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Author: Mudster1 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Just when things were going ok, the rules change Date: 1/3/2009 8:25 PM
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With less than a week's notice, my employer (a public school district) has informed me that I can no longer continue to invest with TIAA-CREF through my 403(b)7 (TSA) plan. I'll save the rant regarding this for elsewhere, but here is my problem, some thoughts, and my request that you evaluate the pros and cons of these ideas and perhaps give me new, hopefully better, ones.

My situation: I max my Roth IRA now, and that is divided between 2 domestic and one international mutual fund options (plus a small amount in Scottrade).

The bulk of my retirement funds are with TIAA-CREF, currently divided among bonds, real estate, a couple funds, and interest-bearing guaranteed accounts.

I am 16 years from the traditional retirement age of 65 and 20+ from the time when I will be forced to withdraw from the funds.

These investments won't be my only retirement income. If they still have Social Security, I'll get some of that, but my state has a pretty good retirement plan for public employees in which I am fully vested.

OK, enough background. Here are my options:

- Invest only after tax and not get the tax-sheltered break of pre-tax investing. I'm not crazy about this because I max my IRA already.

- Open another TSA - almost the only option my district allows under their 403(b) plans, and keep my other money in TIAA-CREF where it is doing fairly well. This would leave me with higher fees (I don't think anyone is as low as TIAA when it comes to TSA) and two accounts to deal with.

- I think I might be able to open a TSA with Vanguard under the new rules that is still a TSA, but at least I get the lower cost fund choices.

- Add to my dividend paying stock portfolio (Almost my entire portfolio is dividend payers), post-tax, and build up some dividend income.

- Subsribe to Champion Funds and buy into some of these for a few years although they would be post-tax unless I put some of my IRA money there.

-This is a subset of my problem - does it make any sense to have a bunch of smaller IRA's spread among different types of funds? It seems like it would make it difficult when the time comes for forced withdrawals, and that is a lot of paperwork to keep track of, but diversification is hard with the annuity choices my district offers.

I guess I'm looking for direction in retirement planning as I try to choose between opening another annunity (which typically have some degree of stability, but not more than a typical mutual fund and have higher costs and less choices) vs. options I may not have considered that would let me earn higher rewards with moderate to low-moderate risk tolerance.

I was comfortable with TIAA-CREF, my IRA's, my pension, SS, and my dividend portfolio. Now the govt. and district have stepped in and made it more confusing and I'm having trouble getting perspective. I can't find an active board with more teachers who have this problem, so I'm trying here. Your thoughts are appreciated.

Mudster
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Author: ltangel Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65028 of 76418
Subject: Re: Just when things were going ok, the rules ch Date: 1/3/2009 10:38 PM
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How about some tax-free mutual bond funds? And adding to the dividend portfolio? Hey - just an opinion from a fledging investor but a teacher also!
What are your dividend payers? Mine are :Whole Foods, TEG,
FTR and NU and berkshire class b for growth
am considering DUK

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Author: WPatch Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65029 of 76418
Subject: Re: Just when things were going ok, the rules ch Date: 1/3/2009 10:58 PM
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One quibble: a 403(B)7 consists solely of mutual funds, TSA -an older term for 403(B) directly referrs to Annuities(Tax Sheltered Annuities). It sounds like your 403(B) account with TIAA-CREF includes both.

Other Insurance companies(Annuity providers) usually charge much higher fees for their Annuities than the mutual funds charge for for 403(B)7 s. Also, I do not believe that Vanguard directly provides 403(B)7's to schools. You would probably be dealing through a third party middleman. Still, you would get good funds and a better deal than the other annuities. However, other 403(B)7's may or may not offer better values.

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Author: FIgirl Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65033 of 76418
Subject: Re: Just when things were going ok, the rules ch Date: 1/4/2009 1:29 AM
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One quibble: a 403(B)7 consists solely of mutual funds, TSA -an older term for 403(B) directly referrs to Annuities(Tax Sheltered Annuities). It sounds like your 403(B) account with TIAA-CREF includes both.

Other Insurance companies(Annuity providers) usually charge much higher fees for their Annuities than the mutual funds charge for for 403(B)7 s. Also, I do not believe that Vanguard directly provides 403(B)7's to schools. You would probably be dealing through a third party middleman. Still, you would get good funds and a better deal than the other annuities. However, other 403(B)7's may or may not offer better values.


The name TSA is misleading in this case - it's a holdover from the bad old days when non-profit employees (teachers, etc) were only allowed to invest in annuities. The name has stuck around even when the 403(b)7 it's attached to allows both annuities and mutual funds. Also, Vanguard does provide 403(b)7's directly to schools and other plans, and as far as I know they only provide direct mutual fund investment - no annuity wrappers.

To the OP -- if your plan has made an agreement with Vanguard, go with it and happily. The funds are less expensive than TIAA and the firm is run with as much or more integrity. Vanguard does not have a guaranteed account like TIAA does, but in all other aspects it is comparable or superior.

FIgirl

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65034 of 76418
Subject: Re: Just when things were going ok, the rules ch Date: 1/4/2009 8:12 AM
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With less than a week's notice, my employer (a public school district) has informed me that I can no longer continue to invest with TIAA-CREF through my 403(b)7

I think you probably had notice that the school district was going to have to choose one and only one 403(b) provider beginning with 2009. It was not their choice - they were required to do it. There were articles about it in a number of places (google "403B changes") - here's a link to one - http://chronicle.com/news/article/2765/new-rules-from-irs-me...

rad

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Author: Mudster1 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65037 of 76418
Subject: Re: Just when things were going ok, the rules ch Date: 1/4/2009 1:49 PM
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How about some tax-free mutual bond funds? And adding to the dividend portfolio? Hey - just an opinion from a fledging investor but a teacher also!
What are your dividend payers? Mine are :Whole Foods, TEG,
FTR and NU and berkshire class b for growth
am considering DUK


I hold PFE, JNJ, KO, DUK, and I hold some BAC (which isn't paying dividends now, but did). I was very happy holding WWY and BUD, but both companies were sold last year.

I think you probably had notice that the school district was going to have to choose one and only one 403(b) provider beginning with 2009. It was not their choice - they were required to do it. There were articles about it in a number of places (google "403B changes") - here's a link to one - http://chronicle.com/news/article/2765/new-rules-from-irs-me......

rad


This is the first notice of change I've received - I never ignore mail from my employer! They don't have to choose only one provider - we have a list of about 20, but they do have one (private) compliance administrator.
This sort of thing has happened in limited form before - usually the holdup is the difference between the district/private compliance co's "hold harmless" form and the one the companies are comfortable signing.

What the law allows and what districts choose to do are typically a bit different - with the district not offering all available options. perhaps the increased regs will result in better offerings, but I'm not holding my breath.

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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65038 of 76418
Subject: Re: Just when things were going ok, the rules ch Date: 1/4/2009 2:49 PM
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I hold some BAC (which isn't paying dividends now, but did).

You might want to check your accounts. BAC reduced their dividend for the 3rd quarter, but did not suspend it. It was paid out on December 26: http://newsroom.bankofamerica.com/index.php?s=press_releases...

In addition, the Board of Directors has declared a quarterly dividend on common stock of $0.32 to be paid on December 26, 2008 to shareholders of record on December 5, 2008. Assuming the current number of issued and outstanding shares, the reduction from $0.64 paid in recent quarters would add more than $1.4 billion to capital each quarter.

BAC 4th quarter earnings haven't been announced yet, so there is a chance that dividends could be suspended then. But There are limitations that have been placed on *increasing* dividends when TARP money is received. But dividends can still be paid at the rates that were in place before receiving the TARP money.

AJ

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Author: PTKeil Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65039 of 76418
Subject: Re: Just when things were going ok, the rules ch Date: 1/4/2009 8:19 PM
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My school district just went through this within the past few months, so I feel your pain. Fortunately I have only been employed for 3 years, so I am early in, not to mention my company (Metlife) was one of the chosen, per se, so I didn't have to change anything. Many teachers did, though, and were completely stressed about it. Consider yourself lucky that someone had the good sense to include Vanguard as an offering. I would have loved that since I use the indexing strategy. We have VERY pathetic choices where I work. Don't know who the people were who decided it, but they didn't know what they were doing.

Things you should consider:
You have quite a bit of time before retirement. You may take a loss now if you roll over your holdings, but in the time you have (with what you're buying at the other company being on "discount") the opportunity to have it grow considerably.

What are you paying for fees in your current holdings? How are they doing?

What is the penalty if you roll them over to the new plan? Vanguard is a great option, but in our corporation you would get penalized if you didn't own the holdings for more than 7 years, I believe (or was it 10?), if you rolled them. You can opt to hang onto them before you roll them so there aren't penalties, but who knows what the market will bring?

Pre-tax is the only way to go if you have the option and can invest in something worthwhile. You are already maxxing out your IRA, and I'm assuming taking full advantage of any employer matches with your TSA. I chose to max out my TSA first because it was pre-tax, and now am contemplating an IRA to diversify.

Just make sure you read over all the paperwork very thoroughly to know what you're in for. We only had about a month to decide, so there was complete panic at our school system. One of the teachers broke down crying because she didn't know what to do, but was unwillinhg to educate herself. Too bad for her.

Good luck.
Tammy

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65044 of 76418
Subject: Re: Just when things were going ok, the rules ch Date: 1/5/2009 1:54 PM
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Pre-tax is the only way to go if you have the option and can invest in something worthwhile. You are already maxxing out your IRA, and I'm assuming taking full advantage of any employer matches with your TSA. I chose to max out my TSA first because it was pre-tax, and now am contemplating an IRA to diversify.

Pre-tax is desirable, as it effectively is, through Fed and State income reduction, reducing the amount one is paying into their retirement plan. For example, if a teacher earns $50,000/yr and contributes 10% of gross salary to her 403(b), her gross 403(b) contribution would be $5,000. But if her Fed + State marginal tax rate (tax rate paid on last dollar earned) is 20%, then her tax bill will be reduced by .2 X $5,000 = $1,000. So her NET household cashflow is reduced by $4,000 instead of $5,000, which would be the reduction if she contributed to a non tax-deductible savings plan. That's the good news.

The bad news are expenses. Unfortunately, for many (most?) 403(b) plans, the cost of this tax savings are expenses, and in some cases, exorbitant expenses that can effectively, over time, eliminate the tax benefit.

In the above example, assuming the teacher's wage rises by an average of 3%/yr and the average annual investment return with ZERO expenses is 9%, the future accumulated value after 20 years, assuming a constant 10% of salary contribution will be $316,525. With 403(b) expenses of 3%, this future value will drop to $233,504, while a Vanguard mix of index funds with an average expense ratio of .25% will result in a future balance of $308,412, a $74,908 (24.2%) difference from a typical high-expense 403(b).

So if a teacher's employer offers only a high-expense 403(b), it may be in
the teacher's best interest to contribute as follows:

1. To the 403(b) to the extent of employer matching (rare for most school districts)
2. Then to one's deductible traditional IRA
3. If not #2 (due to an adjusted gross income that exceeds the TIRA deductibility limit), then to one's Roth IRA
4. Then to a taxable brokerage or mutual fund account. If using a taxable account, it is generally best to keep income-producing investments (such as bond funds or income stocks) in the Roth IRA and growth funds/stocks in the taxable account.

This approach takes advantage of the 'free' (if any) contributions from the employer, very low expenses, full flexibility, full liquidity and capital gains tax rates in long term investments.

BruceM

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Author: epc53 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65045 of 76418
Subject: Re: Just when things were going ok, the rules ch Date: 1/5/2009 2:28 PM
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Pre-tax is the only way to go if you have the option and can invest in something worthwhile.

If your retirement tax rate is higher than your current one pre-tax savings loses money compared to post tax.

Your statement is not true, it is flatly wrong.

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Author: Mudster1 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65054 of 76418
Subject: Re: Just when things were going ok, the rules ch Date: 1/5/2009 8:18 PM
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Thanks for all your responses. It seems there are only 4 people in the entire district who use the company I am with, so I guess the cash flow isn't worth the "hold harmless" form they refuse to sign.

On the more positive sign, I had tried to sign up with Vanguard to have pre-tax funds invested in mutual funds (not in an annuity), but was told that I could not do this - as was a co-worker who wanted the same thing, but with Fidelity. Now, with a new administrator in charge of the office [who seems to have more knowledge of investment as well as a legal background], it appears that they are going to allow this. This would be good news, especially since the vast majority of the other vendors on the approved list are insurance-related companies offering annuities and ready and willing to take a big chunk of earnings through fees. At least some of them are bail-out names.

We don't have any matching contributions here. I think this is partly because there is no will to negotiate for this benefit. My cohorts appear to be generally uninterested in retirement investing issues. What has really scared me today as I've talked with other teachers about this situation - something which affects so many of us - is how little they know about the company with which they invest, their holdings, how their investment has performed, fees, etc. In other words, IF they have invested (cut the potential pool by 75% or more), they have virtually no idea what they've done. I'm a bit taken back.
With the focus on short-term benefits, mainly salary increases, I don't think any amount of reason as to the benefits of pre-tax benefits (matching contributions) will ever sink in. Alas....

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65058 of 76418
Subject: Re: Just when things were going ok, the rules ch Date: 1/5/2009 10:18 PM
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What has really scared me today as I've talked with other teachers about this situation - something which affects so many of us - is how little they know about the company with which they invest, their holdings, how their investment has performed, fees, etc

There is a reason the insurance industry has focused on 403(b) plans of educational districts, and it's not to be of service to teachers. Teachers have unknowingly transferred a large % of their invested lifetime earnings to the middlemen....its been a sweet deal for insurers and certain mutual funds.

This is one of the primary reasons that the IRS has required that all school districts and non-profit organizations offering 403(b) plans to come into compliance, through a written plan that addresses all matters normally addressed by employer sponsored retirement plans, including eligibility, contribution limits, loans, hardship withdrawls, rollover, etc. This requirement is really designed to force school districts to take responsibility for their 403(b) plans instead of leaving it up to the insurance companies. It was supposed to be in effect 1/1/09, but due to low compliance, the IRS has extended this deadline to 1/1/10

BruceM

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Author: PTKeil Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65218 of 76418
Subject: Re: Just when things were going ok, the rules ch Date: 1/25/2009 9:49 AM
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See https://personal.vanguard.com/us/planningeducation/general/P...

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