Teachers have a lot going on. On top of their all-encompassing job, many have families, children and other personal obligations that they must juggle along with everyday activities and tasks around the home. So, when it comes to choosing a 403b vendor to work with, many teachers choose blindly, simply following the course that their colleagues or friends have taken. They trust the professional who came to their classroom, and, from a 10,000-foot glance, thought the plan summary sounded good – “There’s no time to read all the fine print.” But this can be a very costly mistake!
Not all school district employees have the samesituation or needs. And more importantly, the vendor that “yourfriend/colleague” selected, may not have been researched. For example, did youknow that some charge fees that are avoidable and could stunt the growth ofyour retirement nest egg?
Below are some guidelines to help you choose a 403b vendor.
Check the 403b Vendor Fees
Fees may have the biggest impact on the returnof your 403(b) plan because they cut directly into your rate of return.
For a mutual fund held in a retirement plan,these fees can include:
- Expense Ratio: It costs money to run amutual fund, sometimes more than others. This expense, also known as amanagement fee or operating expense, is typically deducted from the fund’s totalassets before your share price is determined.
- Sales fees or Commissions: On certainmutual funds, you will pay an upfront fee sometimes called a “front-end load”.Depending on the amount of your investment, you could qualify for a lowerupfront fee called a “breakpoint”.
- Redemption or surrender fees: Oncertain mutual funds,, you pay a “back-end or deferred load”. These fees willapply if you sell the mutual fund within a certain period of time.
- Short Term Trading fees: Mutualfunds are designed to be long-term investments, so trading fees were createdfor some funds to discourage short-term trading.
- 12(b)1 Service fees: Many fundshave an ongoing service fee that is paid to a financial advisor or the firm heor she works for as compensation for marketing the fund. Just like the expense ratio, this service fee will bededucted out of the total fund assets before your share price is determined.
For an annuity within a 403(b) plan, fees caninclude the following:
- Mortality and expense risk fees: Also known as the Death Benefit. Participants pay the mortality and expense (M&E) fee each year to an insurer to offset the risk of investment loss, plus fees involved to pay annuity provider expenses. According to the Securities and Exchange Commission, that generally means an average of 1.25 percent annually, which equates to $250 a year on a $20,000 account. (Read our recent blog post for more on this).
- Administrative fees: These can be flat fees or a percentage of an account (typically, 0.15 percent, or $30 for a $20,000 account).
- Sales loads: These are sales commissions an investor typically pays up-front when buying an annuity. These costs cut directly into the actual amount available to invest. For example, a 7 percent fee on a $10,000 investment will cost $700, meaning you’ve effectively only invested $9,300. These are common in 403(b) plans.
- Investment Expense Ratio: Inside a variable annuity, the underlying stock and bond investment choices, called sub-accounts, will have an investment management fee which can range from .25 – 2.00% of the value in that account per year.
- Surrender charges: These will apply if you sell an annuity within a certain period of time, known as the surrender period, which can last up to 15 years after purchase. This charge, also called a Contingent Deferred Sales Charge (CDSC), is a percentage of the asset balance at the time a person withdraws or transfers and depends on how long the money has been in place.
- Fees for Optional Features: Special features offered by some variable annuities, such as astepped-up death benefit, aguaranteed minimum income benefit, orlong-term care insurance, often carry additional fees and expenses.
Askfor a Fee Disclosure
To evaluate the fees of an investment productyou’re considering, ask about them.
If you’re working with a financial advisor,
- Ask if he or she receives a commission based on the sale of theproduct, and if so, the amount of this commission
- Ask if the advisor will receive any additional compensation(including any bonuses or incentive gifts) associated with selling this product
- Ask if the advisor will receive a greater sales commission byrecommending a particular product over another, and whether your needs would beequally served by the lower-priced product
PerformanceInformation
Fees can dramatically impact an investment’spotential performance, so, when evaluating investments, it is also useful toreview, compare and contrast their previous performance. However, keep in mindthat past performance is not necessarily an indicator of future returns.
A good way to assess past performance is tocompare a product’s performance to a comparable benchmark index. Thisinformation can be found in a fund’s investment prospectus. And can be done foryou if working with a financial advisor.
For example, if you’re considering a large-capgrowth fund, how does its performance compare with the S&P 500 benchmark?If the fund has come close to matching or exceeded the performance of theindex, it may be worth considering. On the other hand, if the fund hassignificantly underperformed the index, you may wish to look elsewhere.
If you’re considering an insurance company asyour 403(b) plan vendor, it is prudent to review and compare its financialstrength and stability before purchasing a product from that company. Becausethese companies sell insurance products that obligate the insurer to pay a benefit/returnat some point in the future, it is important to verify that the insurer is ingood financial health so it can make good on this obligation.
TheBenefits of a ‘Financial Tutor’
Choosing a suitable 403(b) vendor takes time. That’s why more and more education professionals are turning to advisors who act as fiduciaries for help and expertise with their financial and retirement planning. The right financial advisor can take on this task for them and aim to help ensure they’re on the right track toward reaching their retirement goals.
But beware: Just like 403b vendors, not all financial advisors are created equal. Choosing a financial professional is an important decision. It can take a little time to research a financial advisor, but time spent now can save you time and money in the long-run.
Hiring a financial advisor to help you make informedfinancial decisions can be extremely beneficial. But choosing a professional towork with is one of the biggest decisions you will make. This person candetermine when you can retire, how you’re able to spend that retirement andwhat you’re able to leave behind when you’re gone, if anything.
Don’t follow the herd. Instead, start a newtrend that includes research, insight and smart decisions. It may take sometime, but it’s time well spent for sure!
Warwick Valley Financial Advisors works specifically with teachers and school district employees and is familiar with the needs and issues these hard-working professionals face. Contact us to find out how we can help, or schedule an appointment now to discuss your personal situation in more detail.
*Investing in mutual funds involves risk, including possible loss of principal.
Variable annuities are suitable for long-term investing, such as retirement investing. Withdrawals prior to age 59-½ may be subject to tax penalties and surrender charges may apply. Variable annuities are subject to market risk and may lose value.
Free Guide: What Every K-12 Employee Should Know About Their 403B Plan
Retirement investing for teachers can be confusing. This guide is an excellent source of information about the various options available to you as a school district employee answering important questions.
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