Halloween is always fun with little kids. The costumes they select are always entertaining and seeing how they can trick their friends can be rather interesting. Some of the tricks are obvious and some more subtle, but the purpose is the same - to excite themselves at the expense of their friend! While with kids this is mostly innocent fun that leaves everyone laughing, the same cannot be said for many retirement plans available to educators. While some 403(b) and 457(b) plans are
low-cost, good investments for educators, many more have high fees hidden behind sleek marketing and sport stadium naming rights!
These “tricks” can be unseen to most participants as they believe they are making a wise investment. Understanding what are your investment options, what fees exist, and how they are aligned with your financial goals is important to making the right selection.
Every investment will have fees associated with the option and that is not inherently bad. People should be compensated for the advice they provide. Where that can get exorbitant is when fees are not disclosed, easily understood, or stacked on top of each other. It is important to know what types of fees exist and how they can impact your savings.
- 12b-1 Fee - Generally allows distributors to compensate broker/dealers and representatives for selling their funds. It also can be a charge to cover marketing and distribution costs of the investment.
- Withdrawal Charge (a.k.a. Surrender Charge) - A fee charged by some annuities and funds when an investor takes money out of his or her account.
- Mortality and Expense Fee (M&E) - This applies to some types of annuities and covers insurance related costs.
- Transfer Fee - This is an amount charged by a fund to transfer either within the fund family or to another company.
- Expense Deductions - Charges for investment management, administration and distribution services
- Management Fee - Also called the investment advisory fee, this represents the company’s cost for managing the money in the fund
- Wrap Account Fee - Charged by some types of funds for fund management, this is an annual percentage of the investor’s assets in the account
- Custodial Fee - The charge for safekeeping or physically holding the securities in the fund
Ways to Determine a Trick or Treat
- Ask the company representative how they get paid and to outline every fee: This is a fair question to ask and if they cannot accurately and concisely answer the question then you should strongly consider not enrolling.
- Have a Financial Plan: Working with a financial professional that is a fiduciary can help you determine what type of investment is best for you. They can help you review the options available to you through your employer and select the product aligned with your financial goals.
- Look for Non-Annuity Products: If you have a pension, a fixed or variable annuity may not be the best investment for you. You will already have a guaranteed income, so a greater risk is inflation. Many pensions do not provide a cost-of-living adjustment making investing in assets that grow very important. While you should always seek the advice of a financial adviser that is a fiduciary to determine the best investment for you, investing an annuity on top on an existing annuity may not be the best decision.
- Use Available Resources: There are several resources to review the fees associated with different products. Free information is provided by 403bWise and the Texas Association of School Business Officials.
- Consider a 457(b) as an Alternative: A 457(b) is an additional supplemental retirement plan available to schools that can be used in conjunction with or as a substitute to a 403(b) plan. Most 457(b) plans have an investment advisory committee that reviews investments to ensure that they are low-cost and performing as expected. Additionally, there are typically model portfolios available to help you make wise investment selections. Before enrolling be sure to confirm there is an investment advisory committee and that they are offering low-cost options.
403(b) and 457(b) supplemental retirement plans can be a good tool to save funds if you select the right underlying investment. It is important to understand what is the cost of the investment and, more importantly, how it aligns with your long-term financial goals before committing to a monthly contribution.
