It’s been a while. I was trying to figure out the best
way to walk you through making investment choices within your 403(b), 401(k)
and 457 accounts, but given the big change coming up in April, I am not sure we
even need to discuss the current 403(b) nonsense. So instead of giving you
investment advice (I really can’t do that legally), I will make a few points
that might help you with retirement related choices. Think of this as a mailbag
episode. When it comes to the voluntary plans at Cal State (and at your old
jobs), here are some things to be aware of.
#1. The most frequent question I get is “How do
I invest my 403(b)?” This is not a short conversation. It usually takes me
2-3 hours to do an analysis. I actually
wrote a basic guide walking people through the 5 steps so they can do it
on their own. However, I am very weary of posting a link here because someone is
going to see it as me soliciting business (I do run my own financial
planning practice after all). If you are interested in the guide, let me know
privately, and I will send you the link.
#2.
Big changes are coming to the Cal State 403(b) plan on April 1st.
Right now, there are FIVE 403(b) providers. In April, there will be only ONE.
And that will be Fidelity. You have probably been getting letters about this if
you are enrolled in the 403(b) plan. If you are not sure how to feel about it,
I am going to tell you right now: you need to feel GREAT. This is especially true
of people who are not currently participating in a voluntary plan but are
thinking about doing it in the future. Your life will become so much easier as
the result of this consolidation.
Back in November, I was wining about how I love Fidelity
but how I had to decide against them, and go for the Savings Plan 401(k) because
of the expensive investment options within Fidelity. Well, my friends, that is
changing. This is a big enough change to make me wish I got hired about a year
later and you should appreciate this big moment. A few things you need to know
about the change and what it means to you:
A. Here
is the link that will give you more info on the transition: https://nb.fidelity.com/public/nb/calstate/transition-home
B. If
you are a current participant in the 403(b), you will get information sent to
your house in February.
C. There
will be workshops and educational resources available on campus between February
and April and you better go!
D. The
investment choices are getting expanded and for someone (me), a passive
investor who believes that a 403(b) account is not the place to do active management,
this is really exciting. Starting in April, there will be 5 index funds you can
use to build a really good diversified portfolio. All the available choices are
on the website I mentioned above. Take a look and celebrate (just make sure you
press the investments tab to see all the choices).
E. This
consolidation is REALLY good for you because now, instead of getting sales
pitches, you will be getting education advice. The 403(b) market is pretty
messed up because the “advisors” you see on campus are really salesmen trying
to convince you to choose their provider over the other bunch (see more on this on #4). When you only
have one provider, it is so much easier to do what is best for employees. Fidelity will no longer have to put its efforts into snatching
you as a customer from Voya or MetLife. Instead, it can focus on helping you understand what is going on in that 403(b) of yours. This is really good news.
F. On
a related note, next time when you are power walking, listen to this podcast: http://teachandretirerich.com/podcasts/
Episode 13 in an interview with Fidelity going through the consolidation for
403(b) providers in the marketplace in general and it can explain many of the things
you will be experiencing soon. I don’t want to hear that you don’t have time
for this (there is always that one hour of Real Housewives of Atlanta you can
trade for some 403(b) fun)!
G. The
crazy idea that the more providers you can offer within your 403(b) plan, the
more diversified your retirement plan is, can finally die. Having 1 or 55
providers is irrelevant; the choices you have within the provider is what
matters and now you got good choices.
#3.
The second most popular question I get from people about their 403(b)s is “What
should I do with the funds when I leave a job?”. There
are a few options and the right choice will depend on your new provider, your
old provider, and on the workings of your new retirement system. Here are your 4
main choices:
A. You
can leave that money where it is. Don’t do anything. Just make sure you are
aware there is some account out there you need to keep track of. Do this [only]
if the choices in the old plan are amazing.
B. You
can roll the money into the new job plan (maybe; that’s not always possible).
C. You
can roll the dollars to an IRA on your own and go wild buying gold and oil (don’t
do that please).
D. You
can hire an advisor to manage your money and roll it to an IRA with that advisor.
The option that works best for you will depend on how
much money you can roll and the investment choices available at the old and new
plan. These days, financial advisors will offer you full time financial planning
services (and be on call for you all the time) if you can roll between $200-250k
(that’s pretty much where they can start making money, although you will find
plenty of advisors who will take even less than that). These advisors will make
their money by charging you between 0.7%-1.0%, on average, from the funds you
brought over. Is this a lot? It depends. If you are paying 1% right now for some
crappy target date fund in an old plan, paying the same 1% and but having full financial
planning and investment management service is actually a pretty sweet deal. However,
if you are paying 0.05% for a Vanguard fund and are happy with it, then no,
paying an advisor 1% may seem very expensive.
If your new plan has fantastic investment options, you
may also be able to roll it to the new workplace. Just make sure you don’t roll
it into a plan that has ridiculously expensive choices. I saw a plan last week
in a FL college (let’s not name it) that was so bad, it made me weep.
#4:
How do you find a good financial advisor? This is also a very common question. I promise, this is also related to your retirement. I am a big proponent of getting good help but
it is really hard to figure out what a good advisor is. Again, if you have
never read any of the http://www.403bwise.com/home.htmlhttp://www.403bwise.com/home.html
website, you probably should (and no, I have nothing to do with it, I just
think it is really good advice for college employees). They have a number of
good questions you should ask when interviewing your future advisor.
But here are my 2 cents: when it comes to advisors,
you need to understand the difference between fee-only, fee-based and commission.
These terms have to do with how these people get paid. A fee only person gets
paid by you. A commission person (think Northwestern Mutual or Edward Jones)
gets paid by what they sell you. Do you really think they will be selling you cheap
Vanguard funds? Noooo, they will not. They will be selling you whatever they
are getting paid to sell. A fee-based advisor gets paid from both sources, from
you and commissions. A few good sources to find advisors are:
A. NAPFA
http://www.napfa.org/index.asp (I
am a member so I can tell you more if you have questions). You will see all
kinds of advisors there, some who work with high net worth individuals and some
who do not, but they all charge based on advice and not annuity sales.
B. Garrett
planning Network http://www.garrettplanningnetwork.com/(I am not a member) but they charge hourly and project based fees so if you
have a few questions and only need a few hours of work, this is a good source
to check out.
C. The
XY Planning Network /http://www.xyplanningnetwork.com/consumer/find-advisor/
(I am a member). Most people charge
hourly, from assets or a monthly subscription fee, just like the gym membership.
It caters to the younger planners and younger clients but again, all the payments
are based on advice, not product sales.
Can an advisor really help you? It really depends on
your situation, your interest in this topic, and your commitment to do the
best. I personally think retirement
planning is very important and if someone can spend 2 hours and dig out a few thousand
dollars from under ground, it may be worth your time and cost. For example, a
basic review of your benefits and the 403(b) plan may cost you $500-$1,000 but
it can save you many, many dollars in the long run. I am currently knee deep
into a research project on 403(b) investment choices. Oregon State was nice
enough to provide my co-author and myself with their employees’ investment choices
for the 2 providers they use: Fidelity and TIAA-CREF. What I see in their makes
me want to cry every single day when I open that data to run some more
statistical tests. If you want to get a better idea about what’s going in those
accounts, take a look at my rant here: https://www.linkedin.com/pulse/dont-401k-loser-inga-chira-ph-d-cfp-?trk=prof-post
I have no idea how Cal State employees invest their
403(b), 457 and 401(k) but I really hope it’s better. This may be a project for
the future. If you ever wondered what finance professors do research on, now
you know.
