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By Bob Moeller
WEAC Member Benefits
October 2007
Financial
Planning Seminars
Achieving
Financial Independence
Don’t let advisers By Bob Moeller In addition to bad TSA products, I’ve seen a few instances of financial advisers just plain overcharging customers, so I have included some questions to ask anyone who is proposing to “manage” your money: 1. What are your qualifications and designations? Look for CFP, CFA or RIA. There are many much lesser designations that are easy to get and mean little. 2. Do you have a fiduciary responsibility regarding my account; will I get acknowledgement of that in writing; and what organization or designation requires this responsibility? 3. How will you be paid? It can be commissions, a percentage of your account value, hourly rates, or some combination. You want complete details such as rate per hour, etc. 4. If some of my assets don’t need management (perhaps you have a fair amount in the WEA Trust TSA and feel it doesn’t need separate management) can we exclude them from the fee structure? 5. What total fees will I be paying in the typical year? 6. How long is my required commitment? 7. Will I get a general review of how you expect to invest my money and total costs involved to take home and study before I sign a commitment? |
I spent the summer meeting with individual members and was often asked to review their tax-sheltered annuities or other investments. Again, it was clear that many members have no idea just how expensive their TSAs are. Since many of you will be considering tax sheltered annuities or increases in your contributions, I concluded that it might be a good time to give you some things to look out for. This article is designed to give you questions to ask of any TSA investment, even one you have been in for years. Ask that the answers be in writing so you don’t forget them.
The IRS is instituting new rules regarding a school district’s role and responsibilities concerning the offering of TSA products. Many school districts will eventually reduce the number of vendors that they accept for TSAs. One immediate result was companies trying to convince members to make transfers before a deadline (September 24, 2007). Transfers became more restrictive after September 24, 2007, and will be restricted to companies on the school district approved list after January 1, 2009.
I regard this IRS change as a chance for members to closely examine what they have and think a little about what they will demand in a TSA before they choose a vendor.
Ten questions to ask any 403(b) TSA vendor:
1. What is the annual mortality expense cost for this product?
Acceptable answer: None. For most longer-term investors, this is a costly annual purchase of worthless life insurance. I have seen cases this summer where members were spending more than $1,000 each year on life insurance in their TSA that they will never collect on, even if they die. And invariably they didn’t know they were being forced to buy it. Again, it is called mortality expense. It almost always costs more than 1% of your account value every year. Examples: Equi-vest 1.35%, Ameriprise/IDS Flexible Portfolio 1.25%, Ing GoldenSelect Landmark 1.65%, Lincoln Life Legacy II 1.35%.2. What are the annual total non-mutual fund or non-sub account fees for this product, including the mortality expense fee? (i.e., insurance company fees not related to managing the investments.)
Acceptable answer: ¾% or less.3. What are the sales charges associated with this product?
Acceptable answer: None.4. What is the average sub account management fee or mutual fund management fee? (fees directly related to the investments)
Acceptable answer: A range of less than 1% (for most funds) to no more than 1½% .5. What is the withdrawal or transfer penalty schedule with this product?
Acceptable answer: None.6. If I decide to transfer funds from this product to a different company, can I stipulate that only funds be transferred that are transferred without any reduction?
Acceptable answer: Yes.7. Are there any other fees, costs, or expenses associated with this product that are not covered above? If so, please detail them.
8. What is the fixed interest rate currently? Compare with competitors. Minimum acceptable is federal discount rate (4¾% now) minus ½%.
9. Please supply me with a brief description of each investment option and the five- and 10-year performance record of each compared to its appropriate benchmark.
10. Will I be able to make investment changes, get questions answered, and otherwise manage my account via the internet?
Please send your e-mails to Diana Buchholz at buchholzd@weac.org.
Posted October 3, 2007