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My wife works for a health coop. We are considering participating in their qualified plan (403-B). However the representative of the insurance company that administers these plans has represented to my wife and me that an annuity is the only option. The rep avoids answering our questions regarding alternatives to annuities and I have communicated that we don't need or want an anniuty. From this I have 2 questions for the fool who might know:
1. Is it common for qualified plans to offer only annuities as the investment vehicle?
2. If an annuity is our only option here, do the tax advantages offered by the 403-B out-weigh the additional costs and potentially "restricted" returns offered by the mutual fund subaccounts offered through the annuity?
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kismer asks:

"1. Is it common for qualified plans to offer only annuities as the investment vehicle?
2. If an annuity is our only option here, do the tax advantages offered by the 403-B out-weigh the additional costs and potentially "restricted" returns offered by the mutual fund subaccounts offered through the annuity? "

1. Yes, most qualified plans select a funding provider - that becomes the only choice while working for that employer.

2. Maybe, 403b/TSA plans are not inherently inferior to other plans (like mutual funds), it depends on the funding provider. My experience has found some very competitive plans using TSA's (as well as some not-so-competitive...).

Spend the time studying all the choices & their 5 year and 10 year performance histories. Review the flexibilty of transfers between account (without charge). And be sure to understand the terms of the plan. The "costs" should not be much more than 1.50% (about what many mutual fund operating costs run).

Good luck! PP
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1. Is it common for qualified plans to offer only annuities as the investment vehicle?

Unfortunately, yes.

2. If an annuity is our only option here, do the tax advantages offered by the 403-B out-weigh the additional costs and potentially "restricted" returns offered by the mutual fund subaccounts offered through the annuity?

I'm not sure I understand that question. Having an annuity in a 403(b) is a waste. The 403(b) is already tax-deferred, but the annuity charges you a fee to make it tax-deferred. I'm not 100% positive about this, but I believe that you can invest outside the given choices in a 403(b). Check with a financial planner or with a mutual fund company. You'd be much better off going outside those choices and putting the money into mutual funds yourself.

Leviathan
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peppermintpatty wrote,

The "costs" should not be much more than 1.50% (about what many mutual fund operating costs run).

A Vanguard Tax-Managed Index fund would have "costs" of 0.17%. Adding a risk-free 1.33% to your investment return will do wonders for the size of your retirement nest egg.

intercst
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I'm not sure I understand that question. Having an annuity in a 403(b) is a waste. The 403(b) is already tax-deferred, but the annuity charges you a fee to make it tax-deferred. I'm not 100% positive about this, but I believe that you can invest outside the given choices in a 403(b).

I couldn't for mine. In 5 years, the money grew not at all. 4 years ago I cashed out the 403b and put it into an IRA with a mutual fund my bank had handy (front load, high maintenance fee, you name it) and the money has since doubled. Losing against the market I think but still better than a poke in the eye with a sharp stick.

This past winter I converted the IRA to a Roth IRA, and this week I finally got around to cashing out of that mutual fund. Am now trying to decide what to do with the cash.

My first impulse was to put it in amazon.com and make up for the last 10 years of sluggish performance, but my wife didn't like that idea. My preference, a fantasy I've been developing over the past year, is a selection of genomics companies. 2 weeks ago they all got a glowing profile in the NY Times and their prices have shot way up. Argh.

I expect another 30+ years working, so having to actually collect this money doesn't seem so immediate right now.

Back to the topic at hand, depending on a person's age I wouldn't bother with a 403-b. I accumulated mine in NY, NY state income tax was not deferred on that, and I would have done a lot better with my own IRA (of course at the time investing was the farthest thing on my mind, I might have just blown it all on beer and chips, so maybe it wasn't such a bad thing)
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Having an annuity in a 403(b) is a waste. The 403(b) is already tax-deferred, but the annuity charges you a fee to make it tax-deferred.

Please excuse my ignorance if I am incorrect, but I understand an annuity to be what you get after you retire. In other words, during your working days, you are investing in some sort of "fund" or other "investment" and when you retire, these outfits want you to "annuitize" you "investment" in order to determine your payout. I am in a TSA/403(b) with Valic and am invested in their various funds. I will retire in about 6 months and they are already suggesting I "annuitize" my investments when I retire since I will be making no further payments into them. I do not choose to do this, so they plan manager is saying, OK, leave your money in our funds and let it grow and withdraw as necessary. Since I have an IRA also, I plan to set up the IRA for my living expenses and roll the TSA into a self-directed IRA with Waterhouse. If this is incorrect, please help us all by correcting now. Thanks. HE2
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OK, I'll concede that point. Though the TSA does offer some extras - a "fixed interest fund", and a guaranteed minimum payout in the event of death. Also some TSA offer a variety of funding choices provided by a variety of different fund managers (e.g. the TSA plan I use offers 5 Fidelity funds, a Janus, 2 T.Rowe Price, a Scudder, etc.), and I can switch among them ant time without cost. A 403b(7) mutual fund account requires me to select one fund family. :) PP
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HE2 - "Annuitizing" your TSA balance would not be my first suggestion (or 2nd, or 3rd, etc.). While there may be a case for the dependable cash flow, most people might opt for the flexibility of withdrawing as needed. Your idea of rollover to a self-directed IRA might be good, particularly if you're well-prepared to actually manage your money!

Good luck, PP
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