It’s back to school time – so let’s pressure test your 403b

Joseph A. Davis, CDFA®

August 17, 2016

As thousands of teachers head back to school – many will be faced with the opportunity to purchase a 403b. In most cases, it will be from an insurance company. Before you sign on the dotted line – ask your agent the following questions:

1. How much do you get paid? No wishy-washy answers here – it should be clear and simple.

2. What is the surrender schedule? How long to I have to keep the account & can I get out of it prematurely?

3. Can I invest on my own without having to pay an agent or fee?

4. What are ALL of the underlying costs & fees in my account? This should include:

  • M&E Expense
  • Admin costs
  • Expense Ratios
  • Rider fees (if applicable)
“You would be surprised to learn that the highest paid commissioned products are often the most complex with potentially long-term surrender fees & high administration charges.”

If you’re confused by any of the questions above, believe me, you’re not alone. 403b plans should be clear & simple. We believe 403b investment options should be:

– Free of surrender penalties & schedules
– Free of commissions
– Low in cost
– Transparent: If I’m paying my advisor, I want to pay him/her on a fee schedule & working in my corner as a fiduciary.
– Open Architecture: Educators should be free to invest in a 403b without having to use an advisor if they don’t want or need to.

Often, we are asked why we charge fees instead of commissions. What’s the big deal anyways? Does it really matter? When it comes to investment management – it can matter……a lot.

When you are working with a commissioned salesperson – that’s what you’re getting – a salesperson. The salesperson is selling you a product. That’s how they make money. Is there anything wrong with this? Generally, no. There are many advisors & firms doing good things for their clients that only work on commission. For example, term life insurance has an appropriate place in almost every household & is a commissionable product. However, when it comes to asset management, transactional commissions within the securities industry are highly scrutinized and can create a variety of issues.

First of all, do you know how much you are paying your agent when he/she sells you a product? Nope – because it doesn’t have to be disclosed. Even your doctor’s office eventually shows you what they are charging! You would be surprised to learn that the highest paid commissioned products are often the most complex with potentially long-term surrender fees & high administration charges.

“Your agent will only earn money when you buy or sell. This means a salesperson must continually sell new product in order to maintain their business.”

Second, because the relationship is transactional in nature – your agent will only earn money when you buy or sell. This means a salesperson must continually sell new product in order to maintain their business. This can potentially create conflicts of interest as the salesperson could be placed in situations that place his/her needs above their client’s needs.

Third, where is the commission you’re paying coming from? While you may never write a check to your agent – the commission has to come from somewhere, right? The answer is somewhat complex & differs for each type of product. In general, it comes from the insurance or brokerage company – but is represented in your account through potentially long term high fees and/or long surrender periods. Because of that, if you choose to close out your account prematurely the company may enforce a surrender charge to recoup their costs.

Fourth, salespeople cannot change the costs of the product they are selling. It is typically an off-the-shelf product. This can make it difficult to customize the product for each client. Your individual situation & needs may call for an investment program that has a variety of options that can’t be replicated in any product. Have you ever heard the term, “you can’t fit a round peg into a square hole?”

Contact us today & we’ll pressure test your current 403b with no obligation.

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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.