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FITeacher

Top Questions to ask a 457 provider

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The district suddenly is having a VALIC/AIG advisor coming in to talk about plans. They are one of two providers the district has for 457's, the other is AXA :(. What are the top questions to ask as to get the most out of the meeting not only for myself but for my colleagues? 

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Your question was asked in another thread recently about 403b vendors and here's my answer. Substitute 457 or 403b:

A first question should be to determine if the vendor has a mutual fund (MF) based (403(b)7) plans. AXA has only annuity based (403(b) accounts which are expensive insurance products. VALIC has both types of plans but you should only be interested in the custodial MF accounts.  If a vendor does only annuity accounts, I would not have further questions.

The second question of a vendor with custodial mutual fund 403b is, what are the fees? For VALIC, assuming the Group plan is available in your district, what is your district’s fee? We’ve seen a 0.6% group fee, and also slightly lower, but districts’ vary. Ask about all their fees and get it in writing.

A third question would be to ask the vendor for a list of all the mutual funds in the plan, and their expense ratios (ERs). This is a fee that every mutual fund has, and can be 0.04% for a Vanguard fund and up to 1% or more for actively-managed mutual funds. Ideally your ERs should be <0.10%, although somewhat higher is acceptable (~0.30%?) if there’s no lower choice.

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1 hour ago, krow36 said:

Your question was asked in another thread recently about 403b vendors and here's my answer. Substitute 457 or 403b:

Krow, I am not finding that post. Can you link it?

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1 hour ago, krow36 said:

you should only be interested in the custodial MF accounts.

Looking up custodial accounts it seems like they are designed for adult to open in the name of children. Is this the same as what you are talking about here?

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2 hours ago, FITeacher said:

Looking up custodial accounts it seems like they are designed for adult to open in the name of children. Is this the same as what you are talking about here?

No, a custodial account is the name the IRS gives to 403(b)7 accounts, which allows for mutual fund based 403b plans. Prior to the passing of the 403(b)7 regulations, all 403b accounts were annuity plans sold by insurance companies. Often, the 403(b)7 accounts are just called "mutual fund" accounts to contrast them from annuity accounts. 

The 403b thread on first questions to ask was:

https://board.403bwise.com/topic/7528-small-district-with-a-few-choices/

Quote

Thanks for the quick answer Krow! Does this same line of questioning work for 457's?

Yes, you should contribute to a mutual fund based 403b and/or 457 plan and avoid expensive variable annuity or index annuity plans because they will have fees of 1 to 3%. A third type of annuity is the Fixed annuity, which only grows at a very low rate, maybe 2% or less. It's the equivalent of a non-FDIC- insured savings account.

Have you been contributing to an IRA every year? For 2019, that can be $6000. You can choose Vanguard or Fidelity. After you've maxed out the IRA, I think you would be better off contributing to a taxable account for retirement at Vanguard or Fidelity than to contribute to an annuity based 403b/457 plan. A taxable account using either the Total Stock Mkt Index fund or the S&P 500 Index fund is very tax efficient, especially if you are in the 12% income tax bracket (0% tax rate on most dividends).

You should keep in mind that it is possible to get a low-cost index providing vendor added to the district's list. Your district does not have a leg to stand on when they deny their employees that option! It's up to you and your colleagues to push for low-cost vendors. Districts that have low-cost vendors have them only because employees have asked for them. Districts and the insurance industry resist change, but change is possible.

 

 

 

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