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Transferring Out of a High Fee 403(b)
A high school guidance counselor from Indiana recently began the process of transferring out of two high-fee 403(b) investments and into a low-cost 403(b) investment. Here's her story on this process.
  My husband and I began retirement investment in earnest about 10 years ago. Until that time our savings were primarily directed toward paying off our mortgage. Since my husband, a high school teacher, had a variable annuity with Horace Mann, I opened a variable annuity with Horace Mann. Neither of us knew much about what we were doing. The agent was a former neighbor. After I accepted a position as a guidance counselor at a high school in Lowell, Indiana, eight years ago, I opened another annuity account with AIG-VALIC. My husband also opened an account with AIG-VALIC when his school district offered that choice. We thought it would be a good idea to "diversify" our retirement accounts. I must say that with age comes a little wisdom.
I recently discovered from various web sources including www.403bwise that I may be paying too much for my 403(b) investments. Specifically, I learned that annuity products can be much more expensive than investing directly in no-load mutual funds. I also learned that investing 403(b) money in an annuity product (fixed or variable) offers no additional tax advantage over investing 403(b) money in mutual funds known as a 403(b)(7) custodial account. Unfortunately, annuity products (sometimes known as a TSA for Tax Sheltered Annuity) were the only option offered by my school district.
As luck would have it while I was in the process of talking to other colleagues about their investment plans and doing some research on investing my school district announced it was making the Vanguard mutual fund company available. I was thrilled with this news as I had recently learned about Vanguard's extremely low fee mutual funds.
Not long afterwards I set up an account with Vanguard and started contributing each pay period. I then went about the process of transferring my money from the Horace Mann Insurance Company ($45,000 split roughly $25,000 variable annuity/$20,000 fixed annuity) and AIG-VALIC ($59,000) into my new Vanguard account. I downloaded transfer forms from the Vanguard website and mailed them to my two vendors. AIG-VALIC was very prompt in transferring my assets to Vanguard. Plus there were no exit penalties. It took about a month for them to transfer my money to Vanguard. Horace Mann, on the other hand, has been very frustrating. After hearing nothing from them for a month and a half I contacted one of their representatives. She stated that they hadn't received the transfer forms from Vanguard. I checked with Vanguard who said the forms had been sent out. Horace Mann also told me there would be a 5 percent penalty for transferring out of the account, which I have held for about eight years. I subsequently reviewed my last statement and found that the penalty was actually about 1.9% (which equates to an $860 penalty). I called Horace Mann again, and spoke to another representative who told me that the 5% penalty would apply to the percentage of my annuity that is held in a fixed account and apologized for the other representative's misrepresentation. However, she told me that the Vanguard paperwork that I submitted was not adequate to request a transfer. I would have to complete a Horace Mann request for a transfer. I explained that AIG VALIC, with whom I held another annuity, executed the transfer from my account without additional paperwork, and that my account with AIG VALIC was held for only about 5 years. The representative just repeated that I would need to complete the Horace Mann paperwork, as well as having Vanguard send their forms. I e-mailed the Vanguard customer service representative asking him to resend transfer forms to Horace Mann.
Not long afterward I received Horace Mann's paperwork and mailed it to Vanguard. After completing their portion, Vanguard will forward the paperwork to Horace Mann. To cover all bases, I also requested that Vanguard enclose a third copy of Vanguard transfer forms, which were previously sent to Horace Mann. While the $860 hit to exit the Horace Mann product is a bite, it is a relative small price to pay to have Vanguard.
As I was finishing this story I got a call from my local Horace Mann representative. He did not quibble much with my request to transfer other than to say that I was foregoing valuable advice by switching to company that offers no advice at all (his words). He also stated that there would be no surrender fee, even though it said this on the statement, and in a letter that I received from the annuities specialist at Horace Mann. He also said I should have contacted him first and he would have told me that I would not have a surrender fee. He said there hadn't been a surrender charge for years. This is all very confusing: the agent says one thing and the other sources say another. The local agent then suggested that I contact Horace Mann customer service and ask that the amount in the fixed account be switched into the money market account in order to avoid the surrender charge. I made the switch online. I am now waiting for this money to be moved to Vanguard. I will be glad when it is done.
Comfortable Investing on Own
As far as my concern regarding the level of service Vanguard will provide: I prefer to manage my affairs on-line, myself. Plus, The Vanguard Group also offers on-line customer service and lots of investment information through their website. Of course there is no broker who has a vested interest in my account, so if I make poor decisions, I will have no one but myself to blame. But I don't think it takes a Rhodes Scholar to figure things out and make good choices, as long as the information is accessible and consistent. Taking an active role means actually reading a prospectus rather than tossing it in the trash, watching the markets, and perhaps seeking advice from a financial planner who is not affiliated with a brokerage. I keep track of stock and mutual fund trends by reading Morningstar online. Once I have gotten into the habit of attending to these tasks, they really do not take up that much time. If I grow weary of this, I can always transfer the shares of my various mutual funds into a target-date retirement fund (also known as a life-cycle approach) and let things go on autopilot.
My Thoughts and Suggestions
Take charge of your life and investments. Get out of variable or fixed annuities if you can (see suggestions below from 403(b)wise on transferring), unless you are with a low-fee company like TIAA CREF. The good investment fairy will not drop down out of the sky to bail you out of unwise decisions or pull your head out of the sand. Do not be afraid to read, talk, ask questions, or learn. Financial statements might seem intimidating, but with a little patience and web research, you can figure them out. In my opinion, it is never too late to make a change in investment strategy. After all they say that age "65" is the new "45." You've got time if you can keep your body and brain in good health.
Although investing for one's retirement is important, do a little investing in the present, also. My husband and I are generally frugal people. However, we do a trip of a lifetime about every other year. Last summer we toured the Canadian Rockies. In past years family vacations have included trips to Great Britain, the Grand Canyon, Yellowstone, Arches National Park, Brice Canyon and Zion Canyon. We may have a little less in retirement savings because of these jaunts, but we've got a great portfolio of family memories.
403(b)wise Advice on Transfers
After an investor has made the decision to transfer 403(b) money into a new 403(b) vendor we recommend that the participant cease all contributions to the current vendor and direct this money to the new vendor. This allows an investor's current contributions to go right to work with the new and hopefully better vendor. It also prevents contributions from being subject to new surrender charges with the former vendor. Once investment into the new vendor is arranged, the participant can work on transferring old 403(b) money. It should be noted that transferring takes patience and resolve. Companies do not like losing assets so it should be no surprise if they are less than helpful.
Before initiating a transfer of 403(b) money an investor needs to check to see if surrender charges apply. Surrender charges typically exist for two reasons: (1) to compensate the agent selling the insurance product; and (2) to lock an investor into a relationship with a financial company. Insurance companies (and broker-sold products) often impose exit penalties, which typically range from 5 years to 15 years with the charge corresponding to the number of years the penalty lasts. For example, if a vendor imposes a surrender charge for 7 years, then the exit penalty will often be 7 percent of balance. These charges usually decline by one percent each year. This means that if a vendor imposes a surrender charge for 7 years (and a 7 percent exit penalty) and an investor has been investing in the product for 3 years, the exit penalty declines to 4 percent. Unfortunately, many companies impose rolling surrender charges. This means each new contribution is locked into the original surrender charge time period (7 years in the current example), which means an investor's money could be subject to different surrender charges.
Those subject to surrender penalties have a couple of strategies: (1) bite the bullet, pay the fees and move the money; or (2), transfer only money that has passed the penalty threshold. As new money passes the penalty phase, transfer it.
Lastly, to avoid penalty and a potential tax hit, a participant initiating a transfer must NEVER take possession of the funds. Instead, all exchange of money must be handled by the trustees holding and receiving the money. This is known as a trustee-to-trustee transfer and simply means a transfer from one financial institution to another.
We encourage investors to not only educate themselves but also to educate and involve colleagues. There is power in numbers. Benefits officials and school boards take notice when there are many squeaky wheels. Read the 403(b)wise story on how to get better 403(b) investment choices, and the one on the coming 403(b) regulations which will require more employer fiduciary involvement and hopefully will result in better investment choices. The chart in the latter story graphically illustrates the negative impact of high-fee investments on an investor's balance. Finally, use the 403(b)wise Discussion Board to learn from others and share your insights.

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