Information Overload

by Guest Post Keith Reed

Teacher and Vice President, Morongo Teachers Association. Morongo Valley, CA

(Reprinted here by permission of Mr. Reed. Original publication)

In this age of information overload, we sometimes find it easier to step back and let “experts” make our decisions for us, especially when it comes to our investments.  This is why using an investment advisor is more comfortable and less stressful than trying to manage our own investments.  My problem with this approach is the lack of transparency in some managed investment accounts. The needless complexity that seems designed to discourage people from making decisions about their own retirement accounts.  I want to try and clarify how one can become knowledgeable about investing.  I also want to supply the tools for you to feel confident when discussing your own portfolio, and to know when you may or may not be getting the best out of your investment. This article is a summary of research into 403(b) retirement accounts.  I am not an investment advisor, and in fact you may lose money following my steps, but at least you will know what you are doing while losing money!

A good place to start is with your financial advisor, ask these two questions, “How much exactly does it cost to invest yearly and monthly with this firm?” and “Can you act in a fiduciary capacity for my best interests?”   Find out if the detailed answers will be put in writing.  If your advisor is anything like my financial advisor you will get the best song and dance you have ever seen.

 Next. begin to do your homework,

1)      Go to http://ctainvest.org and login.

2)      Research hiring a CFP (Certified Financial Planner) fiduciary.  A fiduciary is a fee only advisor who has a legal or ethical relationship of trust between two or more parties.  Go to, http://www.napfa.org/

The main point to remember in all this is that the advisor in the lunchroom, the one that comes with free pizza or snacks, is there to make a buck he is not there for your benefit.  I do not begrudge someone making a living.  What I do disagree with is the needless complexity involved with investing, and the ability of a financial advisor to obscure the actual costs of investing.  When I finally got serious about investing and began asking for real numbers my advisor stopped replying to my questions, now I know why.

I have three rather simple goals in mind in doing this.  

1)      Transparency!  Start with an MTA investment committee.

2)      Knowledge!  Get the correct info and tools out to the teachers, and allow them to make their own financial decisions.

3)      Empowerment!  Low cost investing for those teachers that feel they do not need managed funds.

I want to congratulate all MTA members that have taken the step of saving money in a 403(b) retirement account or Roth IRA.  Your foresight will create a retirement based on independence rather than want. You will be able to spend time with family, create, challenge yourself, pay for unexpected expenses and not be a burden to others.  Otherwise you can plan on living on a CALSTRS average 56% of your final year’s pay.

My story is a cautionary tale for experienced and new investors.  Most of you know that you have (X) number of years until retirement.  If you have an investment plan you check your statement and prospectus yearly and know approximately how much you’re earning on your investment.  You also know how much you are charged by your advisor monthly and yearly.  That is what I thought, until I attended a CTA conference on retirement accounts.

First, let me give you a little back ground.  About a year ago my wife, Margaret, and I began wondering about the hidden costs of our 403(b). How much are we paying?  We often see ads saying “Is your investment account being eaten up by hidden fees?”  We wondered if we are being charged these hidden fees, and more importantly, how can we find out?    January 2012, tax time rolls around.  We have received our statements and decide it is time to sit down and answer this question of hidden fees once and for all.  The brokerage statements seem to be the picture of transparency and openness.  We look for evidence of “Hidden Fees”.  The statement shows that on the first of each month we purchased so many shares at such and such price, down to the thousandth of a percent!  The statement also documents a year’s  worth of investments with a total at the bottom, we have invested (X) dollars and have made (Y) dollars.  A marvel of simplicity…….but interestingly we can’t find how much we are charged.

My first step was to Google mutual fund costs.  1 billion hits later, I finally settled on a Vanguard web page, http://www.morningstar.com/ I had heard that Vanguard funds are low cost and have good returns. This web page allowed me to plug in my investment funds and compare them to Vanguard funds.  I discovered that I am being charged an annual management fee of about 2.0% of my total investments while Vanguard charges 0.17%, OK now I have some reference.  The question though is can I trust Vanguard to give me an honest comparison between funds?

The next step was to take these questions to our advisor who has been a friend of ours for years.  When we met with him we had specific questions in mind, for instance, “How much does investing here actually cost us?”, and “Why do our mutual funds charge about 12 times more than Vanguard?”  The advisor went directly into salesman mode, he told us how much we have made, the tax advantage of having a 403(b) and how, when we retire, we can switch to Vanguard.  Interestingly the question of how much it cost to invest there was never answered, but he did offer phrase after phrase of jargon filled complexity; it certainly appeared he knew what he was talking about, but his slick sales job made me want to dig deeper.

January 18, 2013 MTA sent us to a CTA conference on upcoming changes to 403(b) and 457(b) retirement accounts.  The conference presented an outstanding wealth of information and resources.  We were instructed on how to correctly research investment costs, guided through web pages designed to compile investment data, we were given access to a fiduciary advisor to answer general investment questions, and finally how to share this information with other teachers.  An interesting section at the conference was a comparison between managed funds such as Oppenheimer  (managed funds have a “manager” in charge of directing the investments) and stock index funds (index funds are investment funds that are pegged to the stock market, no “Manager” per se). The speaker documented the growth of managed funds in comparison to index funds and showed how, in general, both funds averaged similar growth over a set period of time, but the managed funds charge 1.0% to 2.0% or more, while the index fund may charge only 0.17%. I began to wonder why my funds were all the expensive “Managed funds” when the low cost index funds have similar returns?  I emailed my advisor friend for an answer.

We brought a copy of our portfolio statement to the conference and had one of the CTA advisors take a look and run the numbers.  The advisor showed us how to use an online resource in which all 403(b) vendors that sell to schools must disclose their fees, the web address is, http://www.403bcompare.com/   The advisor showed us how we are not only charged the annual maintenance fee of 2% we are also charged a 5.75% front end load fee on every dollar we invest with our Vendor!  The investment advisor at the conference recommended that we hire a CFP (Certified Financial Planner) that will work with us in a fiduciary capacity.   The CFP could give us more detailed personal information regarding our portfolio.  The CFP, unlike my existing advisor, is paid directly by us, not by how much we are investing in mutual funds, mutual funds by the way that are recommended by his firm!

The revelation that we have been charged about $60 per month to simply put money into a managed fund, plus a 2% annual management fee is a considerable concern. These charges are not apparent on any statement, nor did my advisor ever mention them.  They are probably buried in some fine print, signed 10 years ago, but that’s not how I buy a house, car, or even groceries, why would I buy mutual funds like that?   Margaret and I go home with a lot more questions than we had before the conference. We begin to run the numbers from the http://www.403bcompare.com/ web site and plug them into an online investment calculator.  We found that if we had invested that $60 monthly front load fee, and annualized it for 20 years at about 6%, the cost comes to nearly $30,000, remember, this is just the front load fee!  We didn’t even try to calculate the annual 2.0% yearly maintenance fee, and this was just for my 403(b)!!!  Margaret’s investment costs were similar!  No wonder our broker “Friend” was so insistent on obscuring the cost of investing. Once again, if there was value to this cost, and it was disclosed openly by my advisor, I would just move on and call it my mistake.

Final steps.   CTA put me in contact with some outstanding advisors.  They have answered every question we have thrown at them so that we can share the information with you.  Their first recommendation was that MTA set up an investment committee to look into investment options available to members. CTA’s second recommendation is to get the word out, I am sure all of you have received some mailers or email from CTA about http://ctainvest.org.  If you are like me you just threw the mailer away or deleted the email.  You will actually need to go online and begin your research!

We finally set an appointment to meet with a CFP.  Margaret and I went online to http://www.napfa.org.  This web site was recommended at the CTA conference.  The NAPFA web page had us put in our zip and the distance we would be willing to travel for a CFP.  The web site came up with three CFP’s within 50 miles.   We did some research and decided on a CFP down in Rancho Mirage, we set up an appointment for a review of our portfolio.  While at our appointment we discussed what had been happening with teacher investments over the years both locally and statewide.  The CFP told us he can represent us in a fiduciary capacity, he has an MBA and has given workshops on investing for LAUSD.  He confirmed what the CTA advisors said about the high cost of our portfolio and suggested a low cost Vanguard fund.

Margaret had been researching the possibility of switching our portfolio to a lower cost fund, but we explained to our CFP that we could not get into Vanguard because our advisor “friend” had already told us that Schools First, MUSD’s fund administrator, would not let us invest in this type fund. The CFP was not sure of that statement.  Margaret did more research and discovered that Vanguard funds were actually available to us, and simply by using CalSTRS as a vendor we could invest in a Vanguard fund.   The web site, http://www.403bcompare.com/ had a link to CalSTRS.  She called the number online and made an appointment for a CalSTRS advisor to call her back to help set up an online account.  Our next step was to confirm our decisions with our CFP.  The CFP made more suggestions that were tailored for our investment strategy and we will follow his advice.  The CalSTRS advisors are another resource to look into.  They are not paid a percentage of investment funds, but are salaried advisors therefore there is less inclination to recommend funds not in the customers best interests.

Back to my 3 goals,

Transparency, I am researching setting up an investment committee.  If this is something you would be interested in please email me and we can discuss details.

Knowledge, I am planning one or two (East and West evening meetings to show how you can use CTA web pages to research your own investment strategy.

Empowerment, Low cost investing for those teachers that feel they do not need managed funds and how to take control of your 403(b). CTA will come out to a site to conduct a 90 minute inservice on investment goals.  We will need to plan this as we will need a minimum of 20 people

If you would be interested in a meeting please email me at km4reed@yahoo.com.  If there is enough interest I will set up the meetings and send out flyers.