Image courtesy of debspoons at FreeDigitalPhotos.net
The educational leadership is beginning to look out for your best interests. In case you missed it, Click here for my earlier post about the Los Angeles Unified School District’s 457(b), 2nd largest school district receiving a “Plan Design” award.
In this blog post, I am thrilled to discuss another great plan, the NEA’s 401(k) plan. The Los Angeles Unified and the National Education Association, two of the biggest PreK-12 education giants, avoided the historically troublesome Tax-sheltered Annuity TSA/403(b) and opted for the 457(b) and the 401(k), respectively.
403(b), 457(b) and 401(k) plans offered by public and private employers defer income taxes and are potentially powerful vehicles for retirement savings. But not all plans are created equal. I will elaborate the necessary conditions which look out for our best financial plan interests as teachers, educators, welders, assembly line workers, secretaries, MDs. attorneys, all employees. This requires the employer to hire financial consultants and make available investment companies in which both the consultants and companies exercise their fiduciary duty to employees.
A great plan must have two components:
- Investment Companies which offer low-cost, fully diversified investments
- Financial advisers who practice fiduciary duty
First, let’s clarify fiduciary responsibility. For you and I, the definition of fiduciary duty is quite simple but powerful! According to Investopidea, a fiduciary is “a person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets for the benefit of the other person rather than for his or her own profit.” Keep in mind “his or her own profit.”
While the definition applies to individual professionals such as attorneys and CPAs, the Teachers Insurance Annuity Association-College Retirement Equities Fund (TIAA CREF) and the Vanguard Group are primary examples of investment companies that have always practiced an important form of fiduciary responsibility. Both companies have a long, colorful history looking out for the best interests of clients–it’s embedded in their mission statements– and the public has responded tremendously! They have a combined total of 25 million clients with assets of over $5 trillion under management (Vanguard has over 4 Trillion as of 2017, and TIAA has over 1 Trillion). Clearly the word is getting around these two companies are doing something right. Millions of people, just like you and me, cannot be wrong.
Dan and I invested our money in these companies because of their low-costs:
- Neither charge commissions or excessive annual management fees.
- Neither enter into revenue sharing agreements, the hidden fee.
- Neither charge 12(b)1 marketing fees.
The absence of these fees has huge implications for future returns. It is well-known from academic studies that lowering investment fees by 1.5% could increase your final nest egg by one third. Investment giant John Bogle said that “you cannot get around the math” (PBS Frontline: Retirement Gamble).
Fiduciary Financial Advisers
The difference between financial advisers who have fiduciary duties with advisers who don’t are massive. Fiduciary advisers are trained in investment theory and practice, and are legally bound. Sales brokers or insurance agents aren’t. Fiduciaries have to construct fully diversified stock and bond portfolios at reasonable cost. Nonfiduciaries have no such restrictions and would not put their clients in Vanguard or TIAA CREF because to do so would deny commissions. Thus, the investment philosophies are different, fiduciaries would not select an investment solely because it provides a handsome commission. Brokers are in the business of selling individual stocks and then trading your purchased stocks to get extra commissions. While perfectly legal for stockbrokers and insurance agents, genuine fiduciaries don’t earn commissions.
As previously mentioned Vanguard and TIAA CREF do not pay commissions to financial advisers. Thus, our job of recognizing a fiduciary adviser becomes a whole lot easier. Dan and I ask professionals, “do you use Vanguard or TIAA CREF with your clients?” The nonfiduciary brokers or insurance agents are not afraid to discourage you to stay away from Vanguard or TIAA CREF. When I asked an insurance agent about using mutual funds with my 403(b), she shot back, “I’ll never recommend mutual funds to teachers. They are too risky!” My reaction to this insult was simple, I avoided agents like the plague and learned to manage my own retirement plan.
If you need help, the financial world does have financial advisers who are ready to help and practice their fiduciary duty. They get paid by the hour, as do other professionals: your CPA, yoga teacher, or plumber. Your best chance of finding a fee-only financial adviser with fiduciary duty is to use the National Association of Personal Financial Advisers or Garrett Planning Network. Enter your zip code for names in your neighborhood. As investors trying to find somebody we can trust, we are lucky both organizations require their members to sign fiduciary oaths which pledge their loyalty to the client, no matter what plan you have.
BrightScope Rates Your Employer’s 401(k) Plan
We are lucky we have this wonderful service. BrightScope is an online website which rates employers’ 401(k)s, and compares them with other employer sponsored retirement plans. BrightScope rated NEA’s plan on the following components:
- Plan Cost (This is the most important item!) Rated “Lowest Fees.”
- Company’s generosity (% matched) “Average”
- Participation rate (how many employees use the plan) “Average”
- Salary deferrals “Great”
- Account Balances “Great”
NEA put together a top-notch, low-cost plan with the Vanguard Group as an investment adviser and record keeper. Not surprisingly, the employees decided to invest their money in three Vanguard funds which have the largest holdings. One of those funds, Vanguard Wellesley, is the identical Vanguard fund that our Advisory committee chose for LAUSD employees in our award winning 457(b) plan (Dan and I have money invested in this fund too). NEA and LAUSD’s committee appear to think alike! Congratulations to NEA for looking out for their 700 participating employees. NEA provides a best-in-class model for all unions and employers across the country to follow.
I hope you get this revolutionary picture. The parts of a great plan are not difficult to put together and coming from two K-12 educational giants. The education culture is beginning to discover that the 50 year-TSA/403(b) is troublesome, costly, full of conflict of interests and ruled by mysterious insurance industry regulations. The transparent 457 (b) or the 401(k) plans are low cost and more likely to have genuine fiduciary professionals.
You know a little more about our largest teachers union, fiduciary duty and the companies and financial advisers who practice it. Check out your companies 401 (k) on BrightScope and compare it to what the National Education Association has to offer. Best of fortune.
Here are the websites mentioned:
Click here for Brightscope.
Click here for National Association of Personal Financial Advisers
Click here for Garrett Planning Network
Click here for NEA rating results on BrightScope
Click here for to see our Awarding Winning LAUSD 457(b) plan, and a link to an interview of some of our committee members about our plan.