403B, FINANCIAL LITERACY
Before You Buy That 403b – Learn What You Should Be Looking For
Joseph A. Davis, CDFA®
May 3, 2016
Having been on both sides of the 403b world – both selling & owning a 403b (my wife was a teacher), I have seen first-hand the difference between a good and a bad 403b account. While individual situations may demand different needs, clients should pay attention to the type of product, expenses & overall structure of the investment.
Believe it or not, most people don’t know what they are buying when they purchase their first 403b account. Having a firm understanding of the product type will help you understand what the advantages & disadvantages are of each. Ask your agent what it is they are selling you! In general, most teachers will run into one of the following:
- Fixed Annuities
- Variable Annuities
- Fixed – Indexed Annuities
- Commissionable Mutual Funds
- No Load Mutual Funds
Depending on the product you purchase, you may be placed under a CDSC (contingent deferred sales charge) period. From our experience, very few clients understand what this is & how it can affect them in the long run. A CDSC is typical on all commissionable products & can range from 1 – 15 years in length. If you purchase an annuity, make sure you review the contract. Some surrender periods are contract based & others are premium based. This means the surrender period can either start on the day the account opens or it is rolling; with each new contribution those funds are placed under a new surrender period.
It’s also important to pay attention to the charge you will be assessed should you try to move your account early. It can potentially be very expensive ranging from 1% – 9% of your account balance.
Each product will have their own way of assessing portfolio costs. While fixed & fixed-indexed annuities typically don’t have any internal expenses, there could be rider fees. Also, because these products are fixed, your earnings potential is limited. Beware of anything that states there are no fees – while this may be true, there is also no free lunch. You will have to give up something.
Some of the expenses you may have can contain some of or multiples of the following:
- M&E Expenses – usually varies between 1.00% – 1.65%.
- Annual Admin – typically $40 to $50 per year. Usually waived for accounts over a certain value
- Expense Ratios – these are the charges for the funds. Again, these can vary between .25% – 3%. We usually assess a 1.00% fee here on average.
- Up-Front Sales Charges. This is typical on an A share mutual fund. Charges here can typically vary between 2% – 5.75%.
Last of all, ask questions about the advisor. Is he/she willing to work in a fiduciary capacity? Ask about the advisor’s education, background, credentials & licensing. Find out how he or she is paid. Ask about limits on the types of products & services the advisor can recommend to you.
So what type of 403b is our favorite? Where possible, we prefer no-load mutual funds. These have no up-front costs to the client*, full liquidity & are generally made available to clients through an investment advisor. This means the advisor is acting as a fiduciary on the client’s behalf & is required to disclose their background information on themselves & their firm & all of their fees.
It can be difficult to understand all of your options. Contact our office & we can help sort this out for you.
* No Transaction Fee Fidelity funds are available without paying a trading fee to you broker dealer or a sales load to the fund. However, the fund may charge a short-term trading or redemption fee to protect the interests of long-term shareholders of the fund. Shares are subject to the fund’s management and operating expenses. Contact us for more information.
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Davis Financial LLC
A fee-based financial planning firm servicing Ogden, Utah. We strive to understand your goals, help you manage your retirement planning, guide your overall wealth strategy and help minimize your tax liability through a long-term and trustworthy relationship.
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Securities offered through Securities America, Inc., Member FINRA/SIPC. Joseph Davis, Registered Representative. Tax services provided by Tax Smart Pros. Advisory services offered by Beam Asset Management. Joseph Davis, Investment Advisor Representative. Davis Financial LLC, Beam Asset Management, Tax Smart Pros, Fit Divorce Planning and Securities America, Inc. are separate, unaffiliated entities. CA Insurance Lic. #0I00447.