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Time To Kill The 403(b)?

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Hey Steve,

 

I know. But his failure to answer is really the answer.

 

Dan

 

 

Dan, was this referred back to me?

 

I have my opinion on SS and it is that we are handing over our money with little direction as to how it is handled. I do think that the program has a very important place. I know plenty of people who depend on this as their sole source of income. Without this program, our elderly in this country would be in much worse shape and I find some value in that.

 

With that said I would like to be able to see an account for myself grow, even if it was in a fixed annuity type product that would average between 3.5% to 5.5% depending on the interest rate environment. That would at least guarantee the person getting something for his time value of money. The big question is what % can be allowed to take out of the system. We keep hearing about need buyers for debt other than treasury bonds, let PIMCO manage this and we would start getting more bang for our buck.

 

Also I would like to see the people that SS is replacing 70% of their preretirement income for. That # is way to high for me.

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Pat:

 

You are overlooking a big disadvantage in self employed retirement plans which is that self employed persons pay social security tax at a rate of 15.30% on their retirement plan contributions. The contributions are only deductible from income tax. On a $20,000 contribution the SS tax would be $3060. Employer contributions to qualified plans for employees are exempt from SS tax on both the employer and employee.

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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

 

 

 

I have no problems with the current system and dont think SS benefits should be reduced.

 

As for how to handle the 75 million workers without a pension how do you spell I R A? $600 a year contributed over 40 years into an IRA earning 6% would be worth $92,857 which far more than the fund would be worth if it was invested in US government securities. Over 20 years the annual payment would be $8095 @6% return and you dont have to worry about the government reducing the benefit amount.

 

Of course larger contributions and higher rates of return will provide a higher benefits but you can do the math.

 

And I will ask you when are you going to respond to the 7 questions I raised in post 22? I will give you extra time if you need it. If you cant handle the questions why not admit it?

 

 

 

 

 

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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

 

 

Unlike you I carefully research my responses before posting. Dont confuse a delay in responding with reticence.

 

 

 

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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

 

Hey, Dan. Yes, I think that Ghilarducci's plan is worth a look, but only as a starting point. If it stimulates discussion such as this, great.

 

However, I would be very leery of a plan that is based entirely on government bonds, particularly when the federal government is currently taking on debt at an unbelievable rate.

 

On a philosophical note, there are millions who do not have a workplace savings plan, and there are millions who do not take advantage of workplace savings plans that are available to them. So I have to ask a tough, cold hearted question: Who should be responsible for these folks? Regarding the former, there are alternatives such as the IRA, as you note. Regarding the latter, even if the workplace plan is lousy, there are those same alternatives available.

 

If people are not going to take financial responsibility for themselves, is it really the role of the federal government to play big brother and tell them that everything is going to be OK, and that big brother will take care of them in their old age? How about expecting some personal responsibility from people to take care of themselves?

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Intruder, Dan, AP, bigred,

I agree with Intruder with the IRA has implications for a higher benefit from the pay as you go SS and with bigred about have a fixed account to help. I would add that the IRA be invested in a diversified group of index funds or as bigred suggested some sort of fixed account. I would argue for the TIAA CREF traditional annuity for this purpose. I would even go further and privatize some of the SS as an option for individuals and as long as the mangers do not touch it. Then it becomes very political. Contrary to popular opinion and the main s t r e a m media, this idea is not new and did not originate from the current administration. The Clinton admin. proposed this idea ten years ago. Happy holidays,

Steve

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Intruder, Dan, AP, bigred,

I agree with Intruder with the IRA has implications for a higher benefit from the pay as you go SS and with bigred about have a fixed account to help. I would add that the IRA be invested in a diversified group of index funds or as bigred suggested some sort of fixed account. I would argue for the TIAA CREF traditional annuity for this purpose.

 

 

I would not be against TIAA CREF for that portion of it either. They have had that product around forever. I am just a PIMCO fan(I own no PIMCO) because they really seem to have the best handle on the bond market a year before anyone else does.

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I have a few issues with the current buzz in some circles to kill the 401K's/403b's/457b's etc.:

 

1) Whatever alternative is worked out for the current plans will involve more government control and hence manipulation. How would you like to find out 30 years down the line that the gov't has decided to give 50% of you account value over to a general fund in the guise of some tax in order to pay for the old age of those who consumed beyond their means and didn't save?.

 

2) The general problem with current plans is: Employees want something for nothing. They want a comfortable and prosperous retirement without saving for one.

 

 

I say Keep the plans we have because the Devil you don't know WILL in this case be worse than the devil you already know.

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Dan, Kev, Steve, Tony and others....

 

Unfortunately, I am still concerned that if we can keep the 403b it requires so much homework for teachers (who, I am sorry, are not at all good at doing homework, at least of the financial type!!) it will never work because so few people are willing to take personal responsibility for their own future, perhaps especially in the face of confusing choices. They believe that "someone else" has all the info and superior understanding and they don't know exactly how to figure out who that is, leaving them vulnerable. Even members of my former investment club, who are as thoughtful as you are likely to find and many of whom have Vanguard, have not done one single thing relative to 1/1/09. Nothing. I am disappointed, even disgusted. Furious, actually.

 

So here's a question. Research would provide an interesting perspective, but I do not know where to find the data. Teachers all have had access to 403bs to supplement their retirement. So how many contribute and what percentage of their pay? After all, they have a whole array of choices. Compartively, federal employees have retirement and an opportunity to supplement with only the TSP, a superior, low cost plan. They have no confusion of choices. How many of them contribute and what percentage of their pay? My hypothesis is that more of the federal employees contribute and they contribute a higher percentage of their pay. If so, that might suggest that having a single, solid choice is the best deal.

 

Can anyone find the data to test this hypothesis?

 

JudyS

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Judy,

 

I am going to see if I can find some statistics. I would bet they are out there. My suspicion is that just like

politicians do their own internal polling so do the insurance companies. I may just have given you the answer to where the information can be found.

 

 

My bet is federal employees do have a higher rate of saving. Their plan is probably a lot less confusing and the word gets around fast when you have got a good thing going.

 

In terms of teachers, there is simply no excuse for our own ignorance but I'm seeing that its not just in

our profession.

 

Tony

 

 

 

Also Judy,

 

Why am I blaming the teachers? Administration could adopt a plan that would be suitable for all employees

but instead they turn it over to others who simply take advantage.

 

I am a strong proponent of a single provider like Vanguard, followed up with a heavy dose of teacher education through inservices.

 

We don't need "advisors" in the accumulation stage.

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Bigred,

 

I was under the impression Steve was referring to "intruder."

 

As far as the 70% figure, that is Ghilarducci's estimate of Social Security (40%) + her plan (roughly 30%).

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I am thrilled with the debate this post has sparked. I still come back to the following...

 

1) Do most 403(b) participants have access to quality investments and objective education? If not, is it reasonable to assume this will be the case within 5 years? 10 years? I doubt it.

 

2) Do most 401(k) participants have access to quality investments and objective education? If not, is it reasonable to assume this will be the case within 5 years? 10 years? I am no expert on 401(k) plans but I don't think they are the panacea their champions makes them out to be. Plus, what are companies doing with matches right now? Eliminating them.

 

3) How do we as a society address the 75 million Americans who have no work place plans? We can blame these people for not owning Roth IRAs and other type of investment vehicles but I doubt this will change this figure.

 

4) The Ghilarducci plan offers a way to provide roughly 70% salary replacement in retirement (SS + her plan). Much (not all) of this money would be funded by the individual and by ending 401 plan tax breaks. I have yet to see a plan that replaces this amount of salary and covers all working Americans.

 

5) One idea might be to make the Thrift Savings Plan (or a similar plan run by Fidelity, T. Rowe Price, Vanguard, or another low-cost company etc.) available to all working Americans. Require individuals to opt out. If not, they would contribute say 2% of their salaries to a target date type plan. The participant would have the option of increasing this percentage.

 

6) Put John Bogle in charge of crafting a supplemental plan.

 

Other random thoughts...

As the operator of 403(b)wise, author of books on this plan, and a speaker on this plan, it is in my interest to always champion the 403(b). I am trying to look at this not from what is best for me personally. I'm not looking for a pat on the back, just a debate. On a side note: I would love to see someone like TR1982 start a post titled: "Time to get rid of sales agents?"

 

Its easy, and until recently highly fashionable to fear/blame government. What's interesting is that after 9/11 where did most Americans turn/seek help/guidance? During the current financial slump, where are Americans and private companies (I'll say that again: and private companies) turning for help? What supplemental plan is frequently championed as a model plan? The Thrift Savings Plan. Who among us wouldn't mind having the health plan available to the Senate and the House of Representatives? Does this mean that government is always the answer? No. But neither is the private sector. I think it's highly unlikely, even in the midst of what many are calling the worst financial crisis since the Great Depression, that the financial service industry would permit the elimination of the gravy train that is 401 plans. Even if we are able to get a national supplemental plan administered by say Vanguard, I suspect the financial services industry would do just what they did with the 529 college savings plan (largely destroy it by demanding access to it by high fee firms, brokers and representatives not selected by the states — note: the 529 plan was never intended to be open to groups outside of the financial institution selected by the state. Meaning, the state of Iowa selected Vanguard; Joe the broker in Cedar Rapids wasn't supposed to be able to sell a higher priced plan).

 

Dan Otter

 

 

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Its easy, and until recently highly fashionable to fear/blame government.

 

Dan

 

This has been a great thread. My feeling is too much government is bad but too little is even worse. But after what the IRS has done with the regs I question both government and financial businesses.

 

It may just take a man of John Bogle's stature, knowledge, and respect to sort this all out for us.

 

Tony

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