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Time To Kill The 403(b)?

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In regards to the districts ... 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.

 

Great point, Pat. Large districts, at least, should be trying to obtain institutional pricing.

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In regards to the districts ... 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.

 

Great point, Pat. Large districts, at least, should be trying to obtain institutional pricing.

 

 

Who is going to perform the required due diligence that is not performed on insitutional shares? lnstitutional shares are sold to institutional investors such as tax exempt organizations, non profit foundations, bank trust departments, insurance companies, in addittional to corporate pension plans, who pay their own advisors to perform the necessary review for suitability. Institutional shares have lower fees because the issuing fund does not perform the same level of due dilligence that is performed on funds sold to retail investors. Therefore, the SDs will be assuming investment risks that it is not aware of unless they pay for the cost the due dillegence which will eliminate any savings. Besides the SD will be required to pay for DD on institutional shares while the costs of retail shares is passed on to the participants.

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Hey Pat B.,

 

Thanks for your comments. I also appreciate your feedback on the MCPS portal. Can you imagine if all employees had such a tool? And such an array of investment offerings? Sigh.

 

It's my understanding that 75 million working Americans do not have a workplace savings plan (roughly half of the working population — stats come from The Wall Street Journal story). I think what makes a plan like Ghilarducci's worth a look is that like Social Security, it would include virtually all workers. As she mentions in that article SS could provide 40% of pre-retirement salary, her plan 30% and then the rest could be made up through IRAs and other savings plans. It's doubtful that right now a majority of Americans can count on replacing 70% of their salary through savings plans.

 

While opt-in provisions for 403(b) and 401(k) plans are an important tool for increasing participation for employees who have access to a plan, they can't help those who don't have a plan. And yes, we can say that every eligible American — especially those without a workplace plan — would be wise to have an IRA of some type. It's not realistic, for a variety of reasons, to believe this would ever be the case.

 

Sadly, my experience as an investor and operator of this site makes me more and more distrustful of most financial institutions. As I said before I believe for the rank and file employee, the 403(b) has hardly been a boon. And I think it is only going to get worse for the foreseeable future. Something has to give.

 

Dan Otter

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Who is going to perform the required due diligence that is not performed on insitutional shares? lnstitutional shares are sold to institutional investors such as tax exempt organizations, non profit foundations, bank trust departments, insurance companies, in addittional to corporate pension plans, who pay their own advisors to perform the necessary review for suitability. Institutional shares have lower fees because the issuing fund does not perform the same level of due dilligence that is performed on funds sold to retail investors. Therefore, the SDs will be assuming investment risks that it is not aware of unless they pay for the cost the due dillegence which will eliminate any savings. Besides the SD will be required to pay for DD on institutional shares while the costs of retail shares is passed on to the participants.

 

 

This is something that I am not familiar with. However, the CalSTRS 403b does offer Vanguard institutional shares, so I know that this is not something completely unheard of.

 

It's not clear to me why a district's offering of institutional shares would require any more due diligence than its offering of investor shares. But again, I may be out of my element in a technical area. I would appreciate hearing what others think: Does offering institutional shares require more from a district than offering investor shares?

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Who is going to perform the required due diligence that is not performed on insitutional shares? lnstitutional shares are sold to institutional investors such as tax exempt organizations, non profit foundations, bank trust departments, insurance companies, in addittional to corporate pension plans, who pay their own advisors to perform the necessary review for suitability. Institutional shares have lower fees because the issuing fund does not perform the same level of due dilligence that is performed on funds sold to retail investors. Therefore, the SDs will be assuming investment risks that it is not aware of unless they pay for the cost the due dillegence which will eliminate any savings. Besides the SD will be required to pay for DD on institutional shares while the costs of retail shares is passed on to the participants.

 

 

This is something that I am not familiar with. However, the CalSTRS 403b does offer Vanguard institutional shares, so I know that this is not something completely unheard of.

 

It's not clear to me why a district's offering of institutional shares would require any more due diligence than its offering of investor shares. But again, I may be out of my element in a technical area. I would appreciate hearing what others think: Does offering institutional shares require more from a district than offering investor shares?

 

 

Retail shares are reviewed for compliance with the applicable federal and state securities laws before sale to investors as well as the tax rules for retirement benefits. Institutional shares are not vetted for such laws because they are intended to be sold to accredited investors such as banks, insurance companies, pension funds, tax exempt organizations and foundations, who have the staff to perform their own due dilligence for suitability as an investment for the purchaser. Also most funds selling institutional shares do not provide recordkeeping services for the accounts of individual participants held in institutional shares which means the plan has to pay an administrator to perform these services.

 

CALSTRS is large enough to have their own staff attorneys review the insitutional shares to determine suitability for use in a retirement plan.

 

There is no free lunch in purchasing institutional shares.

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Hey Pat B.,

 

Thanks for your comments. I also appreciate your feedback on the MCPS portal. Can you imagine if all employees had such a tool? And such an array of investment offerings? Sigh.

 

It's my understanding that 75 million working Americans do not have a workplace savings plan (roughly half of the working population — stats come from The Wall Street Journal story). I think what makes a plan like Ghilarducci's worth a look is that like Social Security, it would include virtually all workers. As she mentions in that article SS could provide 40% of pre-retirement salary, her plan 30% and then the rest could be made up through IRAs and other savings plans. It's doubtful that right now a majority of Americans can count on replacing 70% of their salary through savings plans.

 

While opt-in provisions for 403(b) and 401(k) plans are an important tool for increasing participation for employees who have access to a plan, they can't help those who don't have a plan. And yes, we can say that every eligible American — especially those without a workplace plan — would be wise to have an IRA of some type. It's not realistic, for a variety of reasons, to believe this would ever be the case.

 

Sadly, my experience as an investor and operator of this site makes me more and more distrustful of most financial institutions. As I said before I believe for the rank and file employee, the 403(b) has hardly been a boon. And I think it is only going to get worse for the foreseeable future. Something has to give.

 

Dan Otter

 

 

Dan:

 

1. Do you really believe that American workers will be willing to have thier pay reduced by another 5% in these harsh economic times in addition to the 7.65% for SS which is also likely to be increased by 1%. I have seen various versions of this proposal which have stated that the total employer and employee contributions will be 4,5, or 6%. Do you know what % will be taken out of a worker's pay.

 

2. Why would you put long term money into an investment that pays ony 3% per year which violates every investment principle I have ever read? The reason Congress enacted QDIAs was to allow plan sponsors to provide default investments in 401k plan that would have a long term investment return suitable for retirement savings greater than a T-bill rate without a fiduciary risk.

 

3. Since the contributions would be made as a federal tax what guarantee would employees have that they would ever be paid this money by SS? Under Supreme court precedents no individual has a right to any social security benefits because no citizen has any vested right to money that is taxed by the government. What would prevent a future Congress from reducing payments to higher income taxpayers and paying more to lower income taxpayers or denying payment to taxpayers with income above a certain level?

 

4. When would the funds be available? Do you think that workers should have to wait until age 65 to commence benefits? Also who would own the account at the employee's death? The spouse, other heirs, or would the fund revert to SS? What if the employee had multiple spouses? Would they each receive a benefits from the account to the detriment of the children?

 

5. How would the benefits be taxed? Would the employee pay tax on the interest income in retirement that exceed the amount of the contributions so that the government would recapture some of the amounts paid?

 

6. Where will the funds come from to pay these benefits? The funds will be invested in US government bonds which are nothing more than IOUs in which the government promises to pay the holder at a future date. In order to pay the benefits Congress will have to increase taxes and/or cut back on benefits (see 3 above).

 

7. As far as the sucess of a 403b plan are concerned it depends on how the plan is funded. There are many employees of higher education who have retired with greater benefits under a 403b plan than they could have gotten in a retirement plan because they made mandatory contributions which were matched 100% or 200% by the employer over thier working careers. Your experience like most others on this board is limited to SD 403b plan in which contributions are voluntary with a corresponding lower level of benefits.

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This is something that I am not familiar with. However, the CalSTRS 403b does offer Vanguard institutional shares, so I know that this is not something completely unheard of.

 

 

 

AP,

Despite all of the gloom and doom, I did not know that CalSTRS 403b offers VG institutional shares. Thats mightly good news for California teachers.

 

Wonder how many SDs have CalSTRS 403b on their list? Or how many teachers' pension plans are trying to save the 403b from the cubicle bound technocrats and the insurance companies in other states.

 

Despite my sometimes misgivings about the way CalSTRS communicates to its members, it is trying to help out with the regulatory mess, with new low cost options and with a low cost 457 TPA.

 

I wonder who was the consultant and the board member(s) that helped CalSTRS turn around? Hmm

Steve

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Hi,

My brother is self-employed. Look at what he can do with Vanguard. Why can't that be available to everyone?

 

https://personal.vanguard.com/us/VanguardVi...2172008_ALL.jsp

 

Best Wishes,

Joe

 

For those that have been or are self employed, though there are benefits to being your own boss, etc most would not be able to commit funds to the extent of maximums like Vanguard gives the appearance.

 

It's great to say I can bacause the law allows me to, but a whole other story when looking at my self employed balance sheet. And this is still an "employer" plan. The big plus is these tools are available to those that pursue their dreams on their own, of which your brother should be commended.

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Hey Intruder,

 

I encourage you to contact Ghilarducci

 

As far as my opinions on this proposal goes, Pat B., is correct. It's a starting point for a discussion. I think a great many number of folks would be pretty happy to replace 70% of their pre-retirement salary. As I pointed out 75 million working Americans have no workplace plan. How do you suggest these people be reached? I remain convinced the 403(b) is a mess and has gotten worse the past year. I realize proposals such as these threaten those who benefit from the status quo. Sorry, the status quo is largely broken.

 

Dan Otter

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Despite all of the gloom and doom, I did not know that CalSTRS 403b offers VG institutional shares. Thats mightly good news for California teachers.

 

Yes, CalSTRS offers V. institutional shares for as low as .05-06, as I recall. CalSTRS does charge .33 above and beyond that, so it's not as inexpensive as investing directly with Vanguard, but it sure beats most of the other stuff that districts are offering. My wife lost Fidelity, so she is starting up with CalSTRS next month.

 

Two things I would like to see the CalSTRS plan offer:

 

1) An international stock index fund.

2) An intermediate bond index fund.

 

How about it, Scotty?

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I just would feel very uncomfortable with the government getting a larger portion of my paycheck. I already hate the fact I've sent tens of thousands in Soc Sec that I will never see any return on. There are some b plans out there that are quality and hopefully someone fights to get them all that way.

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I just would feel very uncomfortable with the government getting a larger portion of my paycheck. I already hate the fact I've sent tens of thousands in Soc Sec that I will never see any return on. There are some b plans out there that are quality and hopefully someone fights to get them all that way.

 

 

What you dont believe in "I'm from the US government and in return for giving the US treasury 12.65% of your wages until your retire or die if earlier, the US government will guarantee your retirement benefits equal to 70% of your salary if you are alive at 65 by investing your contributions in IOUs paying a 3% return that future taxpayers will have to pay for with increased taxes. "

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It's easy to criticize SS (I've done it myself, and I'm someone that pays both ends of SS tax) but, what would the economy/state of retirees look like if there was no SS and/or SS was tied to the markets? I'm not talking about sophisticated or even semi sophisticated investors (we all have assets and understand investing to a degree), I'm talking about the state of most Americans. Also, I'll ask Intruder again: How do you handle the 75 million w/out work-based plans?

 

Dan Otter

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Dan,

If I may intervene, you are not going to ever get a straight answer from the question asker of all time. He/she/it can dish it out but can't take it.

Sorry for the intrusion,

Steve

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