

 

 

There is one thing I will never understand though, is if there's a way to do it right, namely one low-cost provider, that is easy to manage, and truly gives teachers the opportunity to "Teach and Retire Rich," why haven't we been able to make it happen? Why aren't we that strong?

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Really enjoying the feedback...

 

Judy, I continue to think it will get worse before it gets better. However, I think the worse is going to be worse than we have ever seen (the 90-24 option at least gave those willing to do leg work, an opportunity to have access to low-cost investments), and the better is going to take some time (5 to 10 years?). An argument could be made that the high fee firms — which have benefited/capitalized the most from the new regs — have lowered their fees to a degree. But really, if it's 10 degrees outside and the temperature rises to 14 degrees, it's doubtful many would celebrate. Probably not the best metaphor but I'm still working on the first cup of coffee.

 

As far as education goes, I think many 403(b) eligible employees simply do not know that they do not know. And that is devastating to getting meaningful reform and change. Employers have been loath to help (as you all know far too well). They are only addressing the 403(b) now because they are required to, and of course there is no requirement to provide objective education. We are thrilled to have buillt a YourPlan Portal for MCPS that has been widely lauded. If we were able to build a similar site for even 25% of the employers who have contacted us praising this tool we might be on our way to enacting meaningful education. We are negotiating with several entities now but lets face it, we are in some precarious financial times.

 

Bruceinwayne, like Judy (and Steve and AP) you are to be praised for your tremendous efforts. You basically got Vanguard twice. The latter occasion is especially impressive given the upheaval caused by the new regs.

 

Teresa Ghilarducci, a professor at the New School in NYC, has been advocating an end to 401(k) type plans. She suggests such plans be replaced by a government run plan that would guarantee an inflation adjusted 3% return. It's my understanding this would be a supplement to Social Security, and owned by the individual who would contribute throughout his or her life and only allowed to tap the money after reaching 65 or so. Panned by many, including conservative commentators such as Rush Limbaugh, it's doubtful the financial services industry would take kindly to such a plan. But numerous studies show that individuals (and many financial professionals) are largely incapable of wisely managing their own retirement funds. Such a plan would still allow individuals to invest in IRA investments, I would assume. It will be interesting to see if ideas such as this and the previously referenced LSA/RSA/ERSA ever go anywhere.

 

Dan Otter

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"Outside of high-income earners with access to quality investment firms, who has the 403(b) really benefited? Sure a handful of knowledgeable participants with access to decent investments have done quite well. However, it's doubtful that most rank and file employees (read those who don't frequent this and similar sites) have down well with this plan. "

 

That's an awfully broad brush to paint with. Have you done any surveys or research that leads you to that conclusion?

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What benefits are there to offering such things as 403b's or 401k's that could not be gained by just allowing everyone to contribute $20K per year to a personal IRA, and allow it to be deducted from taxable income in the same way that the 403b already is???

 

Seems like it would be much simpler.

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Kev

 

 

You are 100% correct. Why does the employer need to be in the middle of this? Do they offer any objective

training on how to invest correctly? Why can't the account holder be accountable directly to the IRS like

other accounts are?

 

Besides the match in some 401K plans which are being eliminated by many companies ,I can figure out the benefit to owning a 403b or 401K

 

Don't the high fees negate the tax sheltered benefit to a significant degree?

 

 

It seems these plans are a huge money maker for only one entity and that is the financial services industry.

 

 

We should be able to set it up individually.

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Sounds as if we are suggesting throwing the baby out with the bath water...

 

Building on the premise of no employer involvement in retirement, and for a lack of a better term a "super" IRA being the sole source of retirement savings here are a few quick observations.

 

Participation rates amongst us all would be extremely low.

 

Fact is most humans will not take action themselves without some push (can we say more sales people?). So I struggle with the concept as most will not participate.

 

This will allow the gov't to create some "assistance" that only they can provide us poor lost citizens at a cost to those same poor lost citizens. That may not be working so well, reference social security in about 20 years.

 

As i understand the premise take away retirement plans from the employer, thus taking away a source of income from those providing the investments.

 

Do we think the cost structure will stay the same, or do you think by limiting the options we have to use for retirement to just an IRA provides the industry leverage to price accordingly(higher not lower fees)? Supply and demand anyone?

 

Do i agree certain systems can be better, and that there are people trying to make it better? Absolutely

 

Do i agree with general statements sometimes made that all financial institutions and/or people representing them are "evil"? No.

 

This is a problem to solve for all, business, gov’t and individual. I agree with Dan this will take time. At times we need to all step back and be realistic to our expectations, which can be the toughest part.

 

And this discussions and others like it are great to have.

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Pat B,

 

What are your thoughts on the Ghilarducci proposal? My understanding is that it would include everyone who draws a paycheck and would be a supplement to Social Security. Below is an excerpt from a recent Wall Street Journal story titled How to Fix 401(k)s?

---

 

Teresa Ghilarducci, a professor of economics at New York's New School for Social Research, argues that the government is far better equipped than most individuals to bear the risks associated with investing in the stock market. Her government-sponsored Guaranteed Retirement Accounts would provide a guaranteed rate of return of 3%, on top of inflation. Because that number is tied to the economy's long-term growth rate, "it doesn't present a big risk for the government," Prof. Ghilarducci contends.

 

Prof. Ghilarducci would require every working-age individual to contribute 5% of pay to these accounts. The government, in turn, would give each a $600-a-year tax credit, paid for by scrapping the current system of tax deductions for contributions to 401(k)-style accounts. (This $600 would at least partially cover the 5% required contribution for low-income households.)

 

A full-time worker with an average salary who works 44 years and retires at age 67 would replace approximately 30% of his or her pre-retirement income this way, Prof. Ghilarducci says. (Someone with a below-average income would replace more, while high earners would replace less.) For a worker with an average salary, Social Security replaces an additional 40%. It would be up to individuals to save more, on an after-tax basis, to make up any remaining gap.

 

These accounts would be locked up until retirement, at which point the participant could take a lump sum equivalent to no more than 10% of the account's value. The rest would be distributed in the form of an annual annuity payment that would cover both the participant and a spouse for life. If the account had any remaining value, it would transfer to heirs.

 

Why not simply expand Social Security? Prof. Ghilarducci says that isn't practical, in part because of the way Social Security is funded. In contrast to Social Security, which uses a pay-as-you-go system, "these accounts would be fully funded," she says. That means that any money an individual contributes would be credited to his or her own account and not used to pay current retirees' benefits.

---

 

Dan Otter

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What benefits are there to offering such things as 403b's or 401k's that could not be gained by just allowing everyone to contribute $20K per year to a personal IRA, and allow it to be deducted from taxable income in the same way that the 403b already is???

 

Seems like it would be much simpler.

 

AMEN, Brother Kev! Just take the employer out of the equation.

 

 

Sounds as if we are suggesting throwing the baby out with the bath water...

 

This baby is a great argument for euthanasia.

 

Building on the premise of no employer involvement in retirement, and for a lack of a better term a "super" IRA being the sole source of retirement savings here are a few quick observations.

 

Participation rates amongst us all would be extremely low.

 

They are already pretty low for 4xx programs.

 

Fact is most humans will not take action themselves without some push (can we say more sales people?). So I struggle with the concept as most will not participate.

 

It's high time that people took some responsibility for their own financial well being.

 

Do we think the cost structure will stay the same, or do you think by limiting the options we have to use for retirement to just an IRA provides the industry leverage to price accordingly(higher not lower fees)? Supply and demand anyone?

 

Good grief, just look at the cost structure of the 403b plans that are being adopted by districts. Compare that with IRA options with Vanguard and Fidelity.

 

 

Pat,

 

My comments are in italics. Just some food for thought.

 

 

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Dan, I did read some on her thoughts, which would brings more to the table then just leaving it to the individuals. In this month’s PlanSponsor she was quoted in an article titled "The Plot to Kill the 401(k) as stating the following;

 

“It is an urban myth that I have proposed to take away the 401(k) system,” she says. “I would never think that way. Once something is in place, even a professor living in an ivory tower cannot say that it should be dismantled, but I will say that the experiment has to be considered a failure, and rethought. I view my plan as provocative, which is appropriate for someone in academia.”

 

It is an interesting theory and one that has been and should be continued to be discussed. Much of this still comes to political power and money. Of which those in political power move to those that have the most money, so will theory ever become reality, doubtful.

 

I personally don't believe in gov't providing all my solutions. I do believe business can do much better and that there is a cost to that. A great example is the tool provided by your business in the way of the Portal.

 

I don't believe gov't has the efficiencies to create such solutions and I do not believe long term they can for such solutions as retirement savings. The ideas brought by those like Prof. Ghilarducci and others allow us to find and create solutions.

 

 

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What benefits are there to offering such things as 403b's or 401k's that could not be gained by just allowing everyone to contribute $20K per year to a personal IRA, and allow it to be deducted from taxable income in the same way that the 403b already is???

 

Seems like it would be much simpler.

 

AMEN, Brother Kev! Just take the employer out of the equation.

 

 

Sounds as if we are suggesting throwing the baby out with the bath water...

 

This baby is a great argument for euthanasia.

 

Building on the premise of no employer involvement in retirement, and for a lack of a better term a "super" IRA being the sole source of retirement savings here are a few quick observations.

 

Participation rates amongst us all would be extremely low.

 

They are already pretty low for 4xx programs.

 

Fact is most humans will not take action themselves without some push (can we say more sales people?). So I struggle with the concept as most will not participate.

 

It's high time that people took some responsibility for their own financial well being.

 

Do we think the cost structure will stay the same, or do you think by limiting the options we have to use for retirement to just an IRA provides the industry leverage to price accordingly(higher not lower fees)? Supply and demand anyone?

 

Good grief, just look at the cost structure of the 403b plans that are being adopted by districts. Compare that with IRA options with Vanguard and Fidelity.

 

 

Pat,

 

My comments are in italics. Just some food for thought.

 

AP, good thoughts, and I agree to an extent that we should be able to take personal responsibility. Unfortunately, the fact is we do not.

 

In regards to the districts, the problem seems to be they are not adopting plans as they are keeping all mostly the same, with a few deletions. They are doing nothing to leverage the assets within a plan. Until they start to actively leverage their assets to buy "bulk" it seems the costs will be tied to individual products. I don't believe this is the best way to go for either party.

 

My point may have not been well expressed. In theory if we take away 403b and 401k and only have an IRA as an option, what you see as low expense options today may be no longer. In theory if investment providers no longer have the ability to generate income from employer plans, and they only have the ability to generate income from IRA's the pricing may be different. Different not necessarily being better and they are all in it (Vanguard included) for their bottom line.

 

 

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