403(b) company: 5.25%?

[jq26]

My wife got a great new teaching job. She moved into one of the best districts in the state. As part of being new to the district, companies are soliciting her to administer her 403(. Apparently 403(b)s are totally different than 401(k)s because I have no option whatsoever to change my 401(k) plan. It is adminstered for me by my employer. The 403( process seems to be a free-for-all.

So this morning a financial advisor (so-called, haha) met with us in our home at 10:00am. He works for a private company that has permission to work with teachers within the district. He claims almost all of the teachers have their 403(b)s adminstered through this company.

This is the deal he put forward:

- Wife rolls her current 403( from the previous district into the funds we choose from his company. The fee for rolling the fund in is 5.25% of incoming funds!

- Wife makes biweekly contributions to this new 403( with 5.25% of every new contribution paid directly to said company.

- This 5.25% is not a load. And it is not a 12(-1 fee. They are in addition these fees!

- This 5.25% is only for the privilege of getting into one of the 600 "A" funds that they have access to.

- They DO NOT actively manage your account nor offer any financial advice. He made this clear after I asked him 15 times what exactly is the value added for paying 5.25% on the front end.

- If that wasn't enough, they have the guts to tack on an annual $25 documentation fee.

Can anyone tell me what the heck this enormous fee is for? Is this standard? Quite honestly, this guy was 25 years old and was selling me on his ability to read a prospectus and to check Morningstar. To me, it seems like a total ripoff. But if I wasn't home this morning my wife may have signed up for it.

The previous 403( company that my wife is current with charges $35 per annum flat fee. That's it. But their funds are "B" funds.

Any advice? Am I right to think that this type of upfront fee structure is absurd? His theory was that my wife's access to "A" funds will payback the foregone 5.25% in 3.5 years with additional returns thereafter. Sounds bogus...

[deltadawn]

Any advice? Am I right to think that this type of upfront fee structure is absurd? His theory was my access to "A" funds will payback the 5.25% in 3.5 years.

No advice - however, I was wondering if that was considering the devaluation of the US dollar? The 5.25% would be at todays market value. Until the dollar starts going up, I would proceed cautiously.

[jq26]

Okay, I am a dollar bear but I fail to see what that has to do with this situation.

[deltadawn]

LOL - I knew better than to put my 2 cents in.

I am very inexperienced in this area and don't know how to explain my thought process - but will try.

If the US economy continues in a downward spiral and the US dollar devaluates, that means a decline in purchasing power.

For example if your initial investment was $10,000 and the US dollar decline 20%, your 10,000 investment would only be able to buy $8,000 worth of goods and services; therefore, you have lost $2,000 of buying power.

However if you invested that $10,000 wisely, you could be making money over that 3.5 year period.

Intitial investment 5.25% + 5.25% of new bi-monthly contribution for 3.5 years with basically no customer service = bad investment IMO

I promise to stay out of the finance and business section unless I have a question.

[DHK]

My wife got a great new teaching job. She moved into one of the best districts in the state. As part of being new to the district, companies are soliciting her to administer her 403(. Apparently 403(b)s are totally different than 401(k)s because I have no option whatsoever to change my 401(k) plan. It is adminstered for me by my employer. The 403( process seems to be a free-for-all.

So this morning a financial advisor (so-called, haha) met with us in our home at 10:00am. He works for a private company that has permission to work with teachers within the district. He claims almost all of the teachers have their 403(b)s adminstered through this company.

This is the deal he put forward:

- Wife rolls her current 403( from the previous district into the funds we choose from his company. The fee for rolling the fund in is 5.25% of incoming funds!

- Wife makes biweekly contributions to this new 403( with 5.25% of every new contribution paid directly to said company.

- This 5.25% is not a load. And it is not a 12(-1 fee. They are in addition these fees!

- This 5.25% is only for the privilege of getting into one of the 600 "A" funds that they have access to.

- They DO NOT actively manage your account nor offer any financial advice. He made this clear after I asked him 15 times what exactly is the value added for paying 5.25% on the front end.

- If that wasn't enough, they have the guts to tack on an annual $25 documentation fee.

Can anyone tell me what the heck this enormous fee is for? Is this standard? Quite honestly, this guy was 25 years old and was selling me on his ability to read a prospectus and to check Morningstar. To me, it seems like a total ripoff. But if I wasn't home this morning my wife may have signed up for it.

The previous 403( company that my wife is current with charges $35 per annum flat fee. That's it. But their funds are "B" funds.

Any advice? Am I right to think that this type of upfront fee structure is absurd? His theory was that my wife's access to "A" funds will payback the foregone 5.25% in 3.5 years with additional returns thereafter. Sounds bogus...

He's wrong. It IS a load.

But... he's right, you'll see that money back due to reduced investment management costs.

http://www.finra.org/Industry/Issues/Breakpoints/P011239

Breakpoint search tool

http://tools1.finra.org/nbst/

BUT... paying that money with EACH monthly contribution can add up.

However, compared to what?

I'm glad he didn't offer B-shares - which has a BACK-END charge if you liquidate the holding within the first 6 years from the date of purchase. If you're contributing every month, the 6 years expires after the LAST purchase. It just keeps going.

C-shares are much higher in expenses, but "feel" better. They feel better because you have to stay in them for at least 1 year. But the overall expense is MUCH higher - particularly for long-term investing.

You can always move around your holding WITHIN the mutual fund family without a charge.

The "load" pays for investment management. It does NOT pay for ongoing advice.

The A-shares ARE the least expensive mutual funds THE LONGER YOU HOLD THEM.

The $25 annual fee is standard practice.

Hope this helps some!

[DHK]

Any advice? Am I right to think that this type of upfront fee structure is absurd? His theory was my access to "A" funds will payback the 5.25% in 3.5 years.

No advice - however, I was wondering if that was considering the devaluation of the US dollar? The 5.25% would be at todays market value. Until the dollar starts going up, I would proceed cautiously.

The costs of investing are a different consideration to the market risk of the investment.

However, when considering ANY investment, you should consider:

- Costs

- Risks

- Potential return.

[DHK]

After re-reading the thread... it sounds like the guy is brand new to the investment world.

You can search for information on your broker here:

http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm

You might even want to call the local office and get clarification from a manager of the firm.

Hint: You want to ask for the Registered Principal or the Chief Compliance Officer.

Look, if the guy is new, that's not a crime... but he should be with someone more experienced as he makes presentations.

If the guy is NOT new, then he may be mis-representing his product.

In either case, the compliance officer will notify the rep of his conversation to "shake him up" a bit.

[DHK]

Interesting story a couple of years ago about unions being involved in the investment selection for 403b accounts:

http://www.latimes.com/business/la-fi-retire25apr25,0,132341,full.story

[DHK]

The previous 403( company that my wife is current with charges $35 per annum flat fee. That's it. But their funds are "B" funds.

Do NOT do the rollover until you verify with the mutual fund company that the "B" shares are all OUT OF SURRENDER - meaning that there are no other fees to EXIT those funds.

Otherwise, you could be paying a back-end charge of 4% for example to then be moved into the A-shares at 5.25% - costing you almost 10% just to move the money!

No investment rep should be recommending that move UNLESS and UNTIL that has been verified.

In fact, if the investment guy was smart, he'd look at your B-share company and add these NEW contributions to the same company and see if your "B-share" holdings will help you get a better breakpoint towards A-shares with them.

[jq26]

Thanks for the responses.

My philosophy is that I have no problem paying a load if the NET return to the account is more than it would be otherwise. Then he gets his commission, we get our higher return and we all win. I don't mind paying someone for VALUE ADDED. When I explained this, the financial planner looked at me like I had three heads.

I guess I was taken back by the size of the fees. 5.25% seems whopping to me. So what is the difference between the fee structures between A and B funds? I'm told by him that they havre the same underlying returns (same basket of holdings, same 12(-1 fee and that they charge the same fund management fees. So...why is the net annual return on an A fund higher? It must be if we hit a break point (sort of like buying down a mortgage with points- you hit a break point where it is edfinitely worth paying).

I ask these questions because my wife plans to retire in this district, which would mean 25+ years of 403( accumulation. At some in the next 3 years, our plan is to get her to federal max limits. I want to get this right the first time.

The old 403( company- it turns out they do have a presence in this new district. And they do give the option to get into A funds. Would that be a better option? Is it possible that there won't be a load?

Edited to add: I think there is confusion by my usage of the word "breakpoint". FINRA and sales reps use this term to refer to the point of accumulation of enough fund shares that the fee is reduced. This company has beakpoints that reduce the 5.25% down to as little as 1% as you accumulate incoming funds. Example: After you accumulate $1,000,000 in fund shares, the fee drops to 1%. That would be considered a "breakpoint".

I am using the word breakpoint as the point where the cost of the upfront fee in A shares has been recouped by the additional net return over the no-load B shares. This point in time was sold to me as 3.5 years. And that just happens to jive with the breakpoint of paying points on most mortgages so it sounds reasonable. But the more I read, the more I seem convinced that the loads are very tough to overcome.

[DHK]

Can you tell me the mutual fund company name that he wants to sell you?

Also, which company is the current 403b invested in.

This will help me give you a concrete example and I may know some specifics about each company.

Thanks!

[DHK]

Okay, Finra has changed the breakpoint tool. It used to have actual investment costs calculated between the share classes so we can better illustrate the effect of the costs of the investment.

Let's suppose the following:

Identical Mutual Fund.

Class A has 5.25% up front cost & .75% ongoing cost.

Class B has 0% up front cost & 1.5% ongoing cost.

Which is cheaper?

Well, first remember that YOU PAY no matter which course of action you choose. TANSTAAFL (There ain't no such thing as a free lunch.)

Class A - is kinda like "points on a mortgage". You pay points to lower your overall cost of borrowing. Well, A-shares work the same way. You pay "points" to lower your costs of owning the investment.

And just like you pointed out, the more money you have, the less the up front cost is.

Class B - FEELS better because "you didn't pay a load". However, if you move the money within 6 years, you'll pay the load anyway. PLUS the cost is MUCH more ongoing.

No investment rep can guarantee a particular return over any other kind of investment. What he COULD say, is that historically, the fund has been less volatile with a higher return compared to a similar composit index. (But that assumes that the investment rep is familiar with Alpha, Beta, R2, Treynor, Sharpe and standard deviation.)

5.25% IS a sizeable fee - for smaller accounts. This is where there's more discussion about time horizon. If your time horizon is 5+ years, you will recoup the difference over B-shares due to lower expenses.

BTW, I don't think 3.5 years is right. I think it would take longer and it also depends on the difference in the "spread" of the ongoing expense structure between A & B shares. (Yes, I've seen it where there was only a .25% difference between B & A shares, so it would take a VERY long time to recoup the difference.)

Edited to add that I found the right tool:

http://apps.finra.org/investor_Information/ea/1/mfetf.aspx

[DHK]

Let's play a game with the above link:

Let's say that the guy was promoting American Funds (typically low ongoing A-share expenses).

Put in the following:

First mutual fund: CAIBX (Capital income builder - A)

Second Mutual Fund: CIBBX (Capital Income Builder -

Put in the appropriate investment amount. For my own example, I'll put in $20,000 to "max" out the A-share charge at 5.75%.

Assumed rate of return: 8%

Holding period: I'll start with 4 years - since your investment guy said 3.5 years to recoup the difference.

When does A-shares become lower cost than B-shares? What is the time horizon on this?

(This is how I do it for my clients.)

Answer: At a 4 year interval - A is still more expensive than B. Don't be fooled by the Total Sales Charges on B-shares because you wouldn't choose B if you intended to liquidate within 6 years.

At 5 years, A is STILL more expensive - but they're getting closer.

At 6 years, B is more expensive by $3.

Over 6 years, B is more expensive than A.

BUT... if you had more funds to qualify for a breakpoint on the A-shares, OR the company that you have your B-shares allows for "Rights of Accumulation or ROA", then you'll SAVE much more on your total cost of owning those mutual fund shares.

Hope this makes sense!

[admin]

This is so much over my head. I wish I knew more about it.

It's probably ignorant of me, but I just toss everything into various mutual funds. Is there anything I should know?

[DHK]

This is so much over my head. I wish I knew more about it.

It's probably ignorant of me, but I just toss everything into various mutual funds. Is there anything I should know?

It depends if you're working with a broker or not.

Brokers will tend to sell "commissionable" investments with the A, B & C shares.

If you're working with T.Rowe Price, Fidelity, Vanguard, it's not nearly the same issue since they're considered "no load" (no help) funds.

You can move your assets around within the no-loads as often as you want. (Well, there may be a 30-day wait otherwise they may hit you with a small fee.)

So, if you're working with "various mutual funds", just make sure that they're in the "no load" category to keep your costs as low as possible.

If you're working with a broker, and you have "commission based mutual funds", you need to make sure that you're taking advantage of every price-break that you can.

This generally means to keep all your eggs in one mutual fund company basket.

If you have $20,000 to invest and you have $300,000 in American Funds, I as an ethical advisor, should be recommending that you put your $20k in American Funds - as the costs will be about 2.5% up front using A-shares.

If I recommended a different company (like Franklin Templeton), you'd be charged 5.75% on the same $20,000 investment. There'd have to be a REALLY GOOD REASON to use the different company - and sometimes there are good reasons. I just don't see it very often.

My job is to keep your costs as low as possible with your time frame and risk tolerance in mind.

Hope this helped some!

[jq26]

I think I got it DHK. That's what I thought. You hit the point in time where the reduction in ongoing charges of A shares creates larger annual gain and offsets the upfront load you pay for A shares. Very similar to paying point on a mortgage (which I did willingly on my long-term rental investment).

Surprisingly, this has never come up before. I own about 1100 shares of various funds which I used to move around within my 401k all the time. I've never been hit with any load on the front or back, nor are any of the funds denoted A or B.

Is there a way to buy the A funds without paying a load? This is what I am trying to find out. Mathematically, it may make sense to choose A over B for LT purchases. But to be honest, they offer no financial advice so I am still unsure why anyone should have to pay to get into a fund. The fund managers are paid through fund fees (about 1% annually) and promotional stuff is paid for with 12(-1 fees (0.25% annually). So the whopping 5.25% fee goes to useless hand in the cookie jar that does the least (ie the company that "sells" the fund and nothing more)?

[jq26]

Can you tell me the mutual fund company name that he wants to sell you?

Also, which company is the current 403b invested in.

This will help me give you a concrete example and I may know some specifics about each company.

Thanks!

Your guidance is appreciated.

fyi- her current 403( is set up through Lincoln Financial but this company that visited us on Saturday is a small no-name company under the GWN Securities umbrella . They sell 600 different funds of various companies. He had no advice on any one investment, but they don't sell B funds at all- strictly A funds.

[DHK]

I think I got it DHK. That's what I thought. You hit the point in time where the reduction in ongoing charges of A shares creates larger annual gain and offsets the upfront load you pay for A shares. Very similar to paying point on a mortgage (which I did willingly on my long-term rental investment).

Surprisingly, this has never come up before. I own about 1100 shares of various funds which I used to move around within my 401k all the time. I've never been hit with any load on the front or back, nor are any of the funds denoted A or B.

Is there a way to buy the A funds without paying a load? This is what I am trying to find out. Mathematically, it may make sense to choose A over B for LT purchases. But to be honest, they offer no financial advice so I am still unsure why anyone should have to pay to get into a fund. The fund managers are paid through fund fees (about 1% annually) and promotional stuff is paid for with 12(-1 fees (0.25% annually). So the whopping 5.25% fee goes to useless hand in the cookie jar that does the least (ie the company that "sells" the fund and nothing more)?

401k accounts generally do not charge up front costs - even if they are called A-shares (95+% of the time).

Is there a way to buy the A-shares without a load? Yes and No.

Yes - because you can do it in a wrap account. A wrap account is an account where you can have LOAD-WAIVED A-shares with multiple fund companies.

No - because you'll be paying a "wrap fee" ongoing. Generally it's between 1-2% annually. So, there's little point to the lower A-share costs when you have a constant fee being charged against the account.

Or... you have $1 million to invest and there's no up-front cost!!!

Wrap accounts are generally "advisor" accounts where you're paying for ongoing advice. Advisors who can have these accounts have the following licenses: Series 65, or Series 7 & 66. They may also have a particular designation: CFP, CFA, CPA/PFS, or ChFC (like I have).

These accounts are typically not available for contributing accounts - like a 403b. They're better for larger accounts that are more established - perhaps $100k+.

[DHK]

Your guidance is appreciated.

fyi- her current 403( is set up through Lincoln Financial but this company that visited us on Saturday is a small no-name company under the GWN Securities umbrella . They sell 600 different funds of various companies. He had no advice on any one investment, but they don't sell B funds at all- strictly A funds.

I would call your Lincoln Financial guy and see if they can set up a new 403b account for your wife's new position.

They should have no problem doing this - as 403b's are individually set up with other brokers. I've done this quite a few times.

This way, you can continue to get your A-share advantages at the same cost (and lower) for ongoing contributions.

[jq26]

Thanks. I know I was way off base, but I thought for 5.25% I'd get "wrap-account" type of services. And maybe a Christmas ham sent to us every year.

[DHK]

This is where the ethics and services of the rep can vary greatly.

The way you described him, he was a mutual fund salesman. He sells you the fund and he's done.

The way I do business, I give ongoing advice. It doesn't matter to me if I sell you an annuity, life insurance, A, B or C-share mutual funds, wrap account... it doesn't matter. Whatever is most appropriate for you is how you become my client... and therefore entitled to ongoing advice and guidance.

I'm looking to build relationships with my clients over time. And yes, that means that you'll be buying more products from me over time. But you'll be happy to do so as I've given quality advice and made my client's lives better.

Now, technically, the A-share cost is ONLY paying for the cost of the mutual fund. I'm not contractually obligated with this investment to give ongoing advice, but I do. I give advice and service above what the regulators would minimally require of me.

It's just a better way to do business.

[AboveAverage]

This is where the ethics and services of the rep can vary greatly.

The way you described him, he was a mutual fund salesman. He sells you the fund and he's done.

That's what happened to me in my second to last job. I had a 457B from Metlife but I did not have time to look at any funds. So the jerk who sold it to me said I could put my money in a fund that was guaranteed to give me 5% and I could switch later. Well...after I looked at the funds I wanted, I told him I wanted to switch my money out and he told me he couldn't do it. Pissed off, I canceled my $300 a check deferrals and left about $5k in there until I left my job and transferred it to my Vanguard Roth IRA (yes, I had to transfer to a Rollover, convert it to Roth and will pay taxes this year...would have been last year, but because I had a BIIIG refund coming to me, decided to recharacterize back to Rollover and then transfered it back to Roth and pay those taxes this year). I could have rolled those funds into my new 457b with Prudential (largest employer in NJ) with all agressive funds (which is down 10% btw...yay!! ), but I decided to have a Roth. I chose Vanguard because the fees are among the lowest, plus their customer service is pretty good.

Long haul, baby, long haul....

The way I planned my retirement, if I stay with my current job, I should be able to live off of my pension, 457b, and roth as I will start contributing as soon as I'm done with my car payments without the need for the "Failed Deal", ooh I mean Social Security.

If I do get SS by 2041, I hope to use that for Vegas excursions....lol

[jq26]

All investments have risks. Markets will go up and down. My 401k and my wife's 403( is 35+ year money. We don't plan to touch until at least 2045- the year we turn 67. I'm not concerned about market returns in the short-term. If the Dow dropped to 1000 tomorrow, I'd be cheering it on and buying quality companies as fast s I could. No concerns about volatility until the day comes where I am forced to dollar-cost-average out.

What this thread really had to do with was paying enormous fees. There are investment fund fees (maybe 1%) which pay the fund folks to research, trade, and make you money. Totally understandable and needed. Here, we have an upfront massive LOAD (ie sales commission) being paid to the broker of the mutual funds. They don't give advice, don't actively manage your account, and don't contribute to the wealth accrual process beyong receiving biweekly payments from employer, buying the funds, and then tracking the accrual of shares in an account. That sort of service has been commoditized. Online brokers do this for next to nothing. So my beef is if the investment managers are getting paid and the 12b-1 fee pays for advertising, etc., then why the whopping 5.25% for the person in the chain of events that adds the least value to the 403( process?

Now DHK states he advises clients and helps with fund selections. That is a nice service and very useful. But many don't do this and there is no contractual duties to do so. So where does it go? The sales rep explicitly told me it is nothing more than a commission that goes to Joe Blow's Company that sells the fund- it does not go to the fund company whatsoever. That's a sizable skim for nothing more than a sales call. All I am after here is NET return after all fees, commissions, and taxes. I don't necessarily have an issue with the fees per se, as long as they result in value added.

[DHK]

Now DHK states he advises clients and helps with fund selections. That is a nice service and very useful. But many don't do this and there is no contractual duties to do so. So where does it go? The sales rep explicitly told me it is nothing more than a commission that goes to Joe Blow's Company that sells the fund- it does not go to the fund company whatsoever. That's a sizable skim for nothing more than a sales call. All I am after here is NET return after all fees, commissions, and taxes. I don't necessarily have an issue with the fees per se, as long as they result in value added.

I thought he knew how to read a prospectus? I guess he skipped over the fees part.

Here's the link to American Fund's Capital Income builder.

http://www.americanfunds.com/pdf/mfgepr-912_cibp.pdf

See page 24 within acrobat reader within the prospectus.

You'll see that there is a difference between the OFFERING price and the dealer commission.

Yes, the fund company GETS IT ALL initially. They then keep their small part and pay the rest to Joe Blow's Firm. Joe Blow gets a percentage of that fee.

So, yes, the fund company gets it all, and then pays the broker/dealer a LARGE percentage of that fee.

BTW, 12b1 fees are paid directly to the BROKER who sold you the fund - to help them continue to market and promote their funds.

I agree with you, that I would be looking for the VALUE ADDED part of the equation. This is what I do. Otherwise, I'm just selling some very expensive mutual funds and not necessarily helping my client build a stronger financial life.

[jq26]

Thanks for clearing that up!