The Advisor - May 2012

IMPORTANT NEWS FOR YOUR FINANCIAL AND PERSONAL FUTURE

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403(b) or 457 – Why Not Both?

If you find that your 403(b) and 457 plans both offer attractive options and features, you are not limited to one or the other:

  • You do not have to max out one plan before you can contribute to the other.
  • If you have a 403(b) and 457 plan available to you, you can contribute the maximum annual amount to both plans. In 2012, you could contribute $17,000 to a 403(b) and $17,000 to a 457 – that’s $34,000 in tax-deferred money.
  • If you are age 50 or older, you can add another $5,500 to each, for a total of up to $45,000 a year.

Of course, not many educators can afford to sock away that much money. But just think – if you are nearing retirement – say, within three years – and you were able to max out contributions to both a 403(b) and 457 for those three years and earn an average annual return of 6% after fees and expenses, you’d have nearly $150,000 more in your retirement kitty. (Note: There are also special catch-up provisions for 403(b) and 457 plans – see the comparison chart on here.)

Be Informed about Fees

All investments have fees. However, the more you understand about how the fees are charged and what they are, the better informed you will be when making investment decisions. Fees can have a tremendous impact on the amount of money you can accumulate for retirement.

  • Mutual funds may charge a front-end (when you buy) or back-end (when you sell) sales charge or “load.” Mutual funds also have expense ratios, which is the total of the fund’s operating expenses expressed as a percentage of the fund’s average net assets. Generally, passively managed funds (index funds) have lower expense ratios than actively managed funds. Here are some examples:
    • Vanguard 500 Index Fund – 0.17% (passively managed)
    • Vanguard Diversified Equity Fund – 0.40% (actively managed)
    • Fidelity Spartan U.S. Bond Index Fund – 0.22% (passively managed)
    • Fidelity Corporate Bond Fund – 0.45% (actively managed)
    • Fidelity Worldwide Fund – 1.08% (actively managed)
    • Sources: Vanguard.com, fidelity.com. Website accessed May 14, 2012.

Note that an actively managed fund may be worth the extra cost if the fund manager consistently outperforms the fund’s benchmark index. However, that may be difficult to do over the long term.

  • Compared to mutual funds, the cost of a fixed annuity investment is more complex. One major component of the cost is the “spread” between the amount the insurance company earns by investing your contributions and the amount it credits to your annuity. The “spread” is not transparent in that it may not be specifically disclosed, and it may vary considerably from year to year and insurer to insurer. However, surrender fees are transparent – make sure you understand the surrender fee schedule before choosing a fixed annuity. Finally, fixed annuities may charge an annual contract fee.
  • Equity indexed annuities are technically considered fixed annuities, but they link the return to a specific index. These types of annuities are generally difficult to understand and also have high fees and surrender charges. The Financial Industry Regulatory Authority (FINRA) (finra.org) has even issued an Investor Alert, warning investors about the complexity of equity indexed annuities due to the various ways they are indexed as well as caps on what you can earn.
  • Variable annuities may charge a boatload of fees, including a mortality and expense fee, administrative fee, maintenance charges and surrender fees. There are also fees for optional features you may not really need, such as a living benefits rider, death benefits and lifetime withdrawal benefits. Be sure you understand all the fees involved in a variable annuity. In many cases, you may be able to invest directly in mutual funds through a 403(b)(7) account or a 457 plan that are similar to the investment options available in a variable annuity, but at lower cost.

CTA is working hard to protect the guaranteed pension benefits you’ve earned and deserve, but it’s important for you to take command of what you can control – participation in voluntary retirement savings through a 403(b) or 457 plan. Visit CTAinvest.org to learn more.