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Close out a 403B plan and convert to another non taxable fund.


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Guest weekends1

I worked for a nonprofit company for 7 years and have money in a 403b from that company. There is never any new money put in it. My account has not increase d in 3 years. Actually it has lost money on a consistant basis. I want to close out the account and move it to a non taxable account. Can I convert to my current 401k playn or a Roth IRA?

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What do you mean by close out the account? If your plan permits you can rollover 403(b) funds to another retirement plan or IRA if you have terminated employment or attained 59 1/2. You cannot make a direct transfer to a Roth IRA but must establish ar regular IRA and then transfer the funds to the Roth. See IRS publication 590 available @ irs.gov.

mjb

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What do you mean "from that company"? Isn't the 403(b) money invested in an account or annuity that you chose?

If it has not earned anything in that account that you chose, why do you think that it will earn money just because you change the type of plan? The type of plan is just, for the purposes of this discussion, a name. Regardless of the name of the plan, whether 401(b), 401(k) or whatever, you will still have to choose something to invest the money in. If you could not choose effectively in the 403(b), then chances are that you might not either in a 401(k) or otherwise. UNLESS, you were in the very unlikely situation of not having any real choices within that 403(b). If you had choices, then it was not the 403(b) at fault and there will be no difference in any other plan by any other name.

It might just be that you need to change whatever it is that the 403(b) money is invested in rather than trying to transfer or rollover to a plan with a different name. Assuming that this is a 403(b) account since there would be a different scenario if it is an annuity where an exchange (90-24, I think) might be considered taking into account any surrender charges etc etc.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest weekends1

Thanks guys for your comments. They both make sense but I have a 401k with another company and for some reason it is dong better. I am in moderate stock fun accounts in both. But Anyways I wont to consolidate those accounts somehow so I don't have to keep watching both funds. I will look into the IRA accounts.

Gburns, I am almost positive you can't roll a 403B to a 401K. If I could I would do that. Thanks

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weekends1, you can roll a 403(b) into a 401(k) if the 401(k) plan allows it. This portability rule was added by EGTRRA effective in 2002.

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Free advice, worth every penny. Run, do not walk, to the nearest exit.

Lots of 403(b) annuities have sub par performance because of the internal expense loading on the annuity and/or mediocre investment management.

I'd bet the reason it's under performing are the fees you're paying either explicitly or deducted out of the investment fund.

I expect this may bring some response from people in the annuity business, but I never met an annuity (at least in the accumulation phase) that didn't underperform a comparable investment in mutual funds.

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Ditto to Demosthenes's comments.

403(b) plans earned a bad reputation because they were traditionally funded with annuity contracts -- inflexible, overly conservative, low returns, high fees, and crippling termination or transfer fees. I know that every insurance broker out there is shooting hate-daggers at me right now, but there you have it...

There's nothing wrong, at all, with 403(b) plans per se. Now that they can invest in a wide variety of mutual funds, competitive with and comparable to 401(k) plans, they're usually the best choice of retirement plan for an eligible employer.

Lori Friedman

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Demosthenes

I do not understand "Free advice, worth every penny. Run, do not walk, to the nearest exit."

Was there something wrong in the various posts? What, Why?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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I saw the humor but someone else saw it differently so I wondered if I had read wrong. Their take was that you were saying that any advice given on Forums such as this was free therefore cost nothing therefore worth nothing.

The problem with the original post is that it exposes a situation that is very common. A few groups have made feeble attempts at correcting the situation but in general 403(b) participants get the short end and do not even realize it but worse will not understand even when it is explained to them.

It matters not whether it is an annuity or a mutual fund that is involved.

Shifting from 1 to the other might only mean changing from bad to bad, in most cases. The choices of investment, the fees, the expenses, the surrender charges etc etc are all horrendous when taken in total per "account".

Comments such as "I have a 401k with another company and for some reason it is dong better" are very often without basis. "doing better" than what? A bad 403(b)? Annuity or mutual fund? The key in the quote is "for some reason". Why not know what the reason is before deciding whether it is better or worse?

There has recently been a lot of press coverage showing how difficult it is to find out what fees and expenses etc are being charged or paid in 401(k) plans. This makes evaluation and comparison even more difficult.

RE: "I am almost positive you can't roll a 403B to a 401K. If I could I would do that."

Try not to guess, it is easy to look up. A number of posts gave reasons why you might be able to depending on your plan provisions etc.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Section 403(b) as it is currently constituted should be repealed. Here are my reasons: 1. Employer involvement limited to remittance of salary reduction for investment. 2. No requirement for employer to establish a "plan" with a plan administrator, summary plan description, board of trustees and a trust instrument. 3. The foregoing results in the employee being bombarded with salespeople on the job hawking the obvious----high cost investment products ie annuities and mutual funds. The fees are so high that the participant would be better off in investing after tax dollars in a tax efficient no-load fund.

The 403b, since its inception in 1959, is nothing more than an individual financial salesperson visiting with you at your kitchen table. But why visit 100 individual kitchens when you can hawk your products in the teachers' cafeteria? IT IS A NATIONAL SCANDAL.

Peace and Hope,

Joel L. Frank

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403(b) plans were around long before the govt began regulating pension plans in 1942 and there are reputable 403(b) plan providers. Abolishing 403(b) plans and replacing them with qualified plans will only substitute a new set of evils since 401k plans have higher maintainance expenses for ADP testing, qualification and amendments, auditors opinions, 5500 filings, recordkeeping fees, etc which will be passed on to employees in place of commissions. As numerious posts on this message board have demonstrated establishing a 401k plan does not prevent high mutual fund charges and admin fees being imposed on employees. There are many mutual funds which have similar or higher costs than annuity products. Finally there is no impetus for structual change in 403(b) plan administration in public plans exempt from ERISA which would imposed administrative costs that would be passed on to either employees or taxpayers.

mjb

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While there are some reputable 403(b) investment providers, the record seems to show that the majority of available option are not very desirable.

Large chunks of the business is held by annuities with exorbitant surrender charges. An a large chunk is held by mutual funds with even worse charges.

There is nothing that I have ever seen in the 401(k) market that compares or even comes close to an annuity with 25% surrender charge declining over 15 years or a 50% sales load on a mutual fund ala Destiny, First Command or Pioneer Independence.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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mbozek:

The Federal Thrift Savings Plan charges about 6 basis points.

The Florida Investment Plan charges 21 basis points.

The 457(b)/401(k) Plan of the City of New York charges 34 basis points.

Why does the average 403b investor pay 150-300 basis points? Because the employer permits these individual annuity contracts (403(b)1) and custodial accounts (403(b)7) to be sold, at retail, on an individual basis by commissioned brokers rather than negotiating the fees with a no-load outfit. The Los Angeles Unified School District allows 100 investment providers to solicit its workforce.

Solution: Each state's PERS should act as agent for all the state's local school districts when it comes to 403b. The PERS will then negotiate with a no-load outfit to do the investing. Each participating school district will remit the salary reduction to the PERS for forwarding to the investment provider.

IN ITS CURRENT STATE SECTION 403(b) IS NOTHING MORE THAN A FULL EMPLOYMENT ACT FOR THE RETAIL BROKERAGE COMMUNITY.

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Guest winterain

I opened a 403b when I worked for the teacher's union. Now I am disabled from teaching but still working elswhere part time. I want to move this money into a plan that I can contribute to but can't figure out the laws.

It says that no distribution can be made unless:

separated from service with your employer: or become disabled ( as defined in IRC Section 72(m)(7)

I think I am still considered an employee, just disabled, but I am not disabled totally as I can do part time work of another type elsewhere.

How do I find out what this IRC section says about disability.

I really want to put this money somewhere where I can continue to contribute to it.

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Guest winterain

Joel,

That is exactly how they got me, in the teachers room! You are so right. There is no administrator to save the likes of me from hawks like them. Now it appears as though I am stuck with this thing and cannot even contribute to it anymore!

Anna :angry:

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Winterain:

You may effectuate a Direct Rollover because you no longer work for that 403(b) employer. See if your current employer's plan is no-load. If it is see if they will accept a direct rollover of your old 403(b). It they will then roll it over to your current employer's plan. If your current employer does not have a retirement plan then roll it over to an IRA with a no-load outfit like Vanguard.

Peace,

Joel L. Frank

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Joel,

Is there any factual proof that these no-load fund that you keep pushing are better than every one of the load funds and every one of the annuities?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest Peaceandhope

GBurns,

Over the years many studies have shown that paying a commission to ACQUIRE an investment has nothing to do with investment performance. So it makes no sense to buy a loaded fund. If one feels (s)he needs advice use no-load funds and hire a fee only planner when the need arises.

Using the annuity product inside of a pre-tax plan is like opening up an umbrella indoors. The tax-deferred investment and its gains are already tax-sheltered. The annuity adds no value. There is absolutely no reason to pay a Mortality and Expense charge of 100 bp (or more) in order to be guaranteed a lifetime income when most participants will never lifetime annuitize. Moreover, a distribution option does not have to be elected until one reaches his Required Beginning Date which could be decades away. The 100 bp would be better utilize to grow the account. With the exception of the no-load annuity provider known as TIAA-CREF which charges 3 bp (0.03) for the M&E fee participants in pre-tax plans should avoid the annuity like the plague.

Peace and hope,

Joel L. Frank

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Guest Peaceandhope

THIS IS A MUST READ FOR ALL WHO EXPECT or THINK THEY ARE GETTING UNBIASED INVESTMENT ADVICE FROM THEIR 403(b) REP. It comes from the October 2004 issue of Investment Advisor magazine.

Some may need to read it more than once until the message sinks in. For those of you that do not have a no-load alternative, you may want to give a copy of this article to your employer's decision makers.

Peace and Hope,

Joel L. Frank

================================================

TOOLS OF THE TRADE: House of Games

Wall St. is in the manufacturing business, not the objective advice business.

By Dan Wheeler

Investors looking at an uncertain future will, at some point, turn to the financial services industry for help. That’s good news for the industry, but it’s not always so good for the investors.

The reason is simple: Too much of our profession is set up to ensure our success with little regard for the success of clients and customers. As a result, investors essentially are playing a game where the odds are not in their favor. But this sad state of affairs does provide you with the opportunity to educate your clients by shedding light on how the industry really works—and then demonstrating the value you bring by refusing to play the game.

Numerous studies have shown that today’s investors want guidance. They hope that by working with an investment professional they’ll get objective, expert advice that will enable them to make smart decisions regarding their investment capital. However, the problem with seeking professional investment help is that all too often the person sitting across from the investor as an “advisor” is there to make a sale, thereby generating revenue for his employer and a commission for himself. As with any business, the greater the revenue and the bigger the payout, the better it is for the firm.

Unfortunately, too many people think that Wall Street brokerage firms are there to provide investors with good advice designed to help them reach their financial goals. On the surface, this perception makes sense. After all, stockbrokers work for enormous firms that employ portfolio managers, economists, analysts, and other market watchers. That appears to put the Wall Street broker in an ideal position to tap into all that knowledge and deliver rock-solid advice backed by enormous research and insight.

The belief out there is that the financial services business is made up of professionals. A professional by definition is someone you hire because of their expertise—a doctor, accountant, lawyer, and so forth. By gaining access to that expertise, you receive something of value: better health, a lower tax bill, or a large legal settlement, for example. The relationship between a professional and a client is such that the professional is given incentives to help the client succeed.

The financial services industry spends huge sums each year—more than $700 million on magazine advertising alone—to persuade investors that they provide professional advice. The reality is that Wall Street is not in the business of providing objective, professional advice. Actually, Wall Street is in the manufacturing business. Like any other manufacturing business, the objective is to develop products that will sell, and so the firms hire salespeople to “move the products.”

Of course, there is nothing inherently wrong with creating and manufacturing products and paying a sales force commissions to sell them. Most commerce functions this way. Investors, however, should not be looking to a manufacturer and its sales force for objective advice. In short, the business that much of the financial services industry is in is the wrong one for investors.

The Incentive Game

We all know that recent investigations into the financial services industry have exposed many unsavory practices. Such revelations underscore the fact that the industry has long been masking itself as a profession while in reality it operates as a sales-driven manufacturer of products.

These scandals aren’t what should most trouble your clients and prospects, however. There’s a more fundamental concern: The industry is not structured to give them advice—it’s in the business of selling.

So how did this misconception come about? Wall Street firms began as investment bankers. Companies needing to raise capital would hire an investment banking firm with a skilled sales force to sell their stock to the public. Everyone understood that the broker was a salesperson hired to raise capital for the client. No one expected objective advice. They just wanted information about the company raising the capital.

But once a stock began to trade in the public market, investors began to demand advice about it. The investment banks realized they were well positioned to provide this advice and that it could be a huge source of new revenue. The problem, however, was that these firms had no fee-based advisors to work with clients. So instead of developing professionals to meet this need, they decided it was more profitable to simply present their sales force as “advisors.”

The Product Business

As these companies began providing more stock recommendations, the public increasingly saw them as the source for the advice they craved. Brokerage firms now realized that they had a huge customer base to which they could sell products directly. It was a natural progression and one that made good business sense. After all, if you have customers in front of you, why not sell them “packaged products” that probably carry higher profit margins than products made by someone else?

Once again, generally speaking, there’s nothing wrong with this approach. However, like any manufacturer, once a brokerage firm has a wide range of products to sell, it needs to create incentives among its salespeople. Historically, of course, that incentive has taken the form of a commission.

Here’s where the problem arises. Every manufacturer has some products that are terrific and very easy to sell—a top-notch mutual fund run by a revered manager, for instance. Conversely, some products aren’t nearly as good as the others, and take more effort to sell—such as a fund that’s managed poorly or that has high expenses. In order to move more units of the poorer-quality product, the manufacturer must create extra incentives for the sales team—that is, offer a bigger payout for selling the inferior product.

The result is an uneven level of compensation that gives a commission-based stockbroker a stronger financial incentive to sell investors a fund, stock, or other investment that may not be as good an option as another.

This arrangement is often found at firms that offer in-house funds along with funds created by outside firms such as mutual fund companies. In such instances, a broker may earn a bigger commission for selling his firm’s in-house funds. That might work out fine for investors if the firm’s proprietary funds are well-managed, are strong performers, and constitute the best fit for the investor. But as we all know, that’s often not the case. Even though the in-house offerings may be inferior—or at least not the most suitable options—chances are good that a broker will respond to the incentives created to generate the greatest revenue.

The industry’s recommendations regarding third-party products also may be suspect. That’s because many brokerage firms have long had a financial incentive to recommend certain mutual fund families over others with better performance and lower expenses. The fund companies began setting up these types of revenue-sharing, or “soft dollar,” arrangements as a way to get their funds on the brokerage firms’ preferred lists and encourage brokers to promote them more heavily than the competition’s. According to research firm Financial Research Corporation, the 50 biggest fund companies make approximately $1.5 billion in revenue-sharing payments to brokerage firms each year. Meanwhile, the Securities and Exchange Commission announced in January 2004 that 14 of the 15 brokerage firms it examined over the previous year took such payments from mutual fund companies.

Common sense, therefore, tells us that the incentive game is structured to help the industry win at the expense of the investor. For example, let’s assume that a broker has sold a number of his clients a certain mutual fund and earned his commission. Now let’s assume that the broker awakens one day to discover that the fund he sold has been hurting investors by allowing illegal market timing. Does the broker consider this to be good news or bad news?

On the one hand, his clients have been damaged. But this development has also created the opportunity to move the clients’ money and earn another commission. “We can’t trust these guys anymore and we need to sell your funds,” the broker might say. Would that happen? You tell me. The incentive and pressure to generate commission revenue is awfully strong.

Ask your clients to think about it like this. If you walk into a Ford dealership, you expect the salesperson to try to sell you a Ford. That’s what they get paid to do. You aren’t expecting objective advice regarding the pros and cons of a Ford versus a Toyota. All the participants in this process understand the game. This is why I indicated earlier that commissions are not inherently bad. The difference is that automobile companies are not spending millions to convince you they are giving objective advice.

The financial services business wants to have a commission-based compensation system and the respect that comes from acting as an objective professional. But they can’t have it both ways. This is why we have seen an explosion is the growth of the profession we know as fee-only investment advisors. Investors are becoming informed and demanding objectivity. As an aside, you CPAs who believe you can take commissions and maintain your professionalism are kidding yourselves.

I know the rules of the game, having worked as a broker at two major Wall Street firms. Almost from the moment I walked through the doors, I realized I had not been hired to give investment advice to my clients but to sell products. After three years, I had enough and quit—on my 40th birthday. I must emphasize that these people aren’t corrupt. They’re simply being led by industry practices to act in their own self-interest. But they are not the right source of investment advice for investors. The question your clients and prospects must ask themselves is: Do I really want to work with people who constantly are encouraged to put their needs ahead of mine?

Of course, once clients and prospects understand how the incentive game is played, it’s easy to communicate an important fact: As a fee-only advisor, you don’t play the game. Your business model and value proposition will be obvious to investors once they recognize the alternative. At that point, they’ll be highly motivated to work with you. As I always say: Do your job and the numbers will take care of themselves.

Dan Wheeler is director of global financial advisor services at Dimensional Fund Advisors in Santa Monica, California. He can be reached at dan.wheeler@dfafunds.com.

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Instead of answering the question you posted "Over the years many studies have shown that paying a commission to ACQUIRE an investment has nothing to do with investment performance".

THAT is exactly the point, the commision (or no load) has no relevance to the performance.

So you have shown that no load makes no difference.

Re the article. It is a self serving article and only promotes the very limited experience of 1 individual who has a bias. It serves no purpose in this discussion.

Is there anything that shows that the advice of a fee-only advisor leads to better investment performance? I bet not.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest Peaceandhope

Posted on Oct 23 2004, 03:06 PM

Instead of answering the question you posted "Over the years many studies have shown that paying a commission to ACQUIRE an investment has nothing to do with investment performance".

THAT is exactly the point, the commision (or no load) has no relevance to the performance.

So you have shown that no load makes no difference.

Re the article. It is a self serving article and only promotes the very limited experience of 1 individual who has a bias. It serves no purpose in this discussion.

Is there anything that shows that the advice of a fee-only advisor leads to better investment performance? I bet not.

++++++++++++++++++++++++++++++++++++++++++++++++++++

Trust me when I assert that I am not attempting to evade answering your question. THE POINT IS THAT PAYING THE LOAD MAKES NO DIFFERENCE IN PERFORMANCE---SO YOU TELL ME WHY IT MAKES SENSED TO PAY A LOAD. Paying a load of 5 percent is like running 105 yards in a 100 yard race. In dollar terms if you have $100 to invest and you pay 5% to acquire the investment only $95 is invested. You need an investment return of 5.26 percent just to get you back to the $100 you started with. I find this to be simple common sense. What am I missing?

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Guest Peaceandhope

GBurns Posted: Oct 18 2004, 02:42 PM

Registered User

Posts: 1,448

Joined: 13-September 99

While there are some reputable 403(b) investment providers, the record seems to show that the majority of available option are not very desirable.

Large chunks of the business is held by annuities with exorbitant surrender charges. An a large chunk is held by mutual funds with even worse charges.

There is nothing that I have ever seen in the 401(k) market that compares or even comes close to an annuity with 25% surrender charge declining over 15 years or a 50% sales load on a mutual fund ala Destiny, First Command or Pioneer Independence

====================================================

GB:

Based on this post I am astonished that you are challenging me to prove that no-load investing is superior to paying a load.

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As you do quite often you take things out of context without even using it to prove a point.

I take the viewpoint that no item (no-load, load, high commission annuity, low commission annuity etc) is better than than another item just because of the load, no-load or commission. Each product must be looked at on its own merits and not be blindly dumped because it does not fit someone's niche.

If load is not an indicator of performance then load (or lack) is not a primary issue and should not be used to exclude an item from being considered. It does not matter what you pay, it only matters what you get. Investment performance is determined by return not acquisition cost.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest Peaceandhope

GB: If your post of October 18th was NOT "pushing" (your term) no-load investing, would you please tell us what kind of investing you were or do advocate?

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