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Hello. I'm hoping for some advice.  About 3 years ago at a school event, I won a raffle for free financial planning from a certified financial planner with 25 years experience.  It was listed at a value of $1500.  My wife and I, both teachers, were thrilled as we knew nothing about finance.  We had our pension plans and no other investments. He took all our info, evaluated our risk tolerance, and produced lots of charts and graphs.  We thanked him repeatedly.  He said he was just hoping to get some good word of mouth.  Having young children, he suggested life insurance.  We agreed.  Next, he suggested that we start contributing to our 403b.  Our district has 401k and 403b options.  When asked why he suggested the 403 over the 401k, he said that it had better fund options.  We didn't know the difference.  Unfortunately, we had no clue what to ask during this process.  He set the plans up and we agreed to them.   As you probably guessed, we each ended up with a variable annuity which we didn't understand.  We thought the word annuity was basically a synonym for 403b (Tax Sheltered Annuity). 

It wasn't until this year, after researching, that we realized what we had....an insurance product with high fees that weren't discussed during the process.  I am kicking myself for not doing my research earlier.  I know we were naive in failing to see this as a sales situation vs. an advisory one.  We were under the impression that all fees were waved due to the raffle and he would pick the best funds for us.   I have confronted him that I feel taken advantage of.  I was not nice. He maintains that the annuity provides for our retirement in a sound and responsible manner.  Now I am conflicted.  Is it possible that he truly believes this is a good investment for us?  Was I out of line to suggest otherwise?  My head says I'm right, but I still feel guilty for some reason.  We really liked him and thought he had helped us.  

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My 2 cents:  I don't know any of the particulars, but you are most likely correct: this was probably a sales presentation rather than advice by a fiduciary, the raffle was something of a scam, and your resulting retirement investment is far from optimal.  As you have probably learned, insurance annuities are almost never appropriate within a tax-deferred plan like a 403b.  You were absolutely not out of line speaking up about your concerns.  And your experience is very, very common. 

The salesman may well have sincerely convinced himself (or been convinced) that variable annuities are "suitable" for the likes of you.  There's a famous quote from Upton Sinclair: "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

My further two cents is to accept this as a valuable lesson: don't contribute any more to the annuities, do continue to contribute to the lowest cost, most diversified index fund options in your 401k or 403b plans.  You may  have some gnarly decisions ahead about your relationships to the annuities, surrender fees, etc., but this can be a "wake-up" experience that will serve you well in the long run.

 

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As whyme mentioned, your experience is all too common in the K-12 403b world. Actually you are doing great to have realized the problem after only several years rather than 10 or more years! Most of us on this forum have had regrettable financial experiences that set us back $1000's. Try to view it as an important learning experience. Have you read the NY Times series of articles on the problems of the K-12 403b world? It might help give you some perspective. https://www.nytimes.com/2016/10/23/your-money/403-b-retirement-plans-fees-teachers.html?smid=tw-share&_r=0

You can stop contributing to the variable annuity 403b and put that money in a savings account until you get a new plan receiving contributions. Find out all the 401k, 403b and 457 vendors you district allows you to use. Maybe you've already done this? If you post the vendor lists on the forum, we can make suggestions. What state are you in? Just let the variable annuity sit there while you figure out the plan you want to start using. It might take a month or so before you can start making contributions to the new plan.

Do you know the annual fees you are paying? Do you know what the surrender fee would be if you rolled the balance to another vendor? You can get the cash value and the surrender fee from the rep. Usually the annual fees over time equal or exceed the surrender fee, and it makes sense to get out and invest in low-cost index funds. It can take several months to get the balance of the annuity transferred to a new plan. There's paperwork from both vendors to be signed and exchanged. 

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9 hours ago, 403Learning said:

Now I am conflicted.  Is it possible that he truly believes this is a good investment for us?  Was I out of line to suggest otherwise?  My head says I'm right, but I still feel guilty for some reason.  We really liked him and thought he had helped us.  

 

Don't feel bad. Its a common mistake but its a mistake that is easily corrected. I don't think the saleman's intentions were bad. He is trying to make a living and working within a system that puts him up against the wall if he doesn't sell. I've known some nice people who made their living selling these awful products. The companies pretty much starve these folks early on in their careers and they don't get much of a paycheck if they don't get out there selling the company's product. However, this guy having 25 years experience  certainly knows what he is doing. He is also aware that if he gave you all the details you probably would have run away.

Give him credit, he got you thinking about retirement savings. Give your self credit too that you figured out that its not a good product. Now, get out of it, stop contributing  to it and close the account. Start following this forum and site. Read all you can about investing and  next time you will get it right. You can trust the advice you get here.

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Thanks for the quick replies, everyone!  I have read the New York Times articles.  That is when things really hit home for me. 

I should have added what I have done since but did not want to write a novel for my first post. Steps we have taken:

  • Stopped contributing to the Annuity
  • Opened a Roth IRA through Vanguard with the money we were contributing to 403b
  • Started researching how to transfer the annuity.

We have a 7 year 7% rolling surrender fee, .9 ME, .15 admin, $30 yearly account charge, about 1% expense ratio on funds, and %5.75 upfront sales charge on our contributions.  Ouch!!  The reduction in yearly fees will pay the surrender charges off in about 4 years if my math is right.  I have requested the transfer paperwork.  Now I need to find a suitable fund to transfer it to.

Apparently, we can't transfer the 403b to our 401k (both Security Benefit and Omni told me this) without tax penalties.  We are in Idaho and our 403b provider is Omni.  Most of the choices are insurance companies.  I have found that Aspire seems to have low fees (.15 admin, $40/year maintenance) and has lots of fund choices including Vanguard.  I need to research some others as well as reread Aspire's paperwork to make sure I'm not missing something.  

Once we have transferred those accounts to a new 403b, we aren't sure what would be best:   Keep contributing to the Vanguard Roth, start our PERSI Choice 401k which has low-cost funds, or perhaps the 403b we find will be the best option.  I see a lot of conflicting arguments on what you should max first, Roth Vs 401k.  There is no employer contribution match and we would never be in a position to max our 401ks.  I will need research these options further.

Thanks again!

 

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24 minutes ago, 403Learning said:

We have a 7 year 7% rolling surrender fee, .9 ME, .15 admin, $30 yearly account charge, about 1% expense ratio on funds, and %5.75 upfront sales charge on our contributions.  Ouch!!  The reduction in yearly fees will pay the surrender charges off in about 4 years if my math is right.  I have requested the transfer paperwork.  Now I need to find a suitable fund to transfer it to.

 

 

Wow, that's a bucket load of fees for sure.  You got hit with fees in just about every way. I often try to be professional and nice when I talk about these so-called advisors but actually the more I read the more I despise the industry they work for. This guy did you no favors. He's a thief. You can do much better. You did the right thing investing in an IRA with Vanguard. Can you list your choices in your 403b and 401k that are available to you? Also, might you have a 457b plan? They are usually published somewhere. Also, my suggestion is to leave the current account alone for now and lets work on getting you set up with a good plan. Once we get you set up in your new account we can backtrack and see about transferring the money out. Can you share the amount in those accounts?

Don't feel bad. With only three years in, you caught this mistake early enough to adjust your current course for the better. We can help. Incidentally, Aspire might be a good option for you but let's see your other options.

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You mentioned Security Benefit.  Why not just transfer to their amazing "direct invest" plan.  Don't ask your advisor just call their customer service and they will help you.  I use it and love it.  Gives me access to cheap vanguard funds.

With aspire be careful to use the self direct option.  At my school if you don't you get set up with a Edward jones advisor!!!

 

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Yes, you need a low-cost 403b plan that you can move your annuity 403b balance into. The Aspire Self Direct 403b would work, but the Security Benefit NEA Direct Invest would be a lower cost 403b. If you use the 3 funds that Ed, Bash Dash and others use, you will have the lowest cost 403b plan anybody here knows about! Even lower than your excellent PERSI 401K! 

If both you and your wife have an annuity 403b, you will both need to set up a 403b account with either Aspire or SB NEA Direct Invest. However it sounds like only you have the 403b annuity?  Not being able to move the annuity balance into the PERSI 401k is not a problem because you have 2 very good 403b plans available. 

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I don’t have much time to post, but here are five quick thoughts:

1. Don’t dwell on the past. I wrote a blog about how the advisors are the ones to blame. Just move on and devote your energy to the future and what you can control.

2. I documented the best plans offered in Florida (proxy for the nation) here. You’ll find a link to information about Security Benefit’s NEA DirectInvest there.

3. There was some ambiguity in your posts. I don’t know the transfer rules between a 401k and 403b, but if a transfer is possible, I’m not sure why it would be a taxable event. That may be something worth googling.

4. It is worth your time to study all of your options.

5. It seems lots of people who use Traditional retirement accounts through their employer also use Roth IRAs. Unless you’re ineligible for a Traditional IRA, I think that is likely a mistake. This blog articulates most of the reasons I hold that view.

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42 minutes ago, Bashdash said:

You mentioned Security Benefit.  Why not just transfer to their amazing "direct invest" plan.  Don't ask your advisor just call their customer service and they will help you.  I use it and love it.  Gives me access to cheap vanguard funds.

With aspire be careful to use the self direct option.  At my school if you don't you get set up with a Edward jones advisor!!!

 

I think the surrender fees might be an obstacle to consider but yea moving to Direct Invest depending on the amount in the 403b would make sense. I also agree with BASHDASH that  Aspire is only good for self-directing into a low-cost choice. 

I worry who is representing the advisor part of Aspire . The advisor could do a bait and switch on folks if he is also selling other products and part of another company like Edward Jones!!  I did not know that. That could be a ploy. Use Aspire to get clients in the door  but then suggest Edward Jones higher comissioned higher fee products.

Still I would still like to see 403b learnings  provider choices out of curiosity.

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21 minutes ago, EdLaFave said:

There was some ambiguity in your posts. I don’t know the transfer rules between a 401k and 403b, but if a transfer is possible, I’m not sure why it would be a taxable event. That may be something worth googling.

The IRS rules prevent moving a 403b balance into a 401k plan while still employed by the plans' sponsor. This has come up before on this forum. If the OP changes school districts, it would be possible. The 403b would be put in a separate account within the 401k, and would use the mutual funds of the 401k. Taking a distribution of the 403b would be both taxable and generate a penalty if under age 59.5. I agree that a "taxable event" isn't relevant to what OP wants to do.

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4 minutes ago, EdLaFave said:

I don’t have much time to post, but here are four quick things:

I documented the best plans offered in Florida (proxy for the nation) here. You’ll find a link to information about Security Benefit’s NEA DirectInvest there.

There was some ambiguity in your posts. I don’t know the transfer rules between a 401k and 403b, but if a transfer is possible, I’m not sure why it would be a taxable event. That may be something worth googling.

It is worth your time to study all of your options.

It seems lots of people who use Traditional retirement accounts through their employer also use Roth IRAs. Unless you’re ineligible for a Traditional IRA, I think that is likely a mistake. This blog articulates most of the reasons I hold that view.

Its rare for school systems to have a 401k plan and I have to wonder why a school system would have both. My understanding is You can move money from your 403b plan to your 401k plan either through a rollover or through a direct transfer. Now maybe the way they are set up within this school system won't allow this.?  

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2 minutes ago, krow36 said:

The IRS rules prevent moving a 403b balance into a 401k plan while still employed by the plans' sponsor. This has come before on this forum. If the OP changes school districts, it would be possible. The 403b would be put in a separate account within the 401k, and would use the mutual funds of the 401k. Taking a distribution of the 403b would be both taxable and generate a penalty if under age 59.5. I agree that a "taxable event" isn't relevant to what OP wants to do.

O.K. That's what I figured. You have to separate from service. Thanks for knowing that Krow

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Piggybacking on Ed's linked article, I suggest that 403learning look carefully at a Traditional IRA and a Traditional (as opposed to Roth) 403b/457b/401k.  The main reason, from my POV, is that the immediate tax benefit probably outweighs the promised Roth benefits, especially given that you are far from "max out" contributions.

1. The immediate tax deduction allows you to contribute more without reducing your spendable income.  The amount you contribute, combined with time, are keys to retirement savings success.  For my advice to really work, you need to contribute more.

2. The deduction lowers your taxable income, which not only reduces taxes; it also may (depending on your taxable income level), allow you to contribute to a Trad IRA even when you are enrolled in a pension plan (you'll need to check on this one--figure where you taxable income falls in relation to the IRS phase-outs for the IRA deductibility benefit).

3. You get an immediate tax benefit when you contribute to a Trad IRA.  This encourages savings, at least it has with me.

4. While the Roth IRA is not a bad choice (I contribute to one), nobody knows what the tax situation will be when you retire decades from now.  If the government were to, for example, impose a big consumption tax (like a VAT) while lowering income tax rates, the advantages of money from a Roth will be reduced.

This is a good problem to have: both the Trad and the Roth are good places to build investment portfolios, especially when you can access low cost providers such as Vanguard.  Consider the pros and cons, but so long as you consistently fund one (or even fund both) you'll have made a reasonable choice that you'll be happy about as retirement nears.

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