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How to Select a Suitable 403b Vendor

Teachers have a lot going on. On top of their all-encompassing job, many have families, children and other personal obligations that they must juggle along with everyday activities and tasks around the home. So, when it comes to choosing a 403b vendor to work with, many teachers choose blindly, simply following the course that their colleagues or friends have taken. They trust the professional who came to their classroom, and, from a 10,000-foot glance, thought the plan summary sounded good – “There’s no time to read all the fine print.” But this can be a very costly mistake!

Not all school district employees have the same situation or needs. And more importantly, the vendor that “your friend/colleague” selected, may not have been researched. For example, did you know that some charge fees that are avoidable and could stunt the growth of your retirement nest egg?

Below are some guidelines to help you choose a 403b vendor.

Check the Fees

Fees may have the biggest impact on the return of your 403(b) plan because they cut directly into your rate of return.

For a mutual fund held in a retirement plan, these fees can include:

  • Expense Ratio: It costs money to run a mutual fund, sometimes more than others. This expense, also known as a management fee or operating expense, is typically deducted from the fund’s total assets before your share price is determined.
  • Sales fees or Commissions: On certain mutual funds, you will pay an upfront fee sometimes called a “front-end load”. Depending on the amount of your investment, you could qualify for a lower upfront fee called a “breakpoint”.
  • Redemption or surrender fees: On certain mutual funds,, you pay a “back-end or deferred load”. These fees will apply if you sell the mutual fund within a certain period of time.
  • Short Term Trading fees: Mutual funds are designed to be long-term investments, so trading fees were created for some funds to discourage short-term trading.
  • 12(b)1 Service fees: Many funds have an ongoing service fee that is paid to a financial advisor or the firm he or she works for as compensation for marketing the fund. Just like the expense ratio, this service fee will be deducted out of the total fund assets before your share price is determined.

For an annuity within a 403(b) plan, fees can include the following:

  • Mortality and expense risk fees: Also known as the Death Benefit. Participants pay the mortality and expense (M&E) fee each year to an insurer to offset the risk of investment loss, plus fees involved to pay annuity provider expenses. According to the Securities and Exchange Commission, that generally means an average of 1.25 percent annually, which equates to $250 a year on a $20,000 account. (Read our recent blog post for more on this).
  • Administrative fees: These can be flat fees or a percentage of an account (typically, 0.15 percent, or $30 for a $20,000 account).
  • Sales loads: These are sales commissions an investor typically pays up-front when buying an annuity. These costs cut directly into the actual amount available to invest. For example, a 7 percent fee on a $10,000 investment will cost $700, meaning you’ve effectively only invested $9,300. These are common in 403(b) plans.
  • Investment Expense Ratio: Inside a variable annuity, the underlying stock and bond investment choices, called sub-accounts, will have an investment management fee which can range from .25 – 2.00% of the value in that account per year.
  • Surrender charges: These will apply if you sell an annuity within a certain period of time, known as the surrender period, which can last up to 15 years after purchase. This charge, also called a Contingent Deferred Sales Charge (CDSC), is a percentage of the asset balance at the time a person withdraws or transfers and depends on how long the money has been in place.
  • Fees for Optional Features:  Special features offered by some variable annuities, such as a stepped-up death benefit, a guaranteed minimum income benefit, or long-term care insurance, often carry additional fees and expenses.

Ask for a Fee Disclosure

To evaluate the fees of an investment product you’re considering, ask about them.

If you’re working with a financial advisor,

  • Ask if he or she receives a commission based on the sale of the product, and if so, the amount of this commission
  • Ask if the advisor will receive any additional compensation (including any bonuses or incentive gifts) associated with selling this product
  • Ask if the advisor will receive a greater sales commission by recommending a particular product over another, and whether your needs would be equally served by the lower-priced product

Performance Information

Fees can dramatically impact an investment’s potential performance, so, when evaluating investments, it is also useful to review, compare and contrast their previous performance. However, keep in mind that past performance is not necessarily an indicator of future returns.

A good way to assess past performance is to compare a product’s performance to a comparable benchmark index. This information can be found in a fund’s investment prospectus. And can be done for you if working with a financial advisor.

For example, if you’re considering a large-cap growth fund, how does its performance compare with the S&P 500 benchmark? If the fund has come close to matching or exceeded the performance of the index, it may be worth considering. On the other hand, if the fund has significantly underperformed the index, you may wish to look elsewhere.

If you’re considering an insurance company as your 403(b) plan vendor, it is prudent to review and compare its financial strength and stability before purchasing a product from that company. Because these companies sell insurance products that obligate the insurer to pay a benefit/return at some point in the future, it is important to verify that the insurer is in good financial health so it can make good on this obligation.

The Benefits of a ‘Financial Tutor’

Choosing a suitable 403(b) vendor takes time. That’s why more and more education professionals are turning to advisors who act as  fiduciaries  for help and expertise with their financial and retirement planning. The right financial advisor can take on this task for them and aim to help ensure they’re on the right track toward reaching their retirement goals.

But beware: Just like 403b vendors, not all financial advisors are created equal. Choosing a financial professional is an important decision. It can take a little time to research a financial advisor, but time spent now can save you time and money in the long-run.

Hiring a financial advisor to help you make informed financial decisions can be extremely beneficial. But choosing a professional to work with is one of the biggest decisions you will make. This person can determine when you can retire, how you’re able to spend that retirement and what you’re able to leave behind when you’re gone, if anything.

Don’t follow the herd. Instead, start a new trend that includes research, insight and smart decisions. It may take some time, but it’s time well spent for sure!

Warwick Valley Financial Advisors works specifically with teachers and school district employees and is familiar with the needs and issues these hard-working professionals face. Contact us to find out how we can help, or schedule an appointment now to discuss your personal situation in more detail.


*Investing in mutual funds involves risk, including possible loss of principal.

Variable annuities are suitable for long-term investing, such as retirement investing. Withdrawals prior to age 59-½ may be subject to tax penalties and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

4 Questions Teachers Should Ask a Financial Advisor

Both public and private school teachers have special financial considerations that a high-quality financial advisor should address and incorporate into a financial plan for their clients. But is this happening?

Below are 4 questions that teachers should ask when they are choosing a financial advisor.

1. Are you a fiduciary? What are your certifications?

Your very first question should determine whether the financial advisor you are considering has a fiduciary responsibility to you. Simply put, fiduciaries must place your interests above their own, rather than providing recommendations that will make the “advisor” the most money. Fiduciaries must disclose any conflicts of interest and make a good faith effort to provide all relevant information to aid you in making your financial decisions.

Believe it or not, not everyone who calls themselves a financial advisor follows a fiduciary standard. Consider working with a financial advisor who is in fact a fiduciary.

Financial advisors with fiduciary obligations are held to a higher standard than the financial professionals who are required to meet only the “suitability” standard, which only obligates them to provide “suitable” recommendations that match the client’s general needs and risk profile, rather than acting in the client’s best interest.

Some insurance agents, broker-dealers and personal bankers must only meet the suitability standard. A financial advisor with an advisory relationship with you can help you determine your insurance and investment needs, and as a fiduciary, is obligated to act solely on your best interest.

You should also find out the certifications of the financial advisor with whom you are considering working.

2. What financial planning services do you provide?

Many financial advisors provide a range of financial services beyond investment management, including retirement and estate planning, tax and insurance advice, and budgeting and cash flow recommendations.

You should also ask whether the financial advisor you are considering has advised teachers before. In particular, retirement planning is a particularly salient issue for teachers, who are unique in being one of few careers that still pays pensions to retirees after they have completed a certain number of years of service and reached retirement age. Financial advisors who specialize in working with teachers and school district personnel can personalize your overall financial plan in the context of a teacher’s financial needs, life goals and income and spending projections.

In New York, most public school teachers are part of either the New York State Teachers Retirement System or the New York City Teachers Retirement System, meaning teachers contribute a small percentage of their salary to the pension plan in return for receiving a guaranteed monthly income upon reaching retirement age.

Financial advisors can also advise teachers on their 403(b) retirement account investment options and contribution rates, as well as provide guidance on how much, if any, the client should also consider contributing to a traditional or Roth IRA.

Experienced advisors will also be able to advise teachers on other financial considerations, including potential tax deductions for student loan interest, national and state loan forgiveness programs and deductions for unreimbursed classroom expenses.

3. What are your fees and expenses?

Financial advisory firms differ in how they charge clients, but a good financial advisor will not make this process difficult to understand and will readily answer any questions you have about management and advising fees.

In many instances, you will pay either a fixed fee as a dollar amount or as a percentage of your assets invested with the firm. Some firms might charge a retainer fee for ongoing access to a financial advisor in addition to charging clients for portfolio management.

Be sure you understand what you will be charged and how often.

For every financial planning firm that you consider, you should understand which services you will be able to access. There may be a tiered system for services, such that you will have more access to guidance or contact with your financial advisor if you pay for a higher tier service. These more extensive services may be more extensive than you need, or they may be useful to you, especially if you would prefer regular feedback on your financial plan.

For example, will you just receive investment advice or portfolio management, or will your fees cover other financial services? Advisors differ on the services they offer, but these other domains could include estate plan suggestions, retirement projections and insurance needs assessments.

One of the advantages of working with a financial advisor who has a fiduciary duty to advisory clients is that they often provide competitive and negotiable fees for services for you when they are recommending an investment. In a brokerage relationship, clients typically pay a commission on each transaction in the account.

You can use a pre-written outline that I’ve created on my website to get this conversation started. That resource can be found here.

4. What is your investment and financial planning philosophy?

Finally, the best financial advisors are aware of the limitations of planning – namely, that the future is impossible to predict, and no plan can be perfect. However, different advisors have different philosophies on how they approach the overall process of preparing financially for the future.

Clients should also consider their own investment philosophy and the degree of risk they are willing to incur as they explore potential financial advisors.

The client’s own investing preferences should match the approach used by the financial advisor he or she decides to work with.

Conclusion

Approaching a prospective financial advisor or financial-advisory firm might seem intimidating, but reputable advisors should be happy to answer your questions about their process and the services they provide.

In an industry based heavily on the strength of a financial advisor’s reputation for providing high-quality services, it is in the advisor’s best interest to understand your needs, and both the client and the advisor should communicate their expectations clearly to ensure that they will be a good fit for each other for years to come.

Warwick Valley Financial Advisors is a comprehensive financial-services firm that specializes in wealth management for teachers, school district executives and their families. Contact me directly to see how we can help you.