If Congress succeeds in privatizing part of Social Security or even eking out modest employer pension reforms, it should make picking decent...
If Congress succeeds in privatizing part of Social Security or even eking out modest employer pension reforms, it should make picking decent retirement funds as easy as shopping online.
You would log on and quickly identify diversified funds with the highest, most consistent returns, lowest expenses and lowest risk.
Such a cyber-investing model partly exists. It’s called 403bcompare (www.403bcompare.com) and it’s offered by the California State Teachers Retirement System, the third-largest pension system in the United States, which covers more than 750,000 employees.
Joe McDonald, a 59-year-old teacher in Gardenia, Calif., used 403bcompare to see if he had the most diversified, lowest-cost funds in his 403(b) plan, a retirement plan for nonprofit employers that’s similar to a 401(k). As a third-grade teacher with 28 years’ experience, he wanted to make sure he was on the right track.
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“I compared a TIAA-CREF fund at 0.36 percent annually with a MetLife annuity. MetLife didn’t compare with TIAA-CREF in the expense department,” he said. “In the future, vendors will not be able to hide their high expenses as they have done in the past.”
The most agonizing drawback of 401(k)-type plans is that the fund information is a sea of legalese that’s seldom clearly explained to employees.
Adding insult to injury, your employer locks you into a limited number of funds that may be loaded with unnecessary, hidden expenses. Not only is it difficult to decipher how much these funds really cost, it’s tough to know how much these funds are shortchanging your total return.
The result is poor investment decision-making and inadequate retirement saving. There’s a better way.
On 403bcompare, you can evaluate and compare 103 vendors and 260 products.
All investment options are explained reasonably well and the site is supplemented with retirement-planning calculators. It took me 5 minutes to learn how the site worked.
Let’s compare the two funds McDonald mentioned: the MetLife Financial Freedom Select variable annuity with the CREF equity index account, both funds offered in the California 403(b) program.
According to 403bcompare, you would pay from 1.15 percent to 2 percent just for insurance-related charges in the MetLife program plus a 9 percent surrender fee (if money was withdrawn within the first year of deposit), a $30 contract fee and individual fund expenses ranging from 0.56 percent annually and up. Not exactly Wal-Mart pricing.
The CREF account, in contrast, has no surrender fee and an annual administrative fee of 0.36 percent.
Percentages, of course, are meaningless, unless you apply them to the dollar amount you have invested. That’s where a “fee-impact table” comes in, which 403bcompare provides.
The MetLife fund, for example, will cost you $1,144 in fees on $10,000 invested — if you pulled your money out within a year. The TIAA-CREF account would cost $36 annually.
While this system is far from perfect, it gives you useful information for comparing funds.
Perhaps future upgrades will allow you to calculate expense bites on the actual amount you have invested over any period of time, allowing for shifts between funds.
A better system would also give you an idea of how much investment risk you are taking in each fund.
All retail mutual funds are required to provide fee tables, yet they could be enhanced by including trading costs within funds and calculators that allow you to do customized expense profiles for each portfolio.
How much is your retirement plan really costing you?
Every employer should be able to tell you, although few break out all of the expenses, which may include additional fees to brokers and other third parties.
Even if you’re not in the California teachers, system, 403bcompare can still help you.
Dan Otter, author of “Teach and Retire Rich,” who consulted on the development of 403bcompare, said “the site should be a benefit even for those not in California because many of the 403(b) products registered nationwide are in the 403bcompare database.”
Yet this cyber-model for investing isn’t complete without comprehensive written and oral instruction.
A toll-free help line staffed by qualified advisers should also provide the kind of hand holding you don’t get online.
Some key questions are:
How do you construct a well-diversified portfolio for your age, occupation and risk tolerance?
What kind of planning do you need to do if you are close to retirement?
Do you have special needs such as caregiving costs for a parent?
These are questions that even the best Web site can’t answer with any depth.
There’s no reason why your employer can’t help you make more informed decisions about your retirement plan.
Ask them to provide a comprehensive comparison guide.
It should explain and compare all fund features and expenses, including how much the expenses cost you per $10,000 invested over different periods of time.
Your employer also should include a diversification calculator.
This would show you how a mix of funds, i.e., 80 percent stocks, 20 percent bonds, would perform in different market conditions.
While some employers already offer this feature, it should be a standard tool in every retirement program.
Even better would be an open program that allows you to choose from all the leading mutual-fund groups at institutional expense ratios (under 0.20 percent a year per fund) without paying commissions.
Pre-diversified fund packages geared to specific ages called “lifestyle portfolios” are also needed in every employer’s plan combined with automatic enrollment, which would raise savings rates.
While you are at it, ask the Securities and Exchange Commission to mandate point-of-purchase disclosure that would reveal all mutual fund costs.
It’s considering such a proposal now. You can e-mail them at: email@example.com.
We need to go beyond cyber investing to improve retirement plans.
In an ideal setting, your retirement program should be less like Amazon.com and more like a fair contracting process: Only the lowest bidder with the best product wins.