#3: How Do We Survive All These Investment Choices... and a BONUS: Upcoming 403(b) Changes.

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 1^st. 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.