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.

Product type

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:

  1. Fixed Annuities
  2. Variable Annuities
  3. Fixed – Indexed Annuities
  4. Commissionable Mutual Funds
  5. No Load Mutual Funds
“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.”

Surrender Periods

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.

Underlying Expenses

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.

“Ask about limits on the types of products & services the advisor can recommend to you.”

Some of the expenses you may have can contain some of or multiples of the following:

  1. M&E Expenses – usually varies between 1.00% – 1.65%.
  2. Annual Admin – typically $40 to $50 per year. Usually waived for accounts over a certain value
  3. 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.
  4. 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.

Want new articles straight to your inbox?

Continue Reading...
Financial Planning in the Sandwich Generation

Financial Planning in the Sandwich Generation

While it’s true that retirement accounts can be used to save for college, there may be negative consequences to doing so. It’s best to talk with a financial professional to determine the appropriate course of action and to make sure you’re on track to meet your goals.

read more
Matchmaker: Maximizing Your Employer 401(k) Contributions

Matchmaker: Maximizing Your Employer 401(k) Contributions

A 401(k) isn’t the only option for retirement, but it’s definitely one of the most attractive. In many cases, it offers free money and is relatively easy to roll over when you change jobs. A financial professional can help you prepare for retirement with a 401(k) that fits your current investment style and stage in life and adapts to changes in career or investment styles.

read more
Splitting Retirement Nest Eggs During Divorce

Splitting Retirement Nest Eggs During Divorce

Qualified plans, such as 401(k), profit sharing, defined benefit pension and money purchase pension plans, have defined benefits or defined contributions. A qualified domestic relations order, or QDRO, is required when dividing qualified plans.

read more
Davis Financial LLC

A financial services firm servicing clients across 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.

Get in Touch

Office Hours: M-F, 9am-5pm
Call Us: (801) 620-0586
Directions: Map It

Copyright © 2023 Davis Financial. All Rights Reserved.

This site is published for residents of the United States and is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security or product that may be referenced herein. Persons mentioned on this website may only offer services and transact business and/or respond to inquiries in states or jurisdictions in which they have been properly registered or are exempt from registration. Not all products and services referenced on this site are available in every state, jurisdiction or from every person listed.

Securities offered through Purshe Kaplan Sterling Investments, Member FINRA & SIPC., Headquartered at 80 State Street, Albany, NY 12207.  Advisory Services offered through BEAM Wealth Advisors, Inc., a SEC Registered Investment Advisory Firm.  BEAM Wealth Advisors, Inc. is a separate entity from Purshe Kaplan Sterling Investments. Joseph Davis, Registered Representative, Aaron Schuler, Jr, Investment Advisor Representative, Beam Wealth Advisors, Inc., Tax services provided by Davis Schuler & Associates, LLC.  Advisory services offered by Beam Wealth Advisors.  Davis Financial LLC, Beam Wealth Advisors, Inc., Davis Schuler & Associates, LLC, and Purshe Kaplan Sterling Investments are separate, unaffiliated entities.