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MIA-MD

From 403b To 401k Plan

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I just came across this site and I appreciate your combined experience and expertise on 403b plans. I'm conducting research on the value of our current TDA 403b plan with AXA and have come to understand that there are probably better options out there for us. I work for a non-profit org. and I want to look into other options to our 403b. Seems like we can opt for a 401k plan or retain our 403b, but with a lower-cost provider. There are my questions to the group:

 

1. explain the pros vs. cons of 403b

 

2. What challenges should I expect in changing from a 403b plan to a 401k?

 

3. TIAA-CREF, Vangard and Fidelity were offered as lower-cost 403b alternative providers, which providers should I consider for a 401k?

 

4. Anything else to keep in mind as I talk to different providers and evaluate our options?

 

Thanks

 

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I think the one thing you need to keep in mind is that, when set up properly, a 403b has a wide variety of options that simply don't exist with the 401k. With a 401k, you have one provider offering their menu of investment choices. If you don't like what they're offering, your alternative is simply not to invest at all in a retirement plan at work, which I think you'll agree is a bit extreme. With a 403b plan, be sure it is set up with low-cost and full-service providers, so that everyone can find what they're looking for. There's no reason that AXA can't be one of the providers for your 403b, but by the same token, there's no reason why they have to be the ONLY one, either.

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MIA-MD:

 

I was asked by my boss in a non-profit agency to investigate the options also, however we could only have 403(b) which was fine because of the flexibility and information provided by the major funds. I called T.Rowe Price and Fidelity and they sent the paperwork and we were in business. Very simple. If I had it to do over I would pick Vanguard because of its large cost-effective variety of active funds (managed by professionals with a strong performance history, but still relatively cheap compared to other funds) and passive funds (investing in a group of stocks or bonds that have something in common such as Treasury Bills, or "medium site growth stocks", or enery, health, etc.).

 

Each employee saves into their own account, therefore not subject to being lost if the employer "goes under". Any employee may let the payroll person know how much to deduct from their paycheck and where it is to go. After the money gets to the chosen fund(s) it can be moved by phone call or online to other funds in that family. Minimums are listed at vanguard.com

"Account types and services".

 

This can be a fulfilling task because you are actively helping yourself and coworkers and the administration to get involved in creating and protecting their own retirement. Too many nonprofit employees, like teachers, shy away from money planning, leaving it to others at the state level or those in the cafeterias (the ones with the cookies) who sell annuities...

 

For people who want to start saving but don't know where, Vanguard has their Lifestrategy Growth Fund, or funds which evolve toward a conservative retirement at 2025, or 2030..It's a fun menu, but be patient with your fellow workers because they may not have the investing language that you are getting, and it is hard to trust what we don't understand..but Vanguard's liturature will help. Best wishes and keep us posted. Dan

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Thanks for your responses. It sounds like FT is saying that we can have multiple providers with one 403b plan. Is this right? FT, could you please elaborate on the various 403b options your referenced? Right now, most employees are not investing in our 403b because it's an annuity and it isn't matched by the employer. . .thus providing little benefit. We do have a separate pension plan as well.

 

I was under the impression that typical 403bs often have limited investment options when compared to a 401k since the latter offers direct investment in mutual funds. Our AXA portfolio pretty much offers annuities.

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MIA-MD:

 

I would like to share my view that although a 403(b) may involve multiple vendors. in many instances this approach is not the best way to go for either the employer or 403(b) participants. Following is the basis for this opinion:

 

1. Payroll remittance interfaces are limited & costly. Each vendor adds an additional degree of complexity to the contribution remittance process. This raises expenses, increases the chance for error & may slow the remittance process.

 

In my opinion, a single contribution remittance counterparty for the employer is the most cost effective way to get things done with minimum errors and maximum speed and accountability.

 

2. Diversification is obtained through the investment accumulation instruments, not necessarily the vendor. A single vendor can provide access to both proprietary and non-proprietary investment instruments. I work with several where we have 20-30 investment choices from different mutual funds, including those of the vendor.

 

3. Economics of concentrating your group purchasing power with few or a single vendor. My experience is that you will obtain vastly better terms and much more bidding activity if you plan to contract with a single vendor.

 

Once you open the plan up to multiple vendors, you effectively turn your pricing and terms into a retail environment, as opposed to wholesale terms that are available to well-organized group purchasers.

 

A key in this process is careful attention to group purchasing dynamics.

 

4. Perception of gains from choice versus reality. I have studied the issue of choice extensively with respect to participant-directed retirement plans. While choice and brands of products can help with the marketing of a plan and can certainly create the perception of an attractive plan, I often ask the question, "What did lots of choice actually deliver?" Often, the response is it provided a sense of flexibility, but little other tangible benefit (in terms of better investment returns).

 

Over the long term, there is compelling evidence that investment returns regress to the averages, and that fees matter more than any other variable. The debate reagrding indexing is not something I care to get into any further - but just something to consider.

 

These are my views, based on 25 years of experience in this business. Your actual circumstances will be a very important consideration in how to move forward as a small, start-up plan has a very different challenge as compared to a 3000 life organization with $20 Million and cash flow of $3 Million per year. You must size up your group's attractiveness to the vendor marketplace and use that to your advantage.

 

Hope this perspective is helpful to you.

 

Cheers,

 

Danc

 

 

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Guest Sierra
MIA-MD:

 

I would like to share my view that although a 403(b) may involve multiple vendors. in many instances this approach is not the best way to go for either the employer or 403(b) participants. Following is the basis for this opinion:

 

1. Payroll remittance interfaces are limited & costly. Each vendor adds an additional degree of complexity to the contribution remittance process. This raises expenses, increases the chance for error & may slow the remittance process.

 

In my opinion, a single contribution remittance counterparty for the employer is the most cost effective way to get things done with minimum errors and maximum speed and accountability.

 

2. Diversification is obtained through the investment accumulation instruments, not necessarily the vendor. A single vendor can provide access to both proprietary and non-proprietary investment instruments. I work with several where we have 20-30 investment choices from different mutual funds, including those of the vendor.

 

3. Economics of concentrating your group purchasing power with few or a single vendor. My experience is that you will obtain vastly better terms and much more bidding activity if you plan to contract with a single vendor.

 

Once you open the plan up to multiple vendors, you effectively turn your pricing and terms into a retail environment, as opposed to wholesale terms that are available to well-organized group purchasers.

 

A key in this process is careful attention to group purchasing dynamics.

 

4. Perception of gains from choice versus reality. I have studied the issue of choice extensively with respect to participant-directed retirement plans. While choice and brands of products can help with the marketing of a plan and can certainly create the perception of an attractive plan, I often ask the question, "What did lots of choice actually deliver?" Often, the response is it provided a sense of flexibility, but little other tangible benefit (in terms of better investment returns).

 

Over the long term, there is compelling evidence that investment returns regress to the averages, and that fees matter more than any other variable. The debate reagrding indexing is not something I care to get into any further - but just something to consider.

 

These are my views, based on 25 years of experience in this business. Your actual circumstances will be a very important consideration in how to move forward as a small, start-up plan has a very different challenge as compared to a 3000 life organization with $20 Million and cash flow of $3 Million per year. You must size up your group's attractiveness to the vendor marketplace and use that to your advantage.

 

Hope this perspective is helpful to you.

 

Cheers,

 

Danc

I have posted Danc statement in full because I believe it is a must read! The statement reveals all that is wrong with the 403(b) from the one offered by the LAUSD to the one offered by FT's district in NY.

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Guest TR1982

MIA-MD,

 

I would suggest that unless your employer is willing to set up a 403b plan under ERISA and take fiduciary control and responsibility for it as a group plan, the employer will realize litlle benefit from limiting the number of vendors and/or choices. The primary issue that drives this discussion is who owns the contracts. If the employer is not willing to own the contracts then there is little benefit to employees or the employer in having one vendor. The economies of scale which can be used for price reductions will not come into play since each employee owns their account and cannot be forced to move their assets from one vendor to another. This issue is the blessing and the curse of 403b plans and the subject of much confusion on these threads.

 

BTW, unless the assets in this plan are in excess of the million dollar mark or more, I doubt you would get any price concessions from vendors. If the plan is voluntary only, there will probably no concessions at all, regardless of the assets in the plan, simply because the new vendor has no assurance they would capture any of those assets since employees could not be forced to move their accounts.

 

There might be some benefit in keeping the list of vendors short since the payroll department would have less to deal with but with modern technology, that is a minor issue these days.

 

Your employer has to make a major decision regarding plan liability. Most small non profits understandably do not want to assume the role of a fiduciary if they don't have to. If I were an attorney (which I am not) and advising the board on this issue, I would not recommend that they assume this liability unless the organization was willing and able to contribute money into the plan. Even then, I'm not sure that would be a risk worth taking. In today's litigous environment, any benefits from this could be wiped out (along with the organization) by one lawsuit or unhappy employee.

 

Good luck.

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Guest TR1982

Sierra,

Are you going to post my response also?

Maybe I would have better luck with FT.

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It's so nice to have the diverse views represented by the various people on this forum and I thank you for your time. NOw, I'm sure you've had this question posed before but if giving the choice would you even opt for a 403b plan rather than a 401k? Since I am not with a school district, we have the option to look into other retirement plans and I'd like to get your views on this. As I've said before, our 403b plan isn't matched as we also have a defined pension plan that is total funded by the employer, thus matching contribution to a 401k or 403b is not really an option. In this case, is it even reasonable to continue with a 403b plan?

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I have posted Danc statement in full because I believe it is a must read! The statement reveals all that is wrong with the 403(b) from the one offered by the LAUSD to the one offered by FT's district in NY.

 

The very diversity of opinion that exists on this board is the reason why a single vendor choice is not the best idea. If we tell Sierra that he has a single vendor, and the vendor is TIAA-CREF, he's thrilled; if he finds out he's stuck with ING, he'll scream bloody murder. And rightfully so: not needing full service, why SHOULD he be made to pay for it?

 

By the same token, stick me with TIAA-CREF and their 800 numbers that pass for assistance, and I'll not be satisfied. And why should I be, when there are full-service providers available?

 

The LAUSD solution ("Got a pulse? Got a heartbeat? Then you, too, can be on our vendor list!") is obviously not a good solution either. The answer lies somewhere in the middle, which I suppose is why in my state (NY) most districts that I've heard of limit the vendors to some number between 12 and 25, with a mix of both no-load and full-service options. I'm not sure why Sierra would find fault with "the 403b offered by FT's district in NY," since it has no-load options for investors like him and full-service options for investors like me.

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Guest Sierra

I'm not sure why Sierra would find fault with "the 403b offered by FT's district in NY," since it has no-load options for investors like him and full-service options for investors like me.

================================================

You should direct this query to your NY State United Teachers which has limited their own, employer sponsored 401(k) plan to a single no-load provider. So we have a powerful union which on the one hand, as an employer, sponsors a no-load salary reduction plan for its own employees and then turns around and collects a $4,000,000 endorsement fee from ING for recommending a commissioned based 403(b) VA to it dues paying membership.

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What an excellent, excellent comparison of apples and oranges. 401(k) plans are single-provider entities, and 403(b) plans allow for multiple carriers. I would venture that most NYSUT staff members would trade their single-provider arrangement for an arrangement that features the choice of any number of providers if they could!

 

Finally, I'll point out for not the first time (and undoubtedly not the last) that NYSUT does not collect a $4 million endorsement fee from ING. The two key facts that you continually and willfully misrepresent:

 

* the NYSUT Benefit Trust, not NYSUT, collects the fee in question. By law, they are bound to use these funds for the betterment of their members, not simply "collect" it. The ways in which the Benefit Trust has employed these funds to the general benefit of their membership has been well-documented, here and elsewhere, though I'm sure you've long since stopped reading by the time I get to enumerate those benefits.

 

* the endorsement fee is NOT $4 million. 500,000 NYSUT members $6 per member (the arrangement outlined in the prospectus) = $3 million.

 

It's pretty funny that you practically throw an embolism in your zeal to criticize agents who are charging 2% in expenses compared to the 1% that their clients could be paying elsewhere, yet you think nothing of misquoting a figure that is A FULL 33% HIGHER than the truth, when it suits your purposes to exaggerate. Get your facts straight.

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Guest Sierra

What an excellent, excellent comparison of apples and oranges. 401(k) plans are single-provider entities, and 403(b) plans allow for multiple carriers. I would venture that most NYSUT staff members would trade their single-provider arrangement for an arrangement that features the choice of any number of providers if they could! ================================================

You are not focussing. If the VA is so good for you that your union endorses one to the exclusion of all others for the use of its dues paying members why hasn't the same union, as the employer, endorsed the same agent distributed VA to its employees for its 401(k) Plan?

 

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You are not focussing. If the VA is so good for you that your union endorses one to the exclusion of all others for the use of its dues paying members why hasn't the same union, as the employer, endorsed the same agent distributed VA to its employees for its 401(k) Plan?

 

 

It is YOU who are not focusing, not I. And again, you have your facts wrong. The union has NOT endorsed ING TO THE EXCLUSION OF ALL OTHERS. Indeed, every district in New York has both no-loads and full-service providers. NYSUT's endorsement means that we have cost containment in the one area (full-service providers) where we most need it.

 

You enjoy painting NYSUT's endorsement as exclusionary, despite mountains and mountains of evidence to the contrary. Again, Joel, get your facts straight.

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Guest Sierra

Your logic escapes me. Your UNION/Benefit Trust collects an endorsement fee from a single carrier, ING. Simple logic says that your union is telling everyone that ING is the best at least among the agent distributed VAs. Well, why doesn't it offer (not recommend) this agent distributed VA carrier to its own employees for their 401(k) plan? Why does your union as an employer feel that the no-load arrangement is just fine for their own employees but when it comes to their dues paying members they recommend an agent distributed VA?

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