Tax Loss…. What?

It’s been a while and today I am back with a pretty technical topic but it is a topic that can make a big difference in your returns. The topic of the day is Tax Loss Harvesting. In its basic definition, this consists of selling an investment (like stocks/ETFs/ Mutual Funds) at a loss. Why? So you can use the loss to offset a gain in some other investment. While you sell you loser investment, you also buy something very similar. This way, you maintain your desired asset allocation while paying less in taxes. Remember that portfolio of 80% stock and 20% bonds we originally established? That’s your allocation.

By now, you are probably thinking: “Why in the world would you torture me with such a boring topic?” Here are a few reasons. #1: It is a really good way to pick up extra returns = make more money (read on for more on this one). #2: It is 2016 and there is no excuse not to do it. And #3: It will take 10 minutes to read this and you will learn something new that might help you make more money in the future. The younger you are when you start doing this and the higher your tax bracket is, the better your life will be as a result.

The tax loss harvesting works best with funds. A large cap funds? Well, I am pretty sure I can find another one that is not that different from the one I just sold. Individual stocks? Selling Apple and buying something really close to Apple that’s not Apple? That’s harder to do.  

Sounds like I am on my way to paying less taxes. Ssssweeett. But you need to remember that (1) your investment losses can offset up $3k of ORIDNARY taxable income per year and (2) the IRS has caught up to you and you cannot engage in a “wash sale” (more on this later) when you sell and buy back a “substantially identical” investment.

Ok, fine, sounds important. So how do you actually engage in loss harvesting? You get involved with a robo advisor and let them do it for you. You do not do this manually! To max your losses and increase efficiency, you need to do it EVERY DAY. Some advisors will sell you this service but unless they outsource it to a robo advisor (like I do), it is impossible for a human to compete with a machine.

What does this mean in terms of returns and is this whole exercise worth it? It will depend on your portfolio and market conditions but Betterment[1] (which I do use in my practice and which I think has a one of the best, if not the best tax loss harvesting out there) estimates that for a 70% stock portfolio, harvesting adds about 0.77% in return per year. Some estimates go as high as 1.30% (for a much larger account). Considering that you are paying an advisor 0.75%-1% and getting back 0.77% in tax loss harvesting, well, that is pretty amazing. Throw in the effect of rebalancing, and you pretty much get someone to manage your money and do your financial planning for free.

Now, here comes the hard part. You didn’t think it was this easy, did you? Here are a few things to be aware of:

1. Avoid short term capital gains. Here is the dilemma and what happens. First, if you sell something and buy it back within 30 days, the IRS does not consider the loss. This is called a wash sale. Let’s say Apple dipped by 10% in a day. You sell it and plan to use the loss to offset some gains.  2 weeks later, you change your mind and buy some shares of Apple. Well, your 10% loss is no longer a loss. You have now created wash sale and the IRS treats the loss like it has never happened.

So you are thinking: “Great, I will just wait for 30 days and buy it back but then”. But this is how you the possibility of short term capital gains, which might negate the whole point of tax loss harvesting.

Some other “smart” person might say “Let me sell the stock in my taxable account and instead, buy it in my IRA”. This is a big No, No, No. This might lead to a permanent wash sale. If you care to understand the details, just ask me privately, but if you, or the person managing your money, are not too familiar with these rules and attempt to manually tax loss harvest, you should be careful.  This might result in one expensive tax loss harvest.

2. If you do not have all your accounts in one place, then it is really easy to create wash sales and get in trouble. Betterment is very good at harvesting across ALL their accounts but they still can’t trade in your IRA with Fidelity or Vanguard. This also includes spouse’s accounts.

However, just because you have the same investment somewhere else, you do not get in trouble. Problems come up when you sell something and then turn around and buy some more of a “substantially identical” security (like automatic reinvestment of dividends in your IRA). So be careful, don’t buy the exact same “thing” or one that is very similar. Well, what is very similar? If you sold an index fund that tracks S&P 500, don’t buy another one that tracks the same index. Go and buy something that tracks a different index.

Let’s say I convinced you, you are all for it, especially if you already have (or are considering) a Betterment account. So what happens if you turn tax loss harvesting on but have other accounts in different places? Before you turn it on, check to make sure you do not have similar ETFs/ Mutual funds you already own somewhere else and figure out what your outside investments track[2].

Bottom line is that tax loss harvesting can and should reduce your taxes.  If you have IRAs in other places, roll them other to whoever you plan to use for tax loss harvesting. Same goes for old employer 401(k)s and 403(b)s.  The problem arises when you have current 401k(s) and most of us do have those because well, because we are not ladies of leisure and we have jobs. So those current employer accounts need to be checked before you turn the tax loss harvesting on and if your advisor uses this feature, make sure she understands the implications and what needs to be check for.

One last thought. Someone asked me if they could tax loss harvest in 401(k)s and IRAs… not really.  Those accounts are already tax free to tax advantage so what exactly will we harvest? The harvesting is all about taxable accounts but having IRAs and 401(k) may interfere with the harvesting success so you still need to be aware of how this whole thing works. 

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[1] Here is a good white paper by Betterment on the topic. Please be aware this is how the company does their harvesting. It may not necessarily mean that everyone does it this way: https://www.betterment.com/resources/research/tax-loss-harvesting-white-paper/https://www.betterment.com/resources/research/tax-loss-harvesting-white-paper/

[2] Here is a quote from Betterment that explain this issue very well: “For example, VTI, one of the ETFs we purchase and harvest, tracks the CRSP US Total Market Index. So does the mutual fund VTSAX, also from Vanguard. Despite the fact that they are different types of investments, selling the ETF at a loss while purchasing the mutual fund inside the wash sale window could trigger a wash sale. Another example is any fund that tracks the S&P 500. The large cap funds in Betterment's portfolio track value-tilted indexes, so a fund that tracks the S&P 500 index with no tilt should not be problematic (e.g. VFINX, VFIAX, SPY, FUSEX, FUSVX and many more).”

Should you be Skeptical of Some (Many) Financial Advisors? Yes You Should, and Here is Why.

Sometimes, you get an article across your desk that is so biased, you can’t pretend like it doesn’t exist. I read such an article earlier this week and I feel I owe it to the uninformed public seeking genuine financial advice to make a few comments about it. So today’s lesson is really not about Cal State benefits; it is about how to become an informed consumer of financial products without getting a distorted view. I don’t know the financial advisor spotlighted in the article, nor do I know the reporter who wrote the article. For that matter, I didn’t know where Suwanee, GA was until last Thursday (I did Google that one).  This is certainly not a personal attack but when people put themselves out there, well… then I can use this as a teaching moment.  This type of financial advice happens every day in Anytown, America. This could easily happen to you.

I am a financial advisor. I do understand the industry and its faults. Overall, it is a pretty misunderstood industry when it comes to consumers. What concerns me in this article though, is a number of statements that are not quite what they seem to be. Reading this article, I got the impression there are tons of insurance salesmen out there offering to take care of all of you for free. 

And that is simply, not true.

To understand where I’m coming from, please see the original article first: http://suwaneemagazine.com/financial-fitness/ and then read my comments. Here it goes; let this be an educational opportunity. Keep reading, the last point is by far the best and most misleading.

#1: “Don’t wait to start planning for retirement when you are about to retire” Hill advises…. That is a very good point and is absolutely correct. By the time someone is about to retire, there is only that much can be done. Retirement planning earlier in life is much more useful. I completely agree with the article so far. - Trust has been established.

#2: “Unfortunately, the employee turnover rate of Financial Advisors is among the highest of any service-based industry in the US”. Ok, this point needs some explanation. I, frankly, despise the term “financial advisor” because there is no official definition for it. Anyone can call themselves a financial advisor but the depth and coverage of some financial advice out there is debatable. So I would really like to see some facts included with this quote.  What segment (sub-segment) of the financial service industry is included in this statement?  I agree, if you look at the insurance industry (which the adviser represents), the turnover rate is enormous. This is because of the compensation structure of the industry: you eat what you kill. You work mostly (if not entirely) on commission and there are only so many 22 year olds who can sell enough whole life policies to survive. The insurance companies also tend to hire everyone who is willing to try and when the selection process is not really that selective, turnover rates are high (I do place my graduating students so I see how gets hired where; I am fully aware of the hiring process).

I am having a really tough time getting any real turnover rates for different segments of the industry but if nothing else, from my personal experience of working with financial planning students and placing them in their first jobs, I can promise you that the turnover rate for independent RIAs and salaried (think of banks) financial advisors is much lower than what we see on the insurance side. -I’m becoming a little skeptical of this article now.

#3: “Hill has been recognized as one of the Top Long Term Care leaders for NY Life”. Well, that’s a nice statement, but what does that mean? How does this accomplishment translate into being a good financial advisor? How does this translate into being a comprehensive financial planner who takes care of your entire financial future? And if that’s not what you do then how do you know what’s best for me? Long term care is a very small area of a financial plan. A proven track record in Long Term Care (or life insurance or investments) does not necessarily mean that an advisor is good at everything. And from the way this article was written, I am also asking myself whether being a leader implies deep knowledge or top sales. – Now I feel like I’m being sold.

#4: “You might notice the multiple designations following his name, signifying the advanced degrees”. Let’s talk about those. My first observation is: where is the CFP®?  This is the golden standard for financial planning. For being such an expert, why would you not become a CFP®? I won’t speculate about that because I simply don’t know. However, I did research the other 4 designations to figure out what they require. 

• CLU® - Chartered Life Underwriter. This is an insurance designation and probably the best one to have.  The designation provides advanced insurance knowledge. You go to a college (aka the American College in PA because they pretty much own the designation), you take a number of college classes and you get the designation.  At the very minimum, you have to have at least 3 years in the industry to be designated a CLU®.
• ChFC® -called Chartered Financial Consultant. This is supposed to be an alternative to the CFP® designation but few people out there see it as such. As Investopedia puts it “The biggest difference is that it does not require candidates to pass a comprehensive board exam, as with the CFP®.”
• CASL® or Chartered Advisor for Senior Living. Provides training in the special needs, issues, and decisions facing senior citizens. Basically the same process for designation as the above. Requires 5 classes (15 semester hours)
• LUTCF® - Life Underwriter Training Council Fellow. Never heard about this one but it looks like it requires 3 eight week courses and again, is focused on insurance.

These designations took time, effort, and determination, however at the end of the day, this is no CFP®, with a third party, 6 hour comprehensive board certified exam. You also do need to be aware that the curriculum for these designations is very similar and if you go to the American College, you can kill many birds with one stone. After having all these designations, it would take little effort to have the educational requirement complete and be eligible to sit for the CFP® exam as well, so why not do it?

Additionally, there seems to be some implication in the article that passing the series exams (7 and 63) are huge accomplishments. Ok, let’s define what these really are. These are job requirements that salesmen need in order to sell specific products i.e. insurance, stocks, bonds etc. So if you can’t sell, you can’t do your job. Let’s not make them sound fancier than they are. They do require time and effort but, in my opinion, are not very difficult to obtain. – Now I’m really skeptical. I’m being duped with titles and trickery.

#5: “I don’t want to wake up in the middle of the night worrying about my client’s account because of a stock market crash”. Neither do I, but there is a direct relationship between risk and return. Making it sound like a conservative approach towards asset allocation is always appropriate is misleading. There are many risk vs. reward strategies available and everyone’s portfolio should be based on unique situation and goals. – Low risk, high reward? Apparently I was sleeping during my Ph.D. in Finance.

#6. Here is the major red flag (and the BIGGEST misrepresentation) is in the last paragraph: “Hill does not charge his clients a fee, a testament that his true motive is educating them”. This is simply not true. On the surface he may not be charging them a fee, but whatever product they are getting is certainly not for free. As a New York life agent, he is getting paid based on what he sells (in various forms of commissions for insurance, long term care, investments etc.). The devil is always in the details, and nothing is ever for free. – Now I realize the severity of the situation. The trust is gone and it’s not because I don’t like free things.  

After reading this article, here are a final few questions I would really like answered as a consumer, and frankly, so should you: 

• Can you explain exactly how you earn a living, because the article is implying that you work for free? 
• Are you a fiduciary, in other words, would you always do what is in the consumer’s best interest, and are you willing to put that in writing?
• Would your firm’s compliance department be willing to sign the same document?  
• Finally, if you are representing yourself as fee-free financial advisor (who came up with that term by the way?), how do you personally pay for all those carefully planned vacations mentioned in the article?

I want to emphasize again that I am not trying to attack or discredit this specific adviser. He is just a representative of an industry that selling products to consumers. I want to be very specific here, there is nothing wrong with insurance and securities sales, as long as you understand what you are paying for and what you are getting in return. Usually when I want a specific product, I call a specialist. If I need insurance, I call an insurance salesman, but if I need financial planning, I would call a Certified Financial Planner™.

With that being said, it is not honest to claim that consumers will not be charged fees for services. Consumers beware, you are being charged plenty and you might not see it in a transparent way. If you have no idea how much you are paying right now for your investments, let me know. I will run the numbers for you and hopefully, you will become a more informed consumer.  And let me say it again, if you are looking for financial advice, please find fiduciaries who actually work for your best interest rather than in the interest of the company whose products they sell. 

Is Your Child Worth Your Retirement?

The simple answer it NO, no matter how much you love your child, trading in retirement savings for the cost of your children’s tuition is a pretty bad idea, especially when there are alternatives. This is usually the case when one of the child’s parents is a professor. So today, I am going to focus on the financial aspect of getting your child a college degree. Obtaining a deeply discounted (if not free) college education for your children happens to be a benefit many professors already have available. Let’s look at how this benefit works and what you can and can’t do with it.

Today’s focus is on the fee waiver/tuition reduction benefit.

Here is a real story. This weekend someone came to me for a financial decision analysis. Let’s call her Julie. Julie has a daughter who would like to go to the University of Arizona next fall as a freshman. The out-of-state tuition is a little over $30k per year. Alternatively, Julie’s daughter could also attend a school in the Cal State system (she is a professor here) and use the fee waiver benefit. For anyone who is not current on the Cal State costs, the academic year is about $6,500 including fees, but if you are a Cal State employee, you can pass on up to 6 credit hours to your child for almost nothing. This means the academic year will cost you around $3,400. So Julie came to me to ask what the impact of sending her daughter to Tucson would have on her life.

Before we move on and look into the details of the fee waiver benefit, let’s do a quick calculation. Let’s say Emily will be at Arizona for 4 years. I will assume the cost of living is the same as it would be if she went somewhere in the system, say Bakersfield. If mom, who is in her mid-fifties, has about 15 years to retirement and can earn a conservative 5% return, we are looking at about $190k in additional retirement savings over the next 15 years. Is Emily’s desire to go to Arizona worth $190k? I say, not so much. This is where we might differ, but I am pretty sure that the undergrad education from Arizona is not that different from Cal State and is probably not worth the price of a house somewhere in the state of Texas.

Ok, fine, you convinced me. Sending my child to a big state school and paying out of state tuition may not be optimal for my own finances. Now, give me the details. How can my child actually use this fee waiver benefit? 

• Here is where you find the discounted fees: http://www.csun.edu/financial/employee-dependent-program-fees
• What exactly is waived?  Three things are waived: tuition, application fee, and ID card fee. You still have to pay all the other fees, which end up being about $550 per semester. You, as an employee, do not have to pay these fees but your dependents do.  
• Who can use the benefit?  You (as the employee for really, really cheap), your spouse, or domestic partner, and your children are allowed to use it, assuming you satisfy the following eligibility: Tenured and Probationary faculty unit employees (excluding coaches), and temporary faculty unit employees with three-year appointments pursuant to Article 12 of the CBA.  Coaches must have at least six (6) years of full-time equivalent service in the department.
• How many classes can my child take at a time?  Either 2 classes or 6 units, whichever one is greater. Your child can certainly take more but you will pay the difference in tuition (that’s how I came up with the $3,400 in my original example). If your child only takes 6 credits, you are looking at $550 per semester. For more than 6 credits, you are looking at $1,695 per semester…. This is SO CHEAP. By comparison, look at the most expensive in-state schools in the country and ask yourself, is UC Davis worth almost 4 times the cost of Cal State? http://www.huffingtonpost.com/2014/07/02/most-expensive-public-colleges-2013_n_5552031.html 
• Can I get any degree this cheap? No, you cannot. These rules only apply to state-supported programs, not to self-supported ones. It is hard to find the list of all self-supported programs by campus (at least I was not successful so far but I am still looking; if you have a handy link please post it) but usually, if a program is online, through the extended college, or is a professional degree (like MBA), it’s not eligible for discounted fees. You should not have this problem with most of the undergrad programs. 
• What else do I need to know? 
• While you can take basket weaving classes just because it sounds like fun, “the spouse, domestic partner or dependent child must be matriculated toward a degree or the attainment of a teaching credential in the CSU and the course(s) enrolled in on a fee waiver basis must be for credit toward completion of that degree or teaching credential. 
• Your dependent must be a CA resident.
• The eligibility can be transferred to only one person at a timeà2 kids in college at the same time is a problem. If both parents are professors, you can work around this issue; each of you can pass the benefits to one of the children. Or, you can pass 12 credits to one child and not have to pay the $1,700 difference per semester.
• There is paperwork to complete and deadlines to adhere to every semester. For example, to set yourself up for the spring semester you should have done the paperwork by October 24^th, 2015. Some advanced planning might be required.

One of the things I observed by talking to a few people at Cal State is the misconception that they can only send their children to whichever campus they happen to work at. This is not true. Eligible dependents may use the tuition fee waiver at another CSU campus. This is a very strong argument against the “but I don’t want to live at home and go to the school my mother works at”. Now you can tell your children they don’t have to. There is always some other campus 5 hours away to attend.   

On a different topic, a great resource to look into all things college is the College Solution. There are a number of rankings and lists of schools that are generous and not so generous with financial aid. If you have children who will be going to college in the next few years, it is a good resource to check out: http://www.thecollegesolution.com/

Finally, here is my side rant for the day.  Look, I am not going to tell you what to do but I have seen parents going the two extremes. Some want to pay the out of state Arizona tuition (for no good reason) and others say the children should learn the value of money and finance their studies by taking student loans.

But the other extreme is also not good. Student loans are bad. Forget about the “investment” in yourself argument, especially if your child will most likely be going to grad school. I constantly work with people who have way too many student loans because it is so easy to take those without realizing what you are doing. Most 18-year-olds are not equipped with the skills to calculate the impact of those loans on their post-graduation life.  $50k of student loans is detrimental to the life of your child for years to come. And although a 17-year-old may not comprehend the true gravity of those student loans, we know better, so let’s help the child out.  Bottom line: send your child to the cheapest legitimate (not University of Phoenix) school you can afford without altering your own life or your chance at retirement. 

#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.

#2: The Million Dollars

Sorry, that title was too promising but my marketing friends tell me this is how you produce a best seller. Actually, I will tell you how to get to $2.5 million by retirement. I am going to assume that just like me, you are 33 years old. If you are not, sorry, you will just have to settle for $2 million.  I am also going to start with no money in my retirement account because really, who in their 20s saves for retirement? After reading this post and becoming super motivated, you will go and open a retirement account and start savings the 18k per year that the IRS lets you save tax free. Assuming a pretty realistic return of 7%, 34 years from now, I am looking at $2.5 million.  Now that I solved your millionaire problems, we can all get back to our daily tasks.

Seriously though, your options for getting to the millions of dollars at work are: a 401(k) thrift plan, a 403(b) plan or a 457 plan. Which one do you choose? Why? Where do you start? That’s the topic for today.  

Here is the plan:

• We start with where to find the resources and how to sign up for these plans. 
• Then, we figure out the big differences between the 3 options so you can make a choice. Should you go for a 401 (k), 403(b) or 457? 
• Finally,   I will just touch on the investment options as they relate to choosing a plan. I know many of you really want to discuss those investment choices but we will save that for next time. I am already at 2,000+ words.   

Before we start the “lecture of the day”, please do me a favor and answer the following 2-4 questions. This has not been IRB approved so I promise I am not going to use it for any of my research. I just want to get a feel for where everyone is, to better direct future posts. https://csunbusiness.co1.qualtrics.com/SE/?SID=SV_0P8ImL8NVSjqgjH

Thank you very much for playing along, now we can start.

Here is the easy part, what is available to you? 

1. The 401 (k) though Savings Plus: https://www.savingsplusnow.com/
2. The 457 though Savings Plus: https://www.savingsplusnow.com/
3. The 403(b) though 5 different sources (this is what I will be referring to as providers):
1. Fidelity: https://nb.fidelity.com/public/nb/atwork/home
2. MetLife: https://www.metlife.com/csu/index.html
3. Voya (used to be ING and in full disclose, I used to work there before my Ph.D.): https://csu.beready2retire.com/
4. TIAA-CREF: http://www1.tiaa-cref.org/tcm/csu/
5. Valic: https://www.valic.com/plan-details_633_433090.html

I hope we are all clear that as you are pondering the voluntary retirement plans, you need to make 2 separate decisions. The first choice is which of the 3 PLANS you want (401k, 457 or 403b) and the second choice is, which of the 5 providers do you want for the 403(b)? If you don’t chose the 403(b) then there is nothing to decide on! I even have a nice picture for you to make it easier: https://drive.google.com/file/d/0B9YzYGqtXNeiTGdWbDFkb2dTbzQ/view?usp=sharing 

How to enroll

• The 403(b) plan is a pre-tax (or tax deferred) account. This means, you will be minimizing your taxable income by the amount of your contribution (pay less in taxes this year). The max you can defer is $18,000 in 2015. To start, go to this centralized website https://www.myretirementmanager.com/MYRM/, create a profile with your SSN and decide how much you would like to contribute from each of your paychecks. You can start with as little as $15. One of the steps you will need to decide on is which of the 5 providers to go with. 
• The 457 and the 401(k) plans are both administered though Savings Plus.  This is where all the magic happens: https://www.savingsplusnow.com/

That’s great and all but what in the world is the difference between the 3 plans?

There are two main dimensions to consider: one is the difference between the plans at a big level (IRS level) and the second is the difference in investment choices. As much as I want to have a structured progression and describe these 2 dimensions separately, I really can’t because the investment choices available within each plan forced me to dismiss a few of these options from the start.

As far as the big picture differences, here is some really good bedtime reading for tonight. Whoever at the Cal State Taj Mahal put this together deserves a raise. http://www.calstate.edu/benefits/carrier.materials/2015TSAComparison.pdf

A few weeks ago, I talked to a reported about the differences between 403(b) and 457 plans. The article touches on some of the basic differences between the two plans. (http://www.investopedia.com/articles/personal-finance/111615/457-plans-and-403b-plans-comparison.asp). Although I think this is a good start, I also feel that we need some more knowledge to make that choice here, at our job. 

Here is what else I would like to mention or clarify: 

Can you save more than the standard 18k per year? If you are on the older side (actually if you are 50 or older), you should really take a look at the 457, especially if you are looking to find more ways to save pre-tax. The 457 plan has higher catch-up limits. Obviously, if you are not maxing out the $18k per year, this extra opportunity to save is irrelevant. 

When can you take your money out without penalties? 

For the 401(k) or 403(b): if you are 55 AND retired OR if you are 59 ½, retired or not

For the 457: only if you retired. If you are 65 years old and still teaching, can’t take the money with no penalties unless you are working somewhere else. If you switched jobs, you can take your money any time you want. This is a great rule. This is one way to get access to your money before 59 ½. 

Do you have to take the money out? Yes, usually the plans (driven by the IRS) force you to start taking money out at 70 ½.

Do I only have to choose one plan?No! Actually the 457 is fantastic because it doesn’t count against your 403(b) or 401(k) plan limits. In other words, you could potentially contribute $18k to a 403(b)/401(k) and another $18k to a 457 for a total deferral of $36k per year. If I could find that extra $18k per year to save, I could go from $2.5 to $5 million in retirement savings… but that’s just not happening on my Cal State salary and living in LA.

You cannot, however, defer $18k into the 403(b) and another $18k into the 401(k). Just remember, only 457= savings magic

Do I have a Roth option?  Yes. If bleeding $$$ to taxes is not your problem, then you can go for the Roth. The Roth option is available for the 401(k) and 457, but it doesn’t look like it’s available in the 403(b)[1].

I really like Fidelity or TIAA-CREF (or whichever provider you are familiar with from a previous job), shouldn’t I just choose that one?  And this is where I am going to go into the 3^rd learning objective of the day and talk a little bit about investments. I used to be the biggest fan of Fidelity and TIAA-CREF because the investment options available through those 2 plans at my previous job were fantastic. My enthusiastic bias towards Fidelity (because I also have my IRA with them) was so strong, I was convinced I was going to enroll in a 403(b) with them when I moved here. However, when I looked at the investment options, I wanted to cry because they were so expensive compared to the Savings Plus options.  I had no choice but to go with Savings Plus.

What would I recommend you choose? Sorry but I can’t tell you that.  We are all different and I am not going to give you any individualized advice, but I will walk you through my logic when I was deciding on my own choices in September.  Here are the steps I went through:

First, I looked at my investment choices. I figured out fast that the 401(k) and 457 are exactly the same (thank God, one less plan to compare) and the 403(b) came with 5 choices, so really, I was looking at comparing 6 providers. 

• I downloaded all the choices from each provider and compared their fees and past performance (btw, past performance is irrelevant, I just wanted to make sure there is no clear loser in that bunch of choices). 
• I also wanted to see what’s inside all those choices so I looked at the fund sheets to get a general idea (I am certainly not going to read the 50 page prospectus for each of those funds). 
• You also need to understand my investment philosophy because it drives how I make investment choices. I strongly believe that a large cap fund offered by one provider is in essence no different from a large cap fund offered by another provider. Obviously, they are not 100% identical, but if you compare what is in them, it is really not that much of a difference.  And I believe that the way to keep more money for myself is to pay less to the fund manager in fees. 
• Thus, the fees were central to my decision- making process. I quickly figured that the 401(k)/457 options were cost superior to any of the options from the 403(b) plans and I mean, from any of the 5 providers[2]. So, I settled on Savings Plus as the winner.  Look, I am making it really simple here but that’s the main point.

Next, I had to decide again. Well, if I am going to go with Savings Plus, should it be the 401(k) or the 457 plan?  

• The bottom line is that it didn’t matter to me whatsoever given that I have 35 years to go to retirement and no idea where my life will be in 15, let alone in 35 years. 
• Will I need to take money out while still working at Cal State? I wasn’t sure but in order to avoid this potential problem, I decided to stay away from the 457 for right now (remember if you have a 457, you can’t take the money at 59 ½ if you are still working for the same employer).  
• Why not go for both the 401(k) and 457?  I am not a big fan of complexity and rather than splitting my money between 2 plans, I decided to only go for one right now. I fully intend to enroll into the 457 a few years down the road. Don’t get me wrong. 457 is a good plan, it’s a great plan and one day, I would like to get to the point where I contribute an extra $18k to it, but that day is not today. I am going to wait until I become an Associate Professor and when get whatever pay increase comes with that change, I will send that raise straight to the 457 plan. Eventually, I will get to saving the $36k, but for now, I am going to settle for the $18k in the 401(k). 

Look, I know this reading wasn’t that much fun and there is still homework to do but understanding what your choices are and investing in the most cost efficient ones is very important. And I don’t know about you- but I like to keep the money I earn.  So here is the homework:

1. If you are not contributing to a plan, think about starting. Is there any money you could afford to contribute? Just think about this, even if it’s only $15.
2. If you are contributing, please go back and figure out where your money is currently invested because next time, we will be going over those investments. 
3. Please ask questions. This was a lot of info and there is much I have not touched on. I will answer as many as I can and I will ask HR (or the providers) for the ones that I don’t know.  

Next time, we build the investment spreadsheet with the actual funds.

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[1]  I didn’t choose the 403(b) and I am not interested in Roth contributions so I didn’t try very hard to verify this info.

[2 ] With the exception of Fidelity’s large cap fund (which was 0.05%, just like it should be). However, I couldn’t make the portfolio I wanted out of one S&P 500 fund, so sorry, Fidelity, I had to move on to the next provider. 

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