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Author: dweiss3 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: 403B Fees Date: 12/4/1998 1:12 PM
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Thanks to those who answered my earlier post. I wanted to pass along what I learned about my wife's 403B retirement plan.

Her school system designates Tax Sheltered Annuity (TSA) providers that are authorized to receive payments into 403B accounts. Initially these were all insurance companies offering annuities but three years ago they added an option to invest in mutual funds. However, you had to work thru Lincoln Investment Co. who charged a 5% fee up front. Thus $10,000 withheld from my wife's salary each year resulted in only $9500 being invested in the Vanguard funds we selected. Other than one of their salesman filling out the initial paperwork for my wife, Lincoln Investments did nothing visible to earn that $500 per year. I finally called the school board to determine if there was any way to avoid that heavy up-front charge. It turns out that they have also designated T.Rowe Price as one of their authorized providers. TRP accepts the TSA contributions with no fees, and no account maintenance charges. We are filling out the paperwork today to terminate the contributions thru Lincoln Investments and begin them through T.Rowe Price. The Price funds are low cost, like Vanguard, and they have a wide choice of fund types (index, growth, small cap, etc.) This is like getting an instant 5% boost in investment return. I'm only sorry I didn't find this out sooner.
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Author: peppermintpatty Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7006 of 75335
Subject: Re: 403B Fees Date: 12/4/1998 4:40 PM
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Good for you! Better late than never... PP

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Author: ataloss Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7020 of 75335
Subject: Re: 403B Fees Date: 12/5/1998 3:03 AM
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<<Her school system designates Tax Sheltered Annuity (TSA) providers that are authorized to receive payments into 403B accounts. Initially these were all insurance companies offering annuities but three years ago they added an option to invest in mutual funds.>>

I am glad to see that someone else has dealt with such a horrible system. My wife's former employer had a similar arrangement for their 403b but the only choices were insurance company TSA annuity accounts. She invested in an Aetna annuity that was supposed to be investing in Twentieth Century's Growth fund. No matter how much 20th Century Growth goes up, her annuity account shows essentially no growth. She stopped working there but felt sort of trapped by the fee for terminating the annuity. We have since realized that paying Aetna 5% to go away is a relative bargain compared to sticking with a massively underperforming investment.

My bias is that in general annuities are horrible investments. In a tax sheltered account where you are getting no tax benefit they are worse.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7032 of 75335
Subject: Re: 403B Fees Date: 12/5/1998 11:02 AM
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Dweiss3 wrote in part:

<<We are filling out the paperwork today to terminate the contributions thru Lincoln Investments and begin them through T.Rowe Price. The Price funds are low cost, like Vanguard, and they have a wide choice of fund types (index, growth, small cap, etc.) This is like getting an instant 5% boost in investment return. I'm only sorry I didn't find this out sooner.>>

Yes, it is. Congrats on your persistence in finding a better deal for yourselves.

Regards….Pixy


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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7038 of 75335
Subject: Re: 403B Fees Date: 12/5/1998 11:08 AM
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Ataloss writes:

<<I am glad to see that someone else has dealt with such a horrible system. My wife's former employer had a similar arrangement for their 403b but the only choices were insurance company TSA annuity accounts. She invested in an Aetna annuity that was supposed to be investing in Twentieth Century's Growth fund. No matter how much 20th Century Growth goes up, her annuity account shows essentially no growth. She stopped working there but felt sort of trapped by the fee for terminating the annuity. We have since realized that paying Aetna 5% to go away is a relative bargain compared to sticking with a massively underperforming investment.

My bias is that in general annuities are horrible investments. In a tax sheltered account where you are getting no tax benefit they are worse.>>


An expensive education, but one worth the price if you're now able to take advantage of more productive investments. Annuities may be appropriate for some, but they are definitely not the instrument to use for the serious investor. The tax shelter provided just isn't worth it to the average income person. I share your bias in spades.

Regards….Pixy


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Author: ataloss Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7045 of 75335
Subject: Re: 403B Fees Date: 12/5/1998 4:26 PM
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It was a small account so it wasn't too expensive. I had considered TSAs a few years ago for all of my non- IRA investments. Thanks to the Fools and others I saw the light before making that mistake.

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Author: Cody Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7121 of 75335
Subject: Re: 403B Fees Date: 12/9/1998 12:13 PM
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Several years ago I set up a 403b TSA annuity account through an insurance company. From what I have been reading lately on this board is that TSA accounts are a horrible investment and it would be worth it to pay the 5% penalty to cancel the contract with the insurance company. If I do this, will I have to pay any taxes or can I roll it over into a new 403b plan? Can I now go directly to a Mutual Fund company and set up a 403b account? If so, which Mutual Fund companies offer 403b accounts? I am not sure I asked the right questions, but I guess I want to know my options after I cancel the contract.

Thanks,

Cody

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7134 of 75335
Subject: Re: 403B Fees Date: 12/9/1998 2:27 PM
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Greetings, Cody, and welcome. You wrote:

<<Several years ago I set up a 403b TSA annuity account through an insurance company. From what I have been reading lately on this board is that TSA accounts are a horrible investment and it would be worth it to pay the 5% penalty to cancel the contract with the insurance company. If I do this, will I have to pay any taxes or can I roll it over into a new 403b plan? Can I now go directly to a Mutual Fund company and set up a 403b account? If so, which Mutual Fund companies offer 403b accounts? I am not sure I asked the right questions, but I guess I want to know my options after I cancel the contract.>>

Maybe it may be more productive to cancel your annuity and move to something like an index fund, and maybe not. You have to run some numbers to be sure. You can switch if you wish. On surrender of the annuity, you can be cashed out and you'll have to pay the surrender fee. Remaining cash may then be transferred to a 403b(7) account to be invested in mutual funds with a fund family that accepts such accounts. Vanguard does, and will help you through that process if you ask. There will be no taxes or penalty to be paid if you arrange for a transfer of the net proceeds from the annuity to the fund.

As to whether you should do that, though, you must do an analysis. Look at what your annuity returns now. Compare that to what you could get on the net proceeds elsewhere. Ask yourself what each would be worth at retirement. The one that's bigger when you need the money should get your nod. Let's look at an example. Say you have $15K in the annuity, and it earns 9% per year. You want to move it to an index fund where it will get 10.5% per year. To do so, on surrender you must pay a 5% penalty, leaving only $14.25K to invest. Which will be bigger in 20 years? 3 years?

Left in the annuity, the $15k growing at 9% would be worth $84,066 in 20 years. The $14.25K invested at 10.5% would be $104,969. In that case, the switch is better. Now say you need the money in 3 years. At that point in time the annuity would be worth $19,425, but the $14.25K would only grow to $19,227. Staying put is better in that instance.

Do that kind of analysis and the choice should be clear to you.

Regards….Pixy


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Author: Cody Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7169 of 75335
Subject: Re: 403B Fees Date: 12/10/1998 4:15 PM
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Thanks for your help. I have one more question. My annuity allows me to invest in several of the Fidelity funds, one of them being the Spartan Index fund. I do have some of the money in it now and if I do not decide to cancel my contract, I plan to move all of it over shortly. Is investing in this fund through an insurance company going to give me the same rate of return than if I canceled my contract and paid the 5% penalty (which is about $250) and invested the money in the same fund directly with Fidelity? I currently pay a $30 fee per year. I have at least 25 years until retirement.

Thanks.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 7173 of 75335
Subject: Re: 403B Fees Date: 12/10/1998 5:12 PM
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Cody asks:

<<I have one more question. My annuity allows me to invest in several of the Fidelity funds, one of them being the Spartan Index fund. I do have some of the money in it now and if I do not decide to cancel my contract, I plan to move all of it over shortly. Is investing in this fund through an insurance company going to give me the same rate of return than if I canceled my contract and paid the 5% penalty (which is about $250) and invested the money in the same fund directly with Fidelity? I currently pay a $30 fee per year. I have at least 25 years until retirement.>>

Perhaps. Bounce the reported returns in the annuity against the reported returns of the fund. You should be able to get the annuity numbers from your provider and the fund numbers at www.morningstar.com . They may or may not match depending on the fee agreement the annuity has with the fund and any layering of fees by the annuity itself.

My guess (and that's all it is) that with a penalty of only $250 coupled with an annual fee of $30, then you'll be money ahead over the long term by surrendering the annuity and go the direct route. But you gotta run the numbers to be sure.

Regards….Pixy


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