Are Scholl District 403(b) Plans really this...

[jdmorton]

…bad?

Gang, I would appreciate any insight/experience/thoughts on 403(b) plans in general.  Here's the scoop - Daughter #2 contacted me today to say she would like to start participating in her school district's 403(b) plan.  Yes, she is a teacher, and she will begin her 4th year teaching this fall after graduating from college in 2003.  My initial advice was - YES, DEFINITELY.

Yesterday afternoon while hardly working, I began to investigate 403(b) plans.  I have had a 401(k) plan for over 14 years and have no experience with the the public sector version (or so I thought).  Doing a simple Google search I found the following web sites; one a forum for non-profit retirement funds (403(b) and 457), which seems replete with horror story after horror story about how “bad” most school district 403(b) plans are.

http://bwise.ibforums.com/lofiversion/index.php/f2.html

Then there is this article from our local paper here in the Pittsburgh area last year which doesn’t instill much confidence either.

http://www.post-gazette.com/pg/05237/559905.stm

I know I have a lot more investigating to do, with my daughter, as it appears you have to contact each of the companies authorized to provide a plan under the school district’s 403(b) plan.

I guess what I’m looking for is some general advice that, even with the potential pitfalls of a “bad” 403(b) plan, should we find the “best of the worst” and invest in that, or just chuck the whole 403(b) idea and have her invest after-tax income in a Roth IRA?  I know that this answer will be dependent on what products are being offered, but I was thinking that maybe there aren’t any products worth it.  By the way, her school district does offer a 457(b) plan that contains at least 5 mutual fund options, but has some sort of bizarre (at least to me) “warning” that if you pick this option then,

“If you elect to contribute 100 percent of your check to the 457(b) plan, you may do so. However, given the standard ‘priorities’ assigned to various deductions by the payroll system, the following deductions will NOT be taken: charitable contributions, dues, summer fund withholding if you are paid on a less-than-12-month basis and receive summer checks, and any secondary deposits to savings accounts at other banking institutions…”

If I wasn’t so trusting, I’d swear this was instituted by the 403(b) plan providers, since the 457(b) plan option was just instituted in 2004.  At first I thought it meant your entire paycheck, but the plan limits the maximum yearly contribution to $15,000 plus COLA increases (beginning this year), so I don’t think any teacher in this district makes $15,000 per year.  By the way, this school district has over 20,000 teachers, and an annual budget of 2.1 billion dollars.

Thoughts, anyone?

 

[grumpy]

My wife's former school district (she's now retired) initially had a 403(b) plan that only allowed for investment in variable annuities. All contributions went through a service provider that charged a hefty fee for their (limited) sevices. We said "no thanks". I then started a letter writing campaign to get the district to include no-load fund providers (like T.Rowe Price) in the program. Eventually they did and DW began maxing out her annual contributions. I also had to get the school district to change their payroll software to allow her to max out contributions when she switched to half-time employment (they had a max. % of pay build into their software). I found both the school admin folks and the teachers in general to be woefully ignorant about the 403(b) plan.

If the system has a decent plan (no load funds) then go for it.

Grumpy

 

[youbet]

If the system has a decent plan (no load funds) then go for it.

Exactly.  Each school district will have a list of investment companies you can set your 403b up with.  Hopefully, at least one will have low/no administrative fees and good no-load, low cost funds.  DW switched from ING to Vanguard after doing some research.  ING offered an extensive fund selection, most reasonably low cost.  But they charged 1.25% annually as an administrative fee!     With Vanguard, you can select from any Vanguard fund and there are zero administrative fees.  Much better! 

Also, watch out for backend loads.  Some investment companies will charge you on the way out if you pull funds before some set time, usually on a sliding scale.

What you're seeing is the same variability in product offerings for the 403b that you see in the non-tax deferred world.  Fees, loads, etc., all have to be understood.  But, there are some excellent 403b programs, such as Vanguard's, out there.

Agreed that teachers, as a group, seem seriously disinterested in their retirement savings.  Maybe that's why school districts wind up with so many high fee, loaded fund offerings on the list?  Of course, I'm sure some teachers are on the ball in this regard!

Regarding Roth IRA's.......  I would consider funding a Roth IRA and then funding the 403b with any funds you can afford after that.  It's the same analysis as to whether to fund a deductible IRA or Roth IRA.

 

[Texas Proud]

Like many companies have different plans, good, bad and ugly... so do school districts...

My sister's district had the annuity for a long time... but then opened it up and there is a LONG list of providers you can choose... one was Vanguard and she was putting her money there..

No matching, mind you, but it still was a good plan..

 

[LOL!]

www.403bwise.com has some more disheartening info.

... but the plan limits the maximum yearly contribution to $15,000 plus COLA increases (beginning this year), so I don’t think any teacher in this district makes $15,000 per year

$15K is a federal limit -- the same limit as your 401(k).

There are also bad 401(k) plans.  This is particularly true for small companies such as those my spouse has worked for.  In effect, you don't get the benefit of spreading the costs over many employees.  Her 401(k) is run by Hartford, has all load funds (but the loads are waived) and are wrapped in annuities that cost 1.25% (but her employer pays the 1.25%).    So in the end, the tax-deferral of the plan is worth it for her.

We selected the "best from the worst" from my spouse's 403(b) and filled out our asset allocation in other accounts. For example, none of our other tax-deferred plans offer a REIT, so my spouse has selected the REIT fund from her plan.

Also, you hint that your daughter doesn't make much money, thus she probably pays little income tax, thus the tax-deferral of a 403(b) plan may not be worth as much as the later tax-free withdrawals from a Roth IRA. In that case, do the Roth first, then if money is left over contribute to the 403(b).

 

[ats5g]

Hi,

As for the warning:

“If you elect to contribute 100 percent of your check to the 457(b) plan, you may do so. However, given the standard ‘priorities’ assigned to various deductions by the payroll system, the following deductions will NOT be taken: charitable contributions, dues, summer fund withholding if you are paid on a less-than-12-month basis and receive summer checks, and any secondary deposits to savings accounts at other banking institutions…”

It just looks like the "priority" of the paycheck deduction are 457 first, hence if you contribute 100% of your paycheck to the 457, you'll have nothing left over for "charitable contributions, dues, summer fund withholding if you are paid on a less-than-12-month basis and receive summer checks, and any secondary deposits to savings accounts at other banking institutions..."

Definitely get the documents/prospectus from each plan provider, which will list all the fees associated with the 403(b). Most companies keep these online in pdf files, so if you have trouble deciphering what the fees are, the fine folks here can probably help you out. Some of us read prospectuses for a living. Also, some country/districts will have information about their 457 plans online as well. You may be able to find some info on your own through Googling.

Some of the better 403(b) providers are: Vanguard, TIAA-CREF, T. Rowe Price, and Fidelity. Some of the people in my Fam use Vanguard and TIAA-CREF.

- Alec

 

[jdmorton]

Thanks for the responses so far

Thanks to everyone who has responded so far.  I see I was a little too quick on the draw for posting - "scholl" instead of school  .

Anyway, here's a little more info that I've gleaned from her scholl district's web site...

403(b) companies:

- ABC Financial Center
- AIG VALIC
- Financial Directors, LLC
- Horace Mann
- ING Financial Advisors, LLC
- Lincoln Financial Group
- MetLife Resources (including CitiStreet)

They provide the names and telephone numbers of local contacts and a web page for each.  It looks like you have to contact each company separately to get an idea of what they actually offer.  I don't see any of the usual low load/low fee offerings, but it looks like some are local financial companies.  More work needed here .

457(b) companies -

- Fixed Annuity (Great-West Portfolio Fund)
- Bond Fund (PIMCO Total Return Admin Fund – PTRAX)
- Large Capitalization Fund (Davis NY Venture A Fund – NYVTX)
- Mid Capitalization Fund (Ariel Appreciation Fund – CAAPX)
- Small Capitalization Fund (Baron Growth Fund – BGRFX)
- International Fund (Artisan International Fund– ARTIX)

Again, some homework is involved here, to figure out if these are decent choices.

LOL!, you're right, she doesn't make much money now, but her income is increasing as she gains senority.  I would like her to get in the habit of saving more, so I don't want to lose this opportunity.  Maybe she should start investing now in a Roth IRA anyway until we figure this all out.

 

[grumpy]

The list of 403(b) providers looks to all be annuities - if that is the case, stay away from them.

Grumpy

 

[Mwsinron]

My DW is in Healthcare 403b. They offer two choices. Fidelity and Lincoln Financial. Needless to say Lincoln likes to stab you with certain fees we thought sucked. Frankly only offering two choices is terrible but that is whats going on.

 

[yakers]

I follow 403bwise.com and know some of the posters personally. My wife retired a few weeks back from the Los Angeles School District and they STILL have only annuities despite an active, articulate part of the membership that is demanding low fee companies. The school district does not care, they do not pay into the system and have no responsibility and the union does not care. AFAIK most districts offer only annuities. I know teachers in several large districts and this is so. Maybe there are a few small districts where teachers can be heard but not many.

What to do? First use the Roth. Then look is there is a decent option, generally the best of the older companies is TIAA-Cref, if they are available then consider your daughter lucky. Even though they work through annuities TIAA-Creff has a decent record of returns. If you can get Vanguard or (some) Fidelity even better. Otherwise study the plans in great details to see how long the money is tied up in surrender charges and contingent deferred fees and the like. My wife cannot move her funds out (without a BIG penalty) for another 1 1/2 years until she hits age 59.5. Every plan is different. One fellow at our Vanguard Diehards meeting who posts to 403bwise found one supplier who had no contingencies attached because only a credit union saving account was offered. That company obviously expected the teacher to park the money there for 30 years at saving bank rates. But because there were no other conditions he arranged for a 90-4 transfers to a Vanguard 403b although that was not offered by the school district directly.

Welcome, the 403bs I know about are as bad or worse than you have suggested. The solution may actually come when 403bs. 401ks and 457s all get replaced by some new form or tax deferred retirement savings until then .....

 

[Brat]

I recall one of the well known radio investment-types telling a caller that it is possible to transfer $ in a 403(b) plan into a Vanguard or Fidelity 403(b) while still employed by a school district. Go through those plan documents and ask around.

 

[ats5g]

Re: Thanks for the responses so far

Thanks to everyone who has responded so far. I see I was a little too quick on the draw for posting - "scholl" instead of school .

Anyway, here's a little more info that I've gleaned from her scholl district's web site...

403(b) companies:

- ABC Financial Center
- AIG VALIC
- Financial Directors, LLC
- Horace Mann
- ING Financial Advisors, LLC
- Lincoln Financial Group
- MetLife Resources (including CitiStreet)

They provide the names and telephone numbers of local contacts and a web page for each. It looks like you have to contact each company separately to get an idea of what they actually offer. I don't see any of the usual low load/low fee offerings, but it looks like some are local financial companies. More work needed here .

457(b) companies -

- Fixed Annuity (Great-West Portfolio Fund)
- Bond Fund (PIMCO Total Return Admin Fund – PTRAX)
- Large Capitalization Fund (Davis NY Venture A Fund – NYVTX)
- Mid Capitalization Fund (Ariel Appreciation Fund – CAAPX)
- Small Capitalization Fund (Baron Growth Fund – BGRFX)
- International Fund (Artisan International Fund– ARTIX)

Again, some homework is involved here, to figure out if these are decent choices.

LOL!, you're right, she doesn't make much money now, but her income is increasing as she gains senority. I would like her to get in the habit of saving more, so I don't want to lose this opportunity. Maybe she should start investing now in a Roth IRA anyway until we figure this all out.

Does your daughter teach in Fairfax Country. If so, she's already got a COLA'd DB plan that she contributes to [something like 4%]. And it doesn't look like the county matches anything or contributes to her 403(b) or 457(b). If so, I agree that she should start a Roth IRA first, max that out first at a low cost MF company [like Vanguard], and then consider the 403(b) or 457(b). Note that most mutual fund companies will allow you to open a fund with $1000-$3000 and then contribute as little as $100 after that, and one can usually use automatic transfers from a checking account.

Note that the 457 includes a "small administrative fee", whatever that is. Also, the mutual funds in the 457 aren't cheap by any means. When considering a rather high cost 457 or 403(b), Ed Chang wrote an article, and spreadsheet as well to see how much one could pay in expenses for a 401(k) or 403(b).

- Alec

 

[gindie]

jdmorton-

Re: the Ariel Appreciation Fund – CAAPX. I just sold all that I had in a Roth IRA. Several years of below-average performance.

 

[nuisance]

Just wanted to add that my wife's 403b has Vanguard as an option. In fact the list of companies she can choose from is over 2 pages of fairly small print. She was in an annuity when we were married, because those guys leave ads in the teacher room and that's what the "financial advisor" that the school contracts with recommends. Anyway, after a lot of back and forth I got her contributions switched to Vanguard. The biggest hurdle was that nobody else in the district had ever used Vanguard, so the district needed to open some kind of account with Vanguard first. (The hard part was actually figuring out what needed to happen and who could do it. Once that was done people were very helpful.) The original money is still in the annuity, but that's a battle for another day.

I like her 403b better than my 401k (Merrill Lynch, relatively costly funds).

Tim