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)
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.
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.
Throughout the past two and a half months I have continued to ask myself, did we jump off a financial cliff? The answer was no. How did I know? The answer, while somewhat complex, is profoundly simple.
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.
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.
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.
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.
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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. Tax services provided by Davis Tax & Associates. Advisory services offered by Beam Asset Management. Joseph Davis, Investment Advisor Representative. Davis Financial LLC, Beam Asset Management, Davis Tax & Associates, and Purshe Kaplan Sterling Investments are separate, unaffiliated entities.