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New Jersey 403B Options

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I am pretty savvy with investments as I have been investing in 401ks and Roths (mostly Fidelity) since graduating college (10+ years), read many books on money, and listen to Money Girl's podcast. I've now encountered a puzzling choice for my wife's new job at a public college in the state of New Jersey: her 403b options. There are I think five companies listed (insurance companies), and then within each company is an expense ratio, and then funds within them, some of which include Fidelity funds. Is this an annuity or mututal funds. I'm 36, she's 31, so we want to invest mostly in stock / mututal funds; we're not looking for lower yielding gauranteed income given our ages. Can someone suggest what we should choose, or even, an approach for evaluating these different options.

 

I found a link to the different options from the website of a different college (same choices though): http://www.nj.gov/treasury/pensions/epbam/exhibits/pdf/ea0102bw.pdf

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Hi

 

I think your best choice would be TIAA Creff. The insurance companies should be avoided even if they offer some decent underlying funds like Fidelity because I am sure there are additional add on fees especially if they are an annuity. Read the prospectus carefully and see what the total expense ratio is not just the fund expense.

 

 

 

Tony

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Hi husband,

 

Agree with Tony. Go with TIAA CREF. I had them with my 403b for many years before retiring 3 years ago. Don't forget the Roth and then you can use Vanguard.

Regarding evaluating investments, since you know what you are doing, you know about investing in the different asset classes, seek only low cost investments and rebalance according to your plan. Don't forget fixed income even for your young ages. You need to learn how bonds work because you will gradually increase your bond allocation as you get older. And bond allocation is good when rebalancing your plan. Little bit of psychology, overconfidence in thinking that you got the stock market figured out is what killed people near or in retirement when they had 90-100% in equities with NO BOND holdings.

 

At your ages, a diversified portfolio could be something like this:

 

40% Total Stock Market Index (aka Tiaa Cref equity index)

20% Extended Market Index (Additional exposure to small and medium cap asset classes). I don't know if TIAA CREF has an equivalent, perhaps use this for the Roth with VG or Fidelity.

30% Total International Stock market index (Both Developed and Emerging Markets). I don't remember what TIAA CREF equivalent is.

10% Total Bond Market index (look at the holdings, most total bond market indexes have corporate, GNMAs and Treasuries but there are variations of holdings).

 

Good luck,

Steve

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One option that's available to me are target-date mutual funds that are designed to rebalance stock/bond mix as I approach retirement. A good one stop shop for a retirement investment that does not need a whole lot of effort on my part to worry about having too much or too little in stocks. What you could do is have this type of fund and if you feel you need more exposure to stocks then add a 100% stock fund . I think it's less of a hassle and gives one a quicker assessment of how everything is positioned. And you save on the fees associated with rebalancing in the end.

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Agree that TIAA CREF is best choice. The insurance companies charge more to invest in the same market. Also at your age, you are wise to avoid all annuity products like the plague.

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I agree with the others about TIAA-Cref. That is by far my best option for 403b as a public school administrator among my allowable choices. After much research on expense ratios etc. TIAA was a much better option than the insurance companies, primarily for the cost. I am about 7 years from retirement, and have chosen their target retirement fund. Typically they will have a few options depending on your age and risk tolerance. Mine happens to be a moderate risk fund, which is well-balanced among asset classes and rebalanced each year on my birthday.

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Guest Joel Frank

I am pretty savvy with investments as I have been investing in 401ks and Roths (mostly Fidelity) since graduating college (10+ years), read many books on money, and listen to Money Girl's podcast. I've now encountered a puzzling choice for my wife's new job at a public college in the state of New Jersey: her 403b options. There are I think five companies listed (insurance companies), and then within each company is an expense ratio, and then funds within them, some of which include Fidelity funds. Is this an annuity or mututal funds. I'm 36, she's 31, so we want to invest mostly in stock / mututal funds; we're not looking for lower yielding gauranteed income given our ages. Can someone suggest what we should choose, or even, an approach for evaluating these different options.

 

I found a link to the different options from the website of a different college (same choices though): http://www.nj.gov/treasury/pensions/epbam/exhibits/pdf/ea0102bw.pdf

 

 

Since 1963 the state has offered the Supplemental Annuity Collective Trust (SACT)---this is the State administered 403b plan for school districts and public colleges. A severe drawback of the Plan, however, is the fact it offers only one investment fund---a common stock portfolio. Yes, since 1963 no other investment option has been added to the menu. Is it any wonder the 403b shark is alive, quite well and still growing in NJ? What does the New Jersey Education Association say about all this?

 

Of note: 100 cents on the dollar is invested for you because the law states that the State of New Jersey will pay all costs of operating the SACT. The expense ratio is zero.

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Guest Joel Frank

I am pretty savvy with investments as I have been investing in 401ks and Roths (mostly Fidelity) since graduating college (10+ years), read many books on money, and listen to Money Girl's podcast. I've now encountered a puzzling choice for my wife's new job at a public college in the state of New Jersey: her 403b options. There are I think five companies listed (insurance companies), and then within each company is an expense ratio, and then funds within them, some of which include Fidelity funds. Is this an annuity or mututal funds. I'm 36, she's 31, so we want to invest mostly in stock / mututal funds; we're not looking for lower yielding gauranteed income given our ages. Can someone suggest what we should choose, or even, an approach for evaluating these different options.

 

I found a link to the different options from the website of a different college (same choices though): http://www.nj.gov/treasury/pensions/epbam/exhibits/pdf/ea0102bw.pdf

 

 

JOEL L. FRANK

______________________________________________________________________

PO BOX 148, MARLBORO, NEW JERSEY 07746 732-536-9472 rollover@optonline.net

 

MEMORANDUM

July, 2011

 

NEW JERSEY PENSION REFORM

PART 2

THE DEFINED CONTRIBUTION PENSION SYSTEM

 

The cost of operating an investment fund is expressed in "basis points", with one basis point equal to one hundredth of one percent (0.0001). For the fiscal year ended June 30, 2010 it cost the State of New Jersey eight basis points to operate its Defined Benefit Pension System. This equates to $80.00 for each $100,000 under management. It's important to keep the costs of operating the System to a minimum so that more money will be available for other government programs. Eight basis points is de minimis cost.

 

The same rule of logic applies to our Defined Contribution Pension System where the operating cost is paid, not by the public sector employer but, by the public sector worker-investor. Unlike a Defined Benefit pension where the pension is based on a formula, i.e.; 1.67 Percent times Years of Service times Final Average Salary, a Defined Contribution pension is based on the balance of the personal investment account during retirement. It's important to keep the costs of operating this personal investment portfolio to a minimum so that more money will be available during retirement.

 

THE NEW JERSEY STATE EMPLOYEES DEFERRED COMPENSATION 457(b)PLAN (NJSEDCP). This voluntary/supplemental Defined Contribution pension plan is available only to State employees. For the first 25 years of its existence the State was spot-on by offering its workers just four investment funds. The four funds are managed by the New Jersey Division of Investment. The Division charges the worker the same eight basis points it pays to operate the State's multi-billion dollar Defined Benefit Pension System. This protective shell, encasing the worker-investor's 457(b) investment account severely crashed on January 2, 2006 when each of the four State-managed funds were summarily closed to future worker contributions and replaced with 23 commission-based Prudential investment funds. Moreover, Prudential was hired to handle two key Plan functions: Plan Administration and Plan Investment Provider which, heretofore, were handled by the New Jersey Division of Pensions and Benefits and the New Jersey Division of Investment, respectively. Both agencies are divisions of the New Jersey Department of the Treasury.

The other usual suspects the State could have used are prominently displayed on the website of the New Jersey Department of Community Affairs. They are: AXA Equitable, Great-West Life and Annuity Company, The Hartford, ICMA-RC, ING Life Insurance and Annuity Company, Lincoln National Life Insurance Company, Massachusetts Mutual Life Insurance Company, MetLife, Mutual of America, Nationwide Retirement Solutions, Inc., Prudential Insurance Company of America, Variable Annuity Life Insurance Company. ICMA-RC is the only one that is not commission-based.

 

Do you have any idea how the costs associated with investing impacts the growth of your 457(b)/403(b) retirement-investment account? Example: For 40 years Bob and Rob contribute to the State's 457(b) Plan. Their first year salary is $30,000 with annual increases of 3 percent. 10 percent of their salary is invested in the Plan each year. They each earn an 8 percent return, before costs. At the end of 40 years Bob has an account balance of $1.1 million while Rob’s account balance is $700,000. Why the massive difference? Bob invested his money in the four State-managed funds at a cost of eight basis points or $80.00 per $100,000 of account value while Rob invested his money with Prudential at a cost of 220 basis points or $2200.00 per $100,000 of account value. In other words, after paying his basis points or costs Bob’s net investment return was reduced to 7.92 percent (800 basis points minus 8 basis points) while, after paying his basis points, Rob’s net investment return was reduced to 5.8 percent (800 basis points minus 220 basis points).

 

The sole intent of these fundamental changes to the State's 457(b) Plan was to compel the worker-investor to buy commission-based Prudential funds. Recognizing that it's the worker-investor, not the State, that makes the investment, pays all associated costs of acquiring and maintaining the investment and assumes all investment risk, it is the height of arrogance and wrongdoing for the State to sanction the sale of commission-based investments to its employees. Why, after 25 years of operating the Plan at de minimus cost, did the State see fit to place Prudential’s profit goals ahead of the financial security goals of its workers? Why, after 25 years of operating the Plan at de minimus cost, did the State decide to contribute to Prudential's profit margin on the backs of its own workers? It is just stunning that at a time when fees paid by the worker-investor are under intense scrutiny the New Jersey Deferred Compensation Board would have the unmitigated gall to replace the four de minimis cost funds with 23 commission-based ones. If the Board’s objective was to expand the investment menu all additional funds should have been of the de minimis cost variety. Why is the State's contempt for its workers exhibited with such gusto? Such bedrock changes represent a glaring breach of fiduciary responsibility on the part of the State of New Jersey and should be rejected.

 

COUNTY, MUNICIPAL AND SCHOOL DISTRICT DEFERRED COMPENSATION 457(b) PLANS While investment in commission-based investment funds is comparatively new to State workers, it has flourished on the county, municipal, public authority, and school district level in New Jersey for more than 30 years. For 30+ years "Rob" has been severely mauled by the commission-based sales shark.

 

SCHOOL DISTRICT 403(b) PLANS Since 1963 commission-based investment funds have been sactioned by 565 school districts. For nearly 50 years "Rob" has been severely mauled by the commission-based sales shark.

The New Jersey Defined Contribution Pension System is the poster-child for high pressured, commission-based investment funds.

 

RECOMMENDATIONS

 

1. The same high fiduciary standards that apply to the operation of the Defined Benefit Pension System must also apply, with equal vigor, to the Defined Contribution Pension System to which employees of state, county, municipal governments, public authorities and school districts invest in. To that end, the Defined Contribution Pension System should also be Administered by the New Jersey Division of Pensions and Benefits with the New Jersey Division of Investment being the System's Investment Provider. This includes mandatory Defined Contribution pension plans funded by both employer and employee contributions; i.e., the Alternate Benefit Program (ABP) and the Defined Contribution Retirement Program as well as supplemental Defined Contribution pension plans funded solely by the voluntary salary reductions of workers under sections 457(b) and 403(b) of the Internal Revenue Code. The State should charge the worker the same amount it pays to operate the State's Defined Benefit Pension System, currently eight basis points.

 

2. If it is sound public policy for all public employees (state, county, municipal, public authority and school district) to belong to a single, State-administered, Defined Benefit Pension Plan, why do we have 21 counties, 565 municipalities and 565 school districts farming out their own high pressured, commission-based 457(b) plan to insurance companies and mutual funds? Foolish duplication! The NJSEDCP should be expanded to include county, municipal, public authority and school district employees. See: New York State Deferred Compensation Plan.

 

3. The Supplemental Annuity Collective Trust (SACT) is the State-administered 403(b) Plan for employees of public higher education and school districts. Since its inception in 1963 it has offered just a single investment fund, a common stock portfolio. It’s hard to comprehend how such glaring negligence can continue, unchecked, for almost half a century. For this sole reason the SACT has been a Plan to avoid, like the plague. Such flagrant breach of fiduciary responsibility on the part of the SACT Trustees is the only reason why each of the 565 school districts have farmed out their own, high pressured, commission-based 403(b) plan to insurance companies and mutual funds. For nearly 50 years the SACT, with its singular investment option, has been the commission-based sales shark's most cherished ally.

 

While it's utter nonsense for each of the 565 school districts to sponsor their own 403(b) plan, until the SACT Trustees adopt a diversified investment menu, public higher education and school workers will continue to avoid the SACT, as they should. Unfortunately, they will also continue to be mauled by the high presured, commission-based 403(b) investment funds that have been, since 1963, sactioned by their employing school districts. 565 high pressured, commission-based 403(b) plans when a State-administered 403(b) Plan has been available for nearly half a century. A colossal breach of fiduciary duty!

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Guest Joel Frank

With reference to NJ---I am looking for a SACT participant to sue the Trustees for breach of fiduciary responsibility. A successful litigation will breakup the 403b cartel in New Jersey. Please contact me if you are interested in being the named plaintiff in a Class Action lawsuit. You need not worry about your job because the SACT is a state agency and has nothing to do with a local school district.

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Thank you all for your advice. We are not interested in sueing anyone right now, so no thanks on being a plantiff (we have had fights with health insurance, but I won and that's another story).

 

I saw many of you recommended TIAA-CREF. How could you tell it was not an annuity? By the low expense ratio? We don't have any Prospectus, just that handout.

 

I would like her to get into this because after one year, there is some matching. Right now, we max out our Roth IRAs with Fidelity and my 401k with Vanguard.

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Guest Joel Frank

Thank you all for your advice. We are not interested in sueing anyone right now, so no thanks on being a plantiff (we have had fights with health insurance, but I won and that's another story).

 

I saw many of you recommended TIAA-CREF. How could you tell it was not an annuity? By the low expense ratio? We don't have any Prospectus, just that handout.

 

I would like her to get into this because after one year, there is some matching. Right now, we max out our Roth IRAs with Fidelity and my 401k with Vanguard.

 

TIAA is a legal reserve life insurance company. Having said that, it distributes its products directly to the investor thus eliminating the commission that it would have to pay if it distributed its products thru broker/dealers. Not having to pay commissions is a savings that Tiaa passes on to the investor. Result: A NO-LOAD INVESTMENT PROVIDER AND ONE OF THE BEST!!

 

TC offers annuities and mutual funds. When it comes to a 403(b)plan the sponsor/employer decides which investment vehicle will be made available. The annuities, believe it or not, are of the no-load variety and do not charge a mortality and expense fee during the accumulation period. So for all intents and purposes there is no difference if you use their annuities or mutual funds in a 403(b) plan.

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Guest Joel Frank

Thank you all for your advice. We are not interested in sueing anyone right now, so no thanks on being a plantiff (we have had fights with health insurance, but I won and that's another story).

 

I saw many of you recommended TIAA-CREF. How could you tell it was not an annuity? By the low expense ratio? We don't have any Prospectus, just that handout.

 

I would like her to get into this because after one year, there is some matching. Right now, we max out our Roth IRAs with Fidelity and my 401k with Vanguard.

 

TIAA is a legal reserve life insurance company. Having said that, it distributes its products directly to the investor thus eliminating the commission that it would have to pay if it distributed its products thru broker/dealers. Not having to pay commissions is a savings that Tiaa passes on to the investor. Result: A NO-LOAD INVESTMENT PROVIDER AND ONE OF THE BEST!!

 

TC offers annuities and mutual funds. When it comes to a 403(b)plan the sponsor/employer decides which investment vehicle will be made available. The annuities, believe it or not, are of the no-load variety and do not charge a mortality and expense fee during the accumulation period. So for all intents and purposes there is no difference if you use their annuities or mutual funds in a 403(b) plan.

 

 

Why not use the NJ SACT for the equity portion of your portfolio?

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Guest Joel Frank

Why not use the NJ SACT for the equity portion of your portfolio?

 

I believe it is the Alternate Benefit Program or the ACTS program. I think we're doing ABP so we can get the full matching. We'll save the rest in our Fidelity Roth and brokerage accounts.

 

 

The ABP is the mandatory retirement plan for employees at the NJ public institutions of higher learning. The statutory rates of contributions are 5 percent for the employee and 8 percent for the employer. T/C is the only no-load choice and, therefore, the best choice among the six.

 

Having said that your wife may use the SACT for her supplemental/voluntary plan.

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Guest Joel Frank

One option that's available to me are target-date mutual funds that are designed to rebalance stock/bond mix as I approach retirement. A good one stop shop for a retirement investment that does not need a whole lot of effort on my part to worry about having too much or too little in stocks. What you could do is have this type of fund and if you feel you need more exposure to stocks then add a 100% stock fund . I think it's less of a hassle and gives one a quicker assessment of how everything is positioned. And you save on the fees associated with rebalancing in the end.

 

 

Rather than monitoring a second fund (all stock) just elect a target date mutual fund assuming you are younger than you really are.

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