The 403b Boondoggle

Forbes.com - Magazine Article

2010-07-03T08:09:00.000-04:00

And the beat goes on...

Forbes.com - Magazine Article

Good Example on Why Fees Matter

2010-05-01T07:53:00.000-04:00

2010-04-12T09:08:00.001-04:00

test 4

W. Scott Simon Has a Problem with Most 403B Plans

2009-11-24T07:02:00.000-05:00

If you need something to read this Thanksgiving holiday, Simon's seven part series on the woes of 403b plans should keep you busy.

Enjoy!

CNBC: THE Financial Pornography Network

2009-04-18T17:04:00.002-04:00

Visit msnbc.com for Breaking News, World News, and News about the Economy

I loved this quote about 401k investing and investors: "They just don't have the time and they just don't understand unfortunately." This is the reason that the majority allow their portfolio to be eaten alive by the high fees of the vast MAJORITY of retirement plans. Unfortunately, most teachers 403b plans have even higher fee structures than 401k plans.

Dan Solin got the best line in, "We need less Cramer and more Bogle!" No doubt that trading is not in the best interest of long-term investors, but don't expect CNBC to change its trading over investing mindset.

Overall, CNBC did next to nothing to better inform investors in this piece. Dan Solin did not get to clarify what he thought investors should do. I am sure he would have said, "Determine your asset-allocation, buy a portfolio of index funds that represents your desired asset-allocation, and buy it as cheaply as possible."

Unfortunately, it is very hard to get rock-bottom costs in most retirement plans. Financial services professionals like to avoid talking about fees because that is what butters their bread.

When 1.5% Equals $135,000

2008-10-05T21:08:00.000-04:00

When does 1.5% cost an investor $135,000? Check out this video to see a common scenario.

Bogle at the Vanguard Diehards Conference

2008-10-05T10:34:00.000-04:00

St. Jack shares his wisdom and insights on the state of the U.S. financial system.

Does AIG Valic / Retirement Use Vanguard for Its 401k Plan? If So, Why?

2008-09-22T05:54:00.000-04:00

Source: 403bwise discussion board

Here is a post that suggests that AIG Retirement uses Vanguard as their 401k provider. As one poster wondered, "I wonder how many Vanguard employees use AIG Retirement for their 401k plan?" Uhmmmm, that would be ZERO!

"Below you will see a post from the summer that many of you may have missed. It points out that AIG-Valic does indeed know what is best for retirement savings. I thought that after the events of the last few days it deserves a repeat posting.

This spring my wife's school district and my school district have taken alternate paths in working with the new IRS regulations. My school district chose a CPA firm to assist us. The firm really seems to understand that the spirit of the new regs is to modernize the 403b and make it more transparent. My wife's school district, on the other hand, chose as consultant a firm that seems most focused on promoting the insurance industry at the detriment of teachers' retirement savings.

Previously my wife had Vanguard as an option, but after the consultant's advising, they were left with just ING and AIG-VALIC. The consultant refused to pursue Vanguard or Fidelity. After this shady deal was struck, there was a meeting for all employees who weren't previously with VALIC or ING. The purpose of the meeting was to explain the IRS changes and give the VALIC and ING time to sell their products.

After the business manager gave an introduction, I asked if I could say something and ask a question. I proceeded to read a page and a half prepared statement aggressively bringing light on the past practices of the two companies and the amount of money people lose by going with annuities. (Thanks to 403bwise for a lot of my information). When I finished, the crowd cheered and the tone for the night was set.

Next the representative from VALIC spoke and rolled out their high-fee annuities and their new mutual fund platform, or as I like to say, the bait and switch. I am sure no one will be encouraged to take this option. Of course in true VALIC fashion, she could not produce a list of fees, but promised it would be available later. (So they were chosen to be one of the two options, even though they hadn't shown a fee schedule. Typical). My wife, another audience member and I continued to hammer her with questions and she became more and more agitated. Finally, she said, "You people just don't get it. You have had 15 options for all these years. If you were in business and had a 401k, you would only have one option. You still have two good options. At VALIC, all we have is one option. We only have Vanguard..." I have never seen someone want to take back what she had said more than she did at that moment. What a smoking gun! It was as if the sky opened up and light was finally coming through years of darkness. My wife then asked why VALIC employees could have a true low-cost option, but she couldn't.

The ING guy was next and had to completely change his presentation, because after what he had just witnessed, his new platform 1.35% "all-in" (which I'm sure is a huge improvement) wouldn't have been such a great sell with us in the audience.

So maybe school systems should follow the first good advice that VALIC has ever given (albeit indirectly) and make a low-cost option available to employees."

Do Investment Costs Really Matter? If So, To What Degree?

2008-08-02T14:35:00.011-04:00

I have been having nightmares regarding some runaway BIPs I have been dealing with lately. There seems to be a total lack of comprehension as to how negatively costs can impact total return. BIPs, or basis points, represent 1/100th of a percent, so 100 BIPs would equal one percent (1%). This term is used repeatedly by the financial services industry to discuss fees. The word "BIP" sounds harmless, doesn't it? Semantically, it is easily confused with words like "bit" which indicates small, insignificant amount. "BIP" also sounds similar to the word "blip"--a small, often unimportant, flash of light. To the uninformed it is natural to assume that the word "BIP" is also unimportant . Don't be fooled! While a few BIPs may appear to be a small, inconsequential quantity, they can destroy your investment returns.

Before you read this post any further, please take a look at this Google spreadsheet I created: The Tyranny of Compounding Costs on an Annual Investment of $1,000 at 8% from 5 to 35 Years / PDF version here. This spreadsheet illustrates just how costly investment expenses can be. This first example represents the likely returns of portfolio earning 8% annually in the Federal Thrift Savings Plan. This plan is the least costly of any that I am aware of; it charges a fee of 3 bips on total assets. In other words an investment of $1,000 has an expense of 30 cents. That is incredibly low; consequently, the investor is able to capture the vast majority of the portfolio's gains. Since only .03% is charge against the total assets, the investor earns a net return of 7.97% . Over 35 years the Thrift Savings Plans generates only $1,146 in fees. This represents less than 1 percent (actully only .83%) of the market return over 35 years. The TSP is an amazingly efficient retirement savings plan. Here are some observations regarding the rest of the spreadsheet.

Over 35 years, a product charging 20 bips manages to generate fees that equal approximately 5.5% of the total porfolio return.
A product charging 50 bips ends up with roughly 13% of the portfolio gains.
A 100 bips fee would mean that 25% of the portfolio's return ended up with the financial intermediaries.
A product with a 150 bips fee would ultimately consume 35% of the porfolio gains via fees.
A product carrying a 200 bips fee would result in a 44% reduction in the portfolio gains.

I have many strong opinions regarding the information in the worksheet.

As a rule of thumb, any investment charging more than 50 basis points is entering the realm of BOHICA. I know of no reason to pay more than 50 basis points for any investment.
Once an investor hits a 100 bips, the fees become punitive. Should an investor, who puts up all the capital and bears all the investment risk, really have to cut the financial intermediaries in for about 20% of the investment return? I say to Hell with these blood-sucking parasites.
I read somewhere (I wish I could remember where) that a retirement plan essentially forefits it tax-deferred benefit when it costs exceed 150 bips. It is easy to comprehend how a low-cost taxable investment could surpass the return of a higher cost tax-deferred benefit. After 35 years, 150 bips more than a third of the portfolio's return; that is quite a handicap!
We all stand on the shoulders of giants. I confess that I got the idea for this post from my financial idol--John Bogle. This post is an offshoot of this post which in turn came from Bogle's PBS interview. Here is an excellent related post on John Bogle; be sure to watch the video. It is easy to see why this man is disliked, if not downright hated, by many individuals in the financial services industry.
It is interesting to note that if the investment holding periods been longer than 35 years, the cut to the financial intermediaries would have been even larger. Check out this example Bogle presented on his PBS interview.

Why Pension Fund Beat Mutual Funds

2008-07-10T14:24:00.005-04:00

Here is an article by Jason Zweig explaining why most pension funds beat the pants off mutual funds. Believe it or not the higher costs of mutuals funds drag returns below those of most pension funds. What a shocker! Expenses can actually lower your performance...who knew!?

Bloomberg Expose: The Truth Behind Hidden Fees in 401(k) Plans

2008-07-08T15:39:00.005-04:00

Here is an expose by Bloomberg on hidden fees in 401k accounts. Remember, most 403b plans have even higher expenses. This report mentions one 403b plan, Value Builder offered by the NEA, that carried an incredible worst-case fee of 12.17%! "Value Builder?", for who the union and the annuity salesmen?! What a disgrace.

The NEA's rebuttal:

"It's hard to deliver a program like this with a low fee because there are comminsions paid to agents."

So much for a union looking out for its members. Listen to the whole show; it could literally save you a million dollars.

Wall Street is Not Your Friend

2008-03-19T21:33:00.002-04:00

Wow, people actually listen to this carnival barker!? I feel sorry for those people who actually followed his advice. Oh, well you get some stock calls right and you miss on others.

Scott Burns: "What 'Financial Adviser' Means 95 Percent of the Time"

2008-03-01T06:59:00.002-05:00

Scott Burns, whose site is here, is one of my favorite writers for one main reason--he can explain complicated subject matter to laypeople.

In this article, Burns explores the term "Financial Advisor." He writes that only about 5% of the people using this title have a fiduciary responsibility to the clients. In other words, this 5% minority of financial advisors has a legal obligation to act in the best interests of their clients. Conversely, the 95% majority of FA's are held to a much lower standard--the suitability standard. Unfortunately, many investors assume that the term "Financial Advisor" means that their FA is looking out for them. In reality, many are only trying to maximize their commissions, not investor returns.

Later, Burns states that FA's cost at least 2% (200 basis points) on averages. This is not an insignificant percentage. If you are earning 10% on your investment, that represents 20% of your investment earings (2 of 10 = 20%). If you are earning less, these expenses are even more costly. Burns also cites a Harvard Business study suggesting that mutuals sold by intermediaries (brokers, FA's, etc.) between 1996 to 2002 had an average annual return of 2.9% while those bought directly had an average annual return of 6.6%. (Read it for yourself here; be sure to check the figures on page 50 of this 61 page PDF file) So much for expert advice! I thought FA's and brokers were supposed to increase my return...YEAH RIGHT!

I wonder what John Bogle would say about this. Actually, I already know what he would say.

Is Your Retirement Plan Robbing You Blind?

2008-01-05T21:28:00.000-05:00

Here is a Motley Fool story on how AIG Valic, recently re-branded AIG Retirement, cost a lady 173 basis points in a 3 month period. Wow, pro-rate those costs and get back to me. Read it all.
Let's hope the AIG Retirement is an improvement over AIG Valic. I'm not holding my breath; there is a reason they are trying to re-brand. It is an attempt to escape from their past.

Attention Georgia Politicians, Superintendents, Principals, and School Board Members: Here is How to Improve Educator Retirement Plans at No Cost

2007-12-26T21:49:00.000-05:00

Greetings to everyone reading this article. This article is an earnest attempt to show Georgia’s educational and political leaders how they can improve 403b and 457 plans free of charge. This article is not a sales gimmick, and I do not work for any of the companies mentioned. I am a Spanish teacher at LaGrange High School who would simply like to see better retirement options available to all my colleagues in Georgia.

The Problem

The majority of educators have their 403b/457 investments invested in insurance-based annuity products. These financial products usually have annual fees of over 150 basis points (1.5%); many have fees that are much higher. These fees are a constant drag on the investment’s return. Just how high are these fees? Ridiculously high! The Thrift Savings Plan, the federal government’s 401k plan, carries fees of 3 basis points (.03%) on its investment offerings. The Peach State Reserves, the State of Georgia’s 401k and 457 plan has solid fund offerings charging as little as 6 basis points (.06%). Finally, the Vanguard Group, whose 403b(7) plan could be offered at any school district, has many excellent investment choices charging less than 30 basis points (.30%). When compared to these three options, most 403b and 457 plans in Georgia come up short.

To make matters even worse, most insurance-based annuity products also impose surrender charges on investors who wise up and decide to move their investment elsewhere. In other words, many educators are penalized for moving their money to better themselves. It is a classic scenario of "tails-I-win-heads-you-lose." Investors can leave their money in the investment and get killed by the annuity’s high fees or they can move their money and get savaged by the annuity’s surrender charges.

Usually 403b and 457 plans using insurance-based annuity products are serviced by company sales representatives carrying job titles such as “financial advisor” or “financial consultant”. Many educators erroneously assume that these “advisors” and “consultants” are impartial investment fiduciaries. Unbeknownst to most educators, these “advisors” and “consultants” do not have a legal fiduciary responsibility to do what is in the best interest of the investor. In reality, these individuals are legally held to a much lower standard known as the suitability standard. In other words, if the product is “suitable” for the investor the advisor has done nothing wrong legally (ethically and morally, now that is another issue). There is a huge difference in the fiduciary standard and the suitability standard. The end result is often a worst case scenario: investors believe they are dealing with an objective fiduciary when they are actually dealing with a salesman who is beholden to his company.

Two Simple Suggestions and Why They Are Urgently Needed

In order to improve the 403b and 457 plan options in Georgia, I suggest that the following two plans be added to each district’s 403b/457 options. First, every district should add a Vanguard 403b(7) plan. The Vanguard plan would result in huge savings by allowing teachers to invest in low-cost mutual funds rather than high-cost annuity products. In February of 2007 my district, Troup County School System, added the Vanguard plan; we paid nothing to add it. This could and should be replicated in every school district in Georgia. Second, every district should make the Peach State Reserves 457 a retirement savings option. Like Vanguard’s 403b(7) plan, the PSR’s 457 plan would allow teachers to invest in low-cost index funds and age-based lifestyle funds. These two simple additions would improve teacher retirement options for every teacher in Georgia.

Notice that in the previous paragraph I suggested that two retirement plan options be added. I did not say that any retirement plans from other companies should be removed. This statement will undoubtedly be mischaracterized by many in the financial services industry. These individuals usually feel threatened by low-cost competitors since such plans often cost them business. If the Vanguard and the PSR are such good plans, why haven’t you heard much about them until now? The truth is that no one, other than educators, has anything to gain by advocating the inclusion among retirement plan options. Since neither plan employs a battalion of sales reps to push their product, you will never encounter a Vanguard or PSR representative in the teacher’s lounge or at the county office. To emphasize, I am not advocating that any service provider be removed from any district’s offering; I am only advocating that Vanguard and the PSR be added.

Thus far, you have probably noticed the emphasis I place on low-cost investment options. Why am I obsessed with adding low-cost investments among teacher retirement plan options? Simple, low-cost investments pass the cost savings onto the investor while high-cost options divert money (via fees) away from the investor’s account and into the service provider’s account.

How much does your current retirement plan cost? How much do comparable plans cost throughout the country? Most people cannot answer these two simple questions. Let’s begin by looking at some retirement plans around the country. The federal government’s 401k plan, the Thrift Saving Plan (TSP) is probably the most cost-effective retirement plan in the country. It offers five basic funds and a series of Lifecycle funds that have an expense ratio of only 3 basis points. What does this mean? Simple, for every $1,000 invested TSP investors are charged 30¢ in fees.

According to a series of articles by W. Scott Simon at Morningstar, most 403b and 457b plans using annuity products offered by insurance companies charge expense ratios ranging from 200 to 500 basis points. In other words, for every $1,000 invested an investor will pay $20 to $50 in fees. Let’s compare some retirement plan options:

Thrift Savings Plan: 3 basis points / 30¢ per $1,000 invested / $30 in fees on $100,000 portfolio

Peach State Reserves: 6 basis points / 60¢ per $1,000 invested / $60 in fees on $100,000 portfolio

Vanguard Group: 20 basis points / $2 per $1,000 invested / $200 in fees on $100,000 portfolio

Most 403b / 457 products: 200 to 500 basis points / $20.00 to $50.00 per $1,000 invested / $2,000 to $5,000 on a $100,000 portfolio

Go back and look at those numbers again and let them sink in. In summary, most Georgia 403b and 457 options cost much more than the Peach State Reserves 457 plan or the Vanguard 403b(7) plan. Remember these are fees that are assessed annually. It is no wonder that high-cost plans almost always under perform more cost-effective plans.

Summary: By adding a Vanguard 403b(7) plan and the Peach State Reserves 457 plan to Georgia school districts, two low-cost options would become readily available throughout the state. These additions would inject needed competition into the Georgia's 403b and 457 marketplace.

Teachers are Trapped in One of the "Dankest, Foulest-Smelling Cellars of the Financial World."

2007-12-26T13:42:00.002-05:00

While this article is from 2004, it is still accurate. Here is an interesting quote:

"A lot of annuity products are designed to compensate insurance agents. They aren't designed to provide high returns to teachers." Scott Dauenhauer

Read the whole thing.

Lack of Access to to No-Load, Low-Expense 403b Plans

2007-12-25T14:09:00.001-05:00

Here is a link regarding the lack of access to no-load, low-fee 403b options. Read the conclusion below; it sounds like lawsuits are starting around the U.S. The author states high-fee 403b plans negate the benefit of tax-deferred growth. Ask your friendly 403b "financial advisor"(aka salesman) what he thinks about the impact of fees on long-term investment return. Fees? What fees? Well, you see... blah, blah.

Here is the article in its entirety:
Reasons For and Responses to the Lack of Direct Access to No-Load, Low-Expense 403(b) Plans in Many School Districts (PDF file)

Conclusion:

In conclusion, 403(b) plans offer significant tax advantages to employees of school districts who desire to accumulate wealth and retire at a reasonable age. However, the tax advantages gained by 403(b) plan investors are currently being eradicated by high investment costs in school districts that deny their employees direct access to no-load, low-expense 403(b) plans. Furthermore, the proposed regulations may also deny many school district employees indirect access to no-load, low-expense 403(b) plans by repealing Revenue Rule 90-24. One can only hope that school districts and teachers unions will take a more proactive stance in ensuring that employees have direct access to no-load, low-expense 403(b) plans. Such a result would surely be of great benefit to both school district employees and school districts. However, until such a stance is taken, many attorneys will remain busy representing school district employees in their quest to gain direct access to no-load, low expense 403(b) plans and in class action lawsuits against high-expense 403(b) plan providers and, perhaps, teachers unions.

How to Manage a 403(B) according to Jane Quinn Bryant

2007-12-05T19:54:00.000-05:00

Here are three paragraphs from page 191 of Jane Quinn Bryant's Smart and Simple Financial Strategies for Busy People. I highly recommend this book!

HOW TO MANAGE A 403(B)

"These plans are typically offered to public school teacher, among others. I approach them with a heavy heart. You should definitely participate; they're payroll-deductible and tax-deferred. But school districts tend to offer these plans through insurance agents, whose mutual funds and annuities cost two or three times as much as the funds in the 401(k)s. It's dereliction of duty; you ought to scream to the school boards and administrators. There’s no excuse for sticking teachers with poorer plans than corporate employees have. Hospital 403(b)s often have better options, too.

If you're among the stuck, however, here's what to do.

Get the list of investment plans your school district uses (called the vendor list) from your school office. If it includes low-cost groups such as Vanguard and TIAA-CREF, or Fidelity, T. Rowe Price, and USAA, you're in luck. Get the enrollment forms and sign up for the plan yourself. You don't need a salesperson as intermediary. Use the diversification rules you're seen above to choose your mutual fund.

If you're forced to invest through an insurance agent, choose the insurer’s mutual funds rather than its annuities (for annuities, see page 201). Agents push the annuities because they pay much higher commissions. But their high costs mean poorer investment returns. Also, you usually can't change investments until six or seven years have passed, making it difficult to rebalance. The agents who sell you 403(b)s will probably present themselves as "financial advisers," eager to help you decide on the best ways to invest. Always remember: They're salespeople, that's all. For good advice on 403(b)s, see http://www.403bwise.com/."

Yikes. Lost another one to Vanguard!

2007-11-12T16:54:00.000-05:00

I am reading the Boglehead's Guide to Investing and came across this line:

Yikes. Lost another one to Vanguard!

This lines is probably said by quite a few brokers / financial advisors (aka, salesmen) when their clients realize just how hard they have been getting screwed. This line is right on target. As soon as one learns how the financial services industry works, there are very few rational investment choices. In my opinion, the best choice is almost always Vanguard. If you do not believe me see the following articles.

Amazon.com Widgets

How AIG Valic Can Cost You BIG TIME! Part II

2007-10-16T18:24:00.000-04:00

Here is another look at how AIG Valic can cost you. As most of my co-workers know, I think that Vanguard is the gold standard when it comes to conservative, low-cost investing. Vanguard's popularity among investors has not gone unnoticed by AIG Valic. As a result, AIG Valic offers seven Vanguard funds in its Portfolio Director annuity extravaganza. The seven funds are excellent additions to AIG Valic's offerings; however, there is still one problem. These fine Vanguard funds are trapped in an AIG Valic annuity product; a product which, due to its high insurance expenses, guarantees that the Vanguard funds held in AIG Valic accounts will under perform the same exact Vanguard funds held directly with Vanguard. In other words, the same exact Vanguard funds will not yield the same investment returns: those at AIG Valic will return less than those held at Vanguard. In short, this is due to AIG Valic's additional insurance expense.

Just how expensive is this additional insurance charge and what is its impact on earnings? The insurance charge is 1% on the Vanguard bond funds and 1.25% on the Vanguard stock funds. These insurance charges seem small at first glance, but they are not insignificant. Take a look at what a yearly investment of $6,000 at a 6% return would yield over 10, 20, 30 and 40 years. In each case the AIG Valic options yields a lower return than the same Vanguard fund held with Vanguard itself. Click here to see the whole spreadsheet.

$6000 Per Year at 6% Return over 10, 20, 30 and 40 Years
	10 Years	20 Years	30 Years	40 Years
Vanguard Long-Term Corporate Grade Bond Fund	$77,511.03	$213,082.18	$450,203.74	$864,942.66
Vanguard Long-Term Corporate Grade Bond Fund at AIG Valic	$73,729.26	$188,228.54	$366,042.42	$642,181.94
Vanguard Advantage	$3,781.78	$24,853.64	$84,161.32	$222,760.72

$6000 Per Year at 6% Return over 10, 20, 30 and 40 Years
	10 Years	20 Years	30 Years	40 Years
Vanguard Long-Term Treasury Fund	$77,474.69	$212,854.20	$449,416.75	$862,786.85
Vanguard Long-Term Treasury Fund at AIG Valic	$74,557.79	$193,030.62	$381,284.72	$680,421.73
Vanguard Advantage	$2,916.90	$19,823.58	$68,132.03	$182,365.12

Obviously, the longer the fund is held at AIG Valic, the larger the spread gets between the two options. However, over the course of 40 years I doubt that AIG Valic provides $180,000 to $222,000 worth of value-added service to its investors.

Unfortunately, the spread between the two products is even worse when Vanguard's stock funds are used. Here is what $6,000 annually at a 10% return would yield over 10, 20, 30 and 40 years. In each case the AIG Valic options yields a lower return than the same Vanguard fund held with Vanguard itself.

$6000 Per Year at 10% Return over 10, 20, 30 and 40 Years
	10 Years	20 Years	30 Years	40 Years
Vanguard Lifestrategy Conservative Growth Fund	$94,440.48	$333,666.13	$939,644.76	$2,474,639.41
Vanguard Lifestrategy Conservative Growth Fund at AIG Valic	$88,968.23	$289,938.60	$743,910.67	$1,769,388.38
Vanguard Advantage	$5,472.25	$43,727.53	$195,734.09	$705,251.03

$6000 Per Year at 10% Return over 10, 20, 30 and 40 Years
	10 Years	20 Years	30 Years	40 Years
Vanguard Lifestrategy Moderate Growth Fund	$94,440.48	$333,666.13	$939,644.76	$2,474,639.41
Vanguard Lifestrategy Moderate Growth Fund at AIG Valic	$88,968.23	$289,938.60	$743,910.67	$1,769,388.38
Vanguard Advantage	$5,472.25	$43,727.53	$195,734.09	$705,251.03

$6000 Per Year at 10% Return over 10, 20, 30 and 40 Years
	10 Years	20 Years	30 Years	40 Years
Vanguard Lifestrategy Growth Fund	$94,395.26	$333,288.57	$937,874.14	$2,467,945.10
Vanguard Lifestrategy Growth Fund at AIG Valic	$88,925.89	$289,615.53	$742,535.77	$1,764,694.86
Vanguard Advantage	$5,469.38	$43,673.04	$195,338.37	$703,250.23

$6000 Per Year at 10% Return over 10, 20, 30 and 40 Years
	10 Years	20 Years	30 Years	40 Years
Vanguard Wellington Fund	$94,259.75	$332,158.71	$932,583.78	$2,447,976.14
Vanguard Wellington Fund at AIG Valic	$88,798.99	$288,648.72	$738,427.69	$1,750,693.82
Vanguard Advantage	$5,460.76	$43,509.98	$194,156.09	$697,282.32

$6000 Per Year at 10% Return over 10, 20, 30 and 40 Years
	10 Years	20 Years	30 Years	40 Years
Vanguard Windsor II Fund	$94,079.39	$330,658.78	$925,579.82	$2,421,614.78
Vanguard Windsor II Fund at AIG Valic	$88,630.10	$287,365.25	$732,988.81	$1,732,209.87
Vanguard Advantage	$5,449.29	$43,293.53	$192,591.02	$689,404.91

Wow, over the course of 40 years the same exact Vanguard fund loses about $700,000 when held at AIG Valic than when it is held at Vanguard directly. Does AIG Valic provide $700,000 worth of value-added service? I imagine for the financially obtuse they might; however, for investors with any know-how at all AIG Valic is a terrible option.

I personally would love to use the Vanguard Wellington fund or the Lifestrategy Moderate Growth fund, but AIG Valic's insurance fee structure stops me. I cannot justify paying for services that I do not need nor want. AIG Valic's offering of Vanguard funds within its Portfolio Director annuity extravaganza is like putting lipstick on a pig. At the end of the day, the pig is still a pig.

How AIG Valic Can Cost You BIG TIME!

2007-10-01T20:08:00.000-04:00

Since my wife, Zena, and I returned to the U.S., we have been aggressively saving for our retirement. Here is a table indication our savings among our various retirement savings options. We use Vanguard for our IRAs and our 403b(7) accounts and AIG Valic for our 457b accounts. Previously, we used TIAA-CREF for our 403b accounts, but in August of 2007 we transferred our 403b monies to our Vanguard 403b(7) accounts. While we liked TIAA-CREF, we felt it was better to consolidate our retirement savings at Vanguard to benefit from their excellent products with razor-thin expenses.

Year	Zena 403b	Zena 457b	Zena IRA	Total
2002	$0	$0	$0	$0
2003	$12,000	$0	$3,000	$15,000
2004	$13,000	$0	$3,000	$16,000
2005	$14,000	$0	$4,000	$18,000
2006	$15,000	$3,000	$4,000	$22,000
2007	$15,500	$3,864	$4,000	$23,364
Total	$69,500	$6,864	$18,000	$94,364

Gerry 403b	Gerry 457b	Gerry IRA	Total
$0	$0	$3,000	$3,000
$12,000	$0	$3,000	$15,000
$13,000	$0	$3,000	$16,000
$14,000	$14,000	$4,000	$32,000
$15,000	$15,000	$4,000	$34,000
$15,500	$11,136	$4,000	$30,636
$69,500	$40,136	$21,000	$130,636

Year	Zena Total	Gerry Total	Grand Total
2002	$0	$3,000	$3,000
2003	$15,000	$15,000	$30,000
2004	$16,000	$16,000	$32,000
2005	$18,000	$32,000	$50,000
2006	$22,000	$34,000	$56,000
2007	$23,364	$30,636	$54,000
Total	$94,364	$130,636	$225,000

The aim of this post is to illustrate the effect of expenses on retirement savings plans. The expenses of the various retirement savings options will be compared. I will include the Peach State Reserves plan among the plans compared since it is Georgia’s 457b plan that any district can add, via a board of education vote to approve. A common expense in many retirement plans is an account maintenance fee. Many investors erroneously assume that this is the most important fee associated with their plan. Here is an example of the account maintenance fee of some plans.

Plan	Account maintenance Fee
Vanguard IRA	$10 (waived with assets of over $10,000)
Vanguard 403b(7) account	$15
AIG Valic 457b account	$0
Peach State Reserves 457b account	$50

From the table we see that Vanguard and AIG Valic have lower account maintenance fees than the Peach State Reserve options. However, this is only part of the story. There are also other fees associated with retirement plans. Many 403b/457b plans are insurance products that have two main costs: the mortality and expense fee and the fee for the underlying investment. These insurance investments are usually more costly due to their extra layer of fees (i.e., insurance costs). Plans that only use mutual funds avoid this extra layer of fees. Here are the costs of the plans:

Plan	Mortality & Exp. Fee	Mutual fund fee	Total Investment Fees
Vanguard IRA	0%	.21% (VTTVX)*	.21%
Vanguard 403b(7)	0%	.21% (VTTVX)*	.21%
AIG Valic 457b	1 to 1.25%	.38 and up	1.38% to 2.25%
Peach State Reserves 457b	0%	.06% to .89%	.06% to .89%

* = The majority of our Vanguard 403b(7) and IRA is invested in this fund.

While AIG Valic does not have an account maintenance fee, they have the highest total fees associated with their product. These fees are not insignificant. Let’s assume that all the money that our total retirement savings ($225,000) were invested exclusively in AIG Valic or Vanguard. The total fee is calculated by multiplying $225,000 by the investment fee. The total fee is the sum of the account maintenance fee plus the total investment fee. What would the difference in fees be? What if our money were invested in the same exact fund at Vanguard and AIG Valic? This is possible since AIG Valic does offer many Vanguard funds among is investment choices. For example, we could invest in Vanguard’s LifeStrategy Moderate Growth fund with Vanguard directly or via AIG Valic. Here are the results:

Plan	Account Maintenance Fee	Investment Fee Vanguard & AIG here and here	Total Fees on $225,000
Vanguard LifeStrategy Moderate Growth in Vanguard 403b(7) account	$30 ($15*2)	.25% * $225,000 = $562.50	$592.50
AIG Valic account invested in Vanguard LifeStrategy Moderate Growth	$0	1.5%	$3,375
Why we are disappointed:	→→→→→	Difference of :	→→ $2,785.50!

Remember this is the annual cost to invest in the same exact mutual fund. The only difference is that one is held at Vanguard while the other is at AIG Valic. Does AIG Valic provide $2,782.50 of value-added service to our investments a year? NOT EVEN CLOSE!

What if our money were invested in index funds at AIG Valic versus the Peach State Reserve plan? Index funds are “vanilla” funds that simply track market sectors. Let’s assume that Zena and I both had all our retirement money in the PSR plan. That would mean that we had a total account maintenance fee $100 for our accounts ($50*2=$100). That seems like a significant amount of money, but it is nothing when compared to investing with AIG Valic. For example, what would it cost us to invest in an S&P 500 Index fund with AIG Valic and the Peach State Reserve? Here are the results:

Plan	Account Maintenance Fee	Investment Fee PSR Fees & AIG here and here	Total Fees on $225,000
Peach State Reserves Vanguard Institutional Index fund	$100 ($50 * 2)	.07% * $225,000 = $157.50	$257.50
AIG Valic account invested Stock Index fund	$0	1.38% * $225,000 = $3,105	$3,105
Why we are disappointed:	→→→→→	Difference of :	→→ $2,847.50!!

If we invest in AIG Valic’s other index funds, it is more of the same. The PSR offers Vanguard’s Mid Cap and Small Cap funds at institutional rates. In other words, the funds are dirt cheat--.07% and .08% respectively. What does AIG Valic charge of similar funds? Voila, 1.40% and 1.46% respectively; those charges are astronomical for index funds. Here are the numbers for the Mid Cap index funds just to emphasize my point:

Plan	Account Maintenance Fee	Investment Fee PSR Fees & AIG here and here	Total Fees on $225,000
Peach State Reserves Mid Cap Core Stock Index Fund	$100	.07% * $225,000 = $157.50	$257.50
AIG Valic account invested Mid Cap Index fund	$0	1.40% * $225,000 = $3,150	$3,150
Why we are disappointed:	→→→→→	Difference of :	→→ $2,892.50!!

Still don’t believe me? Here are the numbers for the Small Cap index funds:

Plan	Account Maintenance Fee	Investment Fee PSR Fees & AIG here and here	Total Fees on $225,000
Peach State Reserves Small Cap Core Stock Index Fund	$100	.08% * $225,000 = $180	$280
AIG Valic account invested in Small Cap Index fund	$0	1.46% * $225,000 = $3,285	$3,285
Why we are disappointed:	→→→→→	Difference of :	→→ $3,005!!

Of the retirement savings plans that we use, AIG Valic’s plan is easily the most disappointing for one main reason—its high costs. The fee differentials cited above are on comparable funds. Why should investors have to pay so much to invest? No one should be subjected to such ridiculous fees especially when a cost-effective plans are available. Without a doubt the Vanguard 403b(7) plan and the Peach State Reserve plan are superior to AIG Valic’s 403b and 457 plans. Fortunately for us, the Vanguard 403b(7) plan is available at my job with the Troup County School System. However, we have to only one 457 plan--AIG Valic’s fee-bloated annuity extravaganza. I am perplexed as to why the PSR plan has never been added; it is obviously in the best interest of every school district in Georgia.

What do we get for all the extra fees associated with AIG Valic’s fee-bloated annuity products? First, we get an investment guarantees. For example, if either Zena or I die while the market value of the investment is below cost, the survivor gets the amount of the initial investment back. We are not impressed with the guarantee; we would much rather take our chances investing in the world’s greatest economy without this expensive guarantee. Second, we also have the option of rolling our money into a stream of annuity payments upon retiring if desired. Of course, we could always purchase an immediate annuity if we wanted that. We do not, nor does anyone else, need AIG Valic to do this. The value of using annuity products is greatly overstated; the “benefits” come at a HUGE cost.

$560 Billion!

2007-09-29T11:27:00.000-04:00

Listen to it all, but you must listen from minute 6 to 8.

$560,000,000,000!

In this interview with Bill Moyers, John Bogle claims that the financial services industry annually takes $560 billion of value out of the U.S. economy (transcript here). He states that while no company provides its services for free, the financial sector has gotten "totally out of hand." Bogle worries that greed is leading to a capitalistic system that puts financiers' interests above the interests of consumers and owners.

Who is John Bogle and why does his opinion matter? Bogle is the founder of the Vanguard Group, a company that has $1.1 trillion under management. Depending on investment inflows, Vanguard and Fidelity battle back and forth for the title of the world's largest mutual fund company. This is remarkable when you stop to consider that Vanguard was found in 1975. The fact that Bogle, a pro-investment capitalist, has such strong negative opinions about our capitalist system is noteworthy.

How is this interview relevant to the 403b Boondoggle. Simple, this interview sheds light on financial zeitgeist of the 403b marketplace. The reality is that the majority of insurance and financial services companies in the 403b market exist to enrich themselves and their shareholders, not their 403b plan participants. I realize that these are strong words, but the numbers tell it all. Don't believe me? Read and ponder this article. Now, read and ponder this one. Here is the recap of the previous two links:

One-time Investment of $1,000 (65 Years)	Average Mutual Fund with Expense of 2.5%	Market Return of a Diversified Portfolio
Market Return	8%	8%
Total Expenses	2.5%	0%
Net Return	5.5%	8%
Total 65 Years Later	$34,250	$160,682
Difference of	-$126,432	$126,432

End Result = $126,432 magically disappears into the coffers of the financial croupiers.
Investor nets $33,250 ($34,250 - $1,000 Initial Investment) and receives 20.82% of the return ($33,250/$159,682). The $159,682 figure is the total market value after 65 years minus the initial investment of $1,000.
Financial croupiers net $126,432 or 79.18% of the return ($126,432/$159,682)
Salt in the wound: the investor bears all market risk over the 65 years; the financial croupiers are always assured their cut. Heads you win, tails I lose!

In Gordon L. Eade 's How to Make Money in the Stock Market-Buy 2,500 Different Stocks-Pay no Commission, he points out just how costly many financial products can be. After tallying up the various cost associated with a typical actively managed mutual fund in a taxable account, a solid 8% return is whittled away to a measly 3.6% net return. Conversely, a taxable account in a lower-cost financial product has fewer punitive costs.

One-time Investment of $100,000 (30 Years)	Average Actively Managed Fund	Vanguard Total Stock Market ETF (VTI)
Total Return	8%	8%
Transaction Costs	1.00%	0.15%
Expense Ratio	1.50%	0.07%
Income Taxes	1.90%	0.28%
Total Cost	4.40%	0.50%
Net Return	3.60%	7.50%

The results of higher cost is sickening, the results of lower costs is astounding:

One-time Investment of $100,000 (30 Years)	Average Actively Managed Fund	Vanguard Total Stock Market ETF (VTI)
Total Return	$1,006,266	$1,006,266
Transaction Costs	$163,031	$39,231
Expense Ratio	$244,546	$18,308
Income Taxes	$309,759	$73,231
Total Cost	$717,336	$130,770
Net Return	$288,930	$875,496

Eade's numbers can be found here on pages 15 and 16. While these numbers reflect a different scenario from those in Bogle's example, they lead to the same result--a return that significantly under performs the market while bearing full market risk. As before, the investor bears all the risk while the croupiers carry off the majority of the gains. No wonder brokers, "financial advisors" and other financial parasites fight so hard to perpetuate this system; it sure beats the hell out of working for a living!

Thus far this post has not even addressed the fact that most variable annuities have even higher costs than mutual funds. Consequently, they are even worse vehicles for 403b retirement savings than high-cost mutual funds. If you are considering investing in a 403b plan, consider yourself forewarned. Most 403b plans are financial minefields serviced by battalions of thieves, liars, prevaricators, charlatans and hucksters masquerading as objective fiduciaries looking out for your best interest. NOTHING COULD BE FARTHER FROM THE TRUTH!

403b Compare website

2007-09-04T15:23:00.000-04:00

Here is a great site that enables investors to get a better look at the investment products hawked in the teacher's lounge. Get to know this site: http://www.403bcompare.com/

Here is a great example. Let's say you want to know the expenses related to owning AIG Valic's Stock Index fund versus a competitor's fund. You can easily find it here. For example, here is AIG Valic's S&P 500 equivalent totaling 1.38% a year. Compare this to Vanguard's S&P 500 offering weighing in at .18% a year. Folks, AIG Valic's fund costs more than SIX times the Vanguard offering for the same asset class. (1.38% - .18% = 1.20% then 1.20% / .18 = 6.67 or 667%)

After a little exploring you will be able to determine what your funds actually cost. Boy, I bet the insurance companies do not want consumers to know about this site. I plan on having more fun with site in the near future; look for future posts using this site.

Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 5)

2007-08-21T21:27:00.000-04:00

W. Scott Simon keeps the focus on 403b problems. Read his latest installment.

Want to Check Out Your Broker or Financial Advisor?

2007-08-18T12:51:00.000-04:00

If you want to know a little more about the individual handling your money, check out this site. This lin k will take you to the terms of usage; you can do the rest from there.