Sunday, October 29, 2017

403b Fails During Open Enrollment

What is up my peeps!  It's the most wonderful time of the year.  Yes, I'm talking about open enrollment season for public service employees.  It's the only time you get to elect such things as Dependent Day Care and Section 125 (for all those out of pocket health costs) to be pre-taxed from your paycheck.  The benefit to all those who choose these plans is having less taxable income for the IRS to get their mittens on.  But the tax savings don't stop there.  Oh no they don't!  Many teachers and qualified public service employees will elect for the first time to have a pre-tax portion of their income withdrawn to fund a tax-sheltered annuity or 403b.

If you've been in the biz for some time and are just starting to fund a TSA, because you heard how wonderful they are for retirement savings, I guess it's better late than never.  If you're a rookie teacher or public service employee who set up a 403b understanding the effect of long-term saving, well good for you!  But just because in both cases there is good intent, it doesn't mean the set-up was done correctly.  Case in point.  I have a colleague at school who is on his 15th year of teaching.  Let's call him, Fred.  About two weeks ago, Fred sent me a text message:

"Do you know anything about American Fidelity 403b?"

He knows I blog here at Common Core Money, but has not taken me up on visiting the site.  That's okay, I won't hold that over him.  Most teachers are lousy with their finances and for good reason: they don't take the time to learn personal finance, being "too busy" being teachers.  So I replied:

Of course! I've had one since 2005.  Do u have any questions about it?

Fred: Just if they're going to jack me up w/extraneous fees over the long term, if they're a reliable company n stuff.  If you're happy then I'm happy.

Me: Yes they come with fees.  There are more fees also depending on the interest rate options you choose.  Did u get a fixed rate or variable rate annuity?

Fred: Variable

Me: What funds did you choose?  Did you look at their expense ratios?

Fred: No.  I'd have to get back to you on that.  Thanks

Here's the sad thing.  There are thousands of people like Fred in this country, signing up to 403b or 401k plans without truly understanding their investment choices, and how much in fees they'll be paying annually.  That is a BIG mistake.  For help making sense of your 401k, I suggest you see the fellas at Blooom Inc.  Chris Costello, CEO, was a guest here at CCM.  Below are the four things to make sure you investigate before enrolling in a TSA/403b at work.

1.  Is the company your employer is working with (Fidelity, American Fidelity, etc.) your only option?  There may be a list of companies you can choose from with lower costs and fees to be your custodian.  Find out from your HR department.  Once you have a list of "contenders" so to speak, go to and!

2.  If you choose the fixed annuity option, what interest rate are you getting?  At American Fidelity for example, the guaranteed minimum interest rate is between 1-3%.  In addition to the guaranteed rate, AF may at its discretion, declare a higher "current rate."   These are based on the financial results and operations of the company.  You have to ask the rep: "What is your current declared interest rate?"

3.  If you chose the variable annuity option, what did you get yourself into?  The rep should have presented to you the investing options starting with low risk income funds (money market) to medium risk bond funds, and for more risk tolerant individuals, stock funds.  But just choosing the right investments based on your risk profile would leave you severely exposed.

4.  What are the fund choices within the increasing risk scale offered by the company?  Not all funds are alike.  For example, I chose the variable annuity option with an allocation of 80% stocks and 20% bonds.  Now I had to choose the individual stock funds that would comprise my stock allocation and the individual bond funds that would make up my 20% bond allocation.  I looked through each available type of stock and bond funds AF offered and decided to go with just two funds: Vanguard's Total Stock Market and Vanguard's Total Bond Market.  Why?  They had the cheapest fees and I got all sorts of stock and bond market diversification.

Do you have to wait until open enrollment to change the type of funds you own?

No!  In my case, AF allows me to change the funds I own once a month.  You are not stuck holding expensive stock funds in your portfolio all year long.  You can change these online too at your custodian's website.

Other Questions to Consider:

What allocation percentage of stocks and bonds did you choose?
Did you look over the stock and bond funds you selected for management fees and other costs?
Image result for changes to 401 k laws

Finally, are you contributing enough?  403b's have high contribution limits.  Up to 18K in some cases.  That's $1,500/month.  Contribute as much as you can to have a nice nest egg when you retire; be mindful that you will be taxed for withdrawals during retirement so end up at a lower tax bracket to win, win, win.  President Trump's tax plan may make 401k contributions taxed up front, i.e., take away the tax-deferred status.  This hurts most Americans because the added costs of paying taxes up front may discourage people from ramping up their contributions.  Deferring taxes is a great perk.  One I don't want to lose on my 403b.  Hopefully Republicans leave the 403b alone.

Thanks for reading!  Get three of my eBooks when you subscribe to my blog.  Until next time. 

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