SUNY System 403(b) Annuity Options

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Pigeon
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SUNY System 403(b) Annuity Options

Post by Pigeon » Tue Sep 05, 2017 11:57 am

I’m 58 years old and employed by the SUNY System. I participate in the optional retirement system through TIAA. Employees also have the option to participate in one or both of two types of Voluntary Savings Plans, a 457(b) and a 403(b) Tax Deferred Annuity Program. I should be able to contribute up to $24,000 annually to each, as I am over 50. DH, also over 50, contributes less than half his maximum to a 403(b) through his employer (a school system) and will get a modest pension when he retires. We plan to both retire in 3-5 years, and have a little over $1M in retirement accounts.

I’ve been maxing out contributions to The New York State Deferred Compensation Plan 457(b). They’ve had decent low-cost options and I’ve been largely satisfied with it.

We’ve recently inherited some funds (about $400K) and am thinking about whether it makes sense to also max out contribution to the SUNY Voluntary 403(b) Tax-Deferred Annuity Program. I am not a horribly sophisticated investor. I understand that in general, annuities aren’t a good idea, so this concerns me.

Further complicating the situation is that I have a kid who will be going to the SUNY system for college next year. If we were to max out all three deferred compensation accounts (dh’s 403(b), my 457(b) and my 403(b) tax-deferred annuity, a combined total of $72,000), we should be able to get our AGI under the threshold to qualify for the state’s free tuition program for at least my daughter’s last two years of college.

So, I’m looking at the 403(b) annuity options and as this is totally unfamiliar territory for me, I’m sort of paralyzed. https://www.suny.edu/benefits/vsp/403bproviders/

The providers all list mutual funds, which confuses me. I don’t understand how investing in, say the FID 500 Index PR, a relatively low cost index fund, is an annuity? I suspect that’s the best option as a fund, but I have a nagging feeling it’s not as simple as buying a fund.

The VALIC funds all have steep expense ratios and the link to the VOYA funds is broken.

The TIAA site links to a quarterly investment update file with a lot of fine print about fees that’s impenetrable to me. TIAA has TIAA Traditional Annuity which might be an OK option at a guaranteed 3% but which could be higher. Our overall portfolio is pretty heavily weighted toward equities, and putting some funds in this might not be a terrible thing.

If anyone has any thoughts I’d appreciate it.

terran
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Re: SUNY System 403(b) Annuity Options

Post by terran » Tue Sep 05, 2017 12:43 pm

I think that's just what 403(b)s are called. Sounds like you have some great investment options and good reason to defer as much income as you can (free tuition), so it seems like a good idea. I wouldn't worry about what they call it as long as you're satisfied with the investment options.

vaught
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Re: SUNY System 403(b) Annuity Options

Post by vaught » Tue Sep 05, 2017 3:24 pm

I'm new to the site and still learning a lot so I'll go ahead and acknowledge that I'm anxious to hear other Bogleheads advice on this but wanted to offer my two cents.

FYI, I followed your link but once to that site I clicked on the "fees" link and it was no good.

The annuity is the product. The funds you get to choose from are invested in those particular funds but that should not be the only fees you are looking at. Those are just the expense ratios of each fund.

The annuity also has a fee (which I attempted to view but the link wouldn't take me there). It's usually pretty expensive.

I had a similar issue come up as my wife contributes directly to an index fund in her 457b plan which is a great product.
She also has access to a 403b where the only option is a variable annuity.

Even though the funds she can choose from inside the annuity are good and have low expense ratios the fee for the annuity made it prohibitively expensive. I believe it is termed a "mortality and something" fee. That alone was 1.25% and I didn't quite see the value. It essentially just guaranteed that they would always pay out at a minimum whatever our initial deposit was. Well that would just be a $1,500 initial monthly deposit. So over the course of 20+ years that didn't seem to be worth anything in my opinion. That is the "insurance" part of the annuity product and how they justify the added expense.

Edited to add: I looked at your link again and it looks like they over four annuity products and one more that is actually NOT an annuity through Fidelity. I think the Fidelity option is going to be your best bet but I'll defer to other Bogleheads.

Grt2bOutdoors
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Re: SUNY System 403(b) Annuity Options

Post by Grt2bOutdoors » Tue Sep 05, 2017 8:21 pm

Pigeon wrote:
Tue Sep 05, 2017 11:57 am
I’m 58 years old and employed by the SUNY System. I participate in the optional retirement system through TIAA. Employees also have the option to participate in one or both of two types of Voluntary Savings Plans, a 457(b) and a 403(b) Tax Deferred Annuity Program. I should be able to contribute up to $24,000 annually to each, as I am over 50. DH, also over 50, contributes less than half his maximum to a 403(b) through his employer (a school system) and will get a modest pension when he retires. We plan to both retire in 3-5 years, and have a little over $1M in retirement accounts.

I’ve been maxing out contributions to The New York State Deferred Compensation Plan 457(b). They’ve had decent low-cost options and I’ve been largely satisfied with it.

We’ve recently inherited some funds (about $400K) and am thinking about whether it makes sense to also max out contribution to the SUNY Voluntary 403(b) Tax-Deferred Annuity Program. I am not a horribly sophisticated investor. I understand that in general, annuities aren’t a good idea, so this concerns me.

So, I’m looking at the 403(b) annuity options and as this is totally unfamiliar territory for me, I’m sort of paralyzed. https://www.suny.edu/benefits/vsp/403bproviders/

The providers all list mutual funds, which confuses me. I don’t understand how investing in, say the FID 500 Index PR, a relatively low cost index fund, is an annuity? I suspect that’s the best option as a fund, but I have a nagging feeling it’s not as simple as buying a fund.
A variable annuity is a tax deferred wrapper offered by an insurance company permitting you the account holder to place your contributions in various asset classes -domestic/international equity/fixed income. The performance of the account is based on the underlying performance of the investments you choose less account expenses. Upon retirement, you have the option of utilizing the "annuity" option, that is, you can instruct the provider to send you monthly payments for the remainder of you and your beneficiaries life.
The underlying insurance company, in the case of the Fidelity option, Massachusetts Mutual Life Insurance Company, will annuitize the value of the account and send you monthly payments. There generally is a charge for selecting the annuity feature, but you are under no obligation to select that option, you can tell Fidelity at retirement to send you the money,
by selling shares in those accounts, but as in any withdrawal from a retirement plan, those withdrawals are taxable. ----> Here is the link that provides a better explanation, see asterick located just below the Enrollment section which provides definition of a variable annuity. https://www.suny.edu/benefits/vsp/

Page 4 of this document provides a comparison of payment options between the 403(b) and 457 plan, you'll see the 403(b) offers the same distributions options as the 457 plan, but it also offers a LIfetime Annuity option for which you pay for through the Mortality and Expense charges in the 403(b) plan.

It seems like they conveniently left out the section on "Expenses and Charges" for each of the providers. See if you can obtain that from your local HR department. If you can not, my suggestion is to call the Plan Administrator in Albany, his phone number is listed on the last page of this document ----> https://www.tiaa.org/public/pdf/Volunta ... 1504660484

Never invest in anything where you don't know what you are getting and what you are paying.

The VALIC funds all have steep expense ratios and the link to the VOYA funds is broken.

The TIAA site links to a quarterly investment update file with a lot of fine print about fees that’s impenetrable to me. TIAA has TIAA Traditional Annuity which might be an OK option at a guaranteed 3% but which could be higher. Our overall portfolio is pretty heavily weighted toward equities, and putting some funds in this might not be a terrible thing.

If anyone has any thoughts I’d appreciate it.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

billfromct
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Re: SUNY System 403(b) Annuity Options

Post by billfromct » Tue Sep 05, 2017 8:33 pm

You don't mention if you have Roth IRAs, but if you don't, with the extra money you may want to open Roth IRAs ($6.5k/year) for both you & your husband to build some tax diversity in your retirement accounts.

bill

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FiveK
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Re: SUNY System 403(b) Annuity Options

Post by FiveK » Tue Sep 05, 2017 9:17 pm

Pigeon wrote:
Tue Sep 05, 2017 11:57 am
The providers all list mutual funds, which confuses me. I don’t understand how investing in, say the FID 500 Index PR, a relatively low cost index fund, is an annuity? I suspect that’s the best option as a fund, but I have a nagging feeling it’s not as simple as buying a fund.
It's not an annuity, and it should be just that simple.

Note this paragraph in the link you provided:
The SUNY Voluntary 403(b) Savings Plan currently offers employees a choice of four different Investment Providers offering annuity* investment products (TIAA, Voya, and VALIC) and one Investment Provider offering 403(b)(7) mutual fund** investment products (Fidelity).
Seems you have indeed identified the provider of choice (Fidelity) and the particular fund you noted has a 0.035% expense ratio, so have at it!

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CyclingDuo
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Re: SUNY System 403(b) Annuity Options

Post by CyclingDuo » Tue Sep 05, 2017 9:52 pm

Pigeon wrote:
Tue Sep 05, 2017 11:57 am
I’m 58 years old and employed by the SUNY System. I participate in the optional retirement system through TIAA. Employees also have the option to participate in one or both of two types of Voluntary Savings Plans, a 457(b) and a 403(b) Tax Deferred Annuity Program. I should be able to contribute up to $24,000 annually to each, as I am over 50. DH, also over 50, contributes less than half his maximum to a 403(b) through his employer (a school system) and will get a modest pension when he retires. We plan to both retire in 3-5 years, and have a little over $1M in retirement accounts.

I’ve been maxing out contributions to The New York State Deferred Compensation Plan 457(b). They’ve had decent low-cost options and I’ve been largely satisfied with it.

We’ve recently inherited some funds (about $400K) and am thinking about whether it makes sense to also max out contribution to the SUNY Voluntary 403(b) Tax-Deferred Annuity Program. I am not a horribly sophisticated investor. I understand that in general, annuities aren’t a good idea, so this concerns me.

Further complicating the situation is that I have a kid who will be going to the SUNY system for college next year. If we were to max out all three deferred compensation accounts (dh’s 403(b), my 457(b) and my 403(b) tax-deferred annuity, a combined total of $72,000), we should be able to get our AGI under the threshold to qualify for the state’s free tuition program for at least my daughter’s last two years of college.

So, I’m looking at the 403(b) annuity options and as this is totally unfamiliar territory for me, I’m sort of paralyzed. https://www.suny.edu/benefits/vsp/403bproviders/

The providers all list mutual funds, which confuses me. I don’t understand how investing in, say the FID 500 Index PR, a relatively low cost index fund, is an annuity? I suspect that’s the best option as a fund, but I have a nagging feeling it’s not as simple as buying a fund.

The VALIC funds all have steep expense ratios and the link to the VOYA funds is broken.

The TIAA site links to a quarterly investment update file with a lot of fine print about fees that’s impenetrable to me. TIAA has TIAA Traditional Annuity which might be an OK option at a guaranteed 3% but which could be higher. Our overall portfolio is pretty heavily weighted toward equities, and putting some funds in this might not be a terrible thing.

If anyone has any thoughts I’d appreciate it.
All matters 403b (as well as 457) found here:

http://www.403bwise.com/


A 403b is just like a 401k. How a 403(b) is different from a 401(k)?

The 403(b) is a retirement plan available to certain employees of public schools, employees of certain tax-exempt organizations and certain ministers. The 401(k) is a retirement plan for private sector workers.The 403b is standard in education, religious, non-profit institutions. The insurance companies offer the products that are called variable annuity.

http://www.403bwise.com/k12/content/78

Depending on your employer or state and what was negotiated with each of the providers, there may be an annual account fee/charge (often called or known as a "wrap" fee). This fee may be picked up by your employer or state, or it may be listed in your quarterly statement, or it may be included as an add on with your underlying funds' expense ratio fees (ER fees). We have one at VALIC and they tack on .18% to the Vanguard funds' ER fees we hold within that plan. We have another 403b with TIAA that the fee is paid by the employer, so the only expense for us is the underlying ER fees of each Vanguard fund that we use. It all depends on the size of your organization, who negotiated with them, and what the end result of those negotiations and plan size ended up being with regard to expenses.

You happen to have 4 excellent plan providers via Fidelity, TIAA, VALIC, and VOYA. I viewed the fund options available in three of them (couldn't access the VALIC plan). Several good funds - and low cost - at Fidelity, TIAA, and VOYA. Certainly would be easy to build the equivalent of a Three Fund Portfolio at least at the three I just viewed.

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FiveK
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Re: SUNY System 403(b) Annuity Options

Post by FiveK » Tue Sep 05, 2017 10:02 pm

Pigeon wrote:
Tue Sep 05, 2017 11:57 am
...a 403(b) Tax Deferred Annuity Program.
Some historical background might be useful. Originally, annuities were the only investments allowed in 403b programs.

In 1974, certain custodial accounts in which contributions are invested in mutual funds were made available as funding vehicles. But the "annuity" descriptor persists, even when non-annuity mutual funds are available.

See also 403(b) - Bogleheads.

stm
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Re: SUNY System 403(b) Annuity Options

Post by stm » Tue Sep 05, 2017 11:09 pm

And be really careful of which are annuities - I learned the hard way that some cannot be rolled over on separation to a new job and have to either be left in the account, or cashed out into an annuity immediately. Fine print :oops:

Grt2bOutdoors
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Re: SUNY System 403(b) Annuity Options

Post by Grt2bOutdoors » Wed Sep 06, 2017 6:34 am

FiveK wrote:
Tue Sep 05, 2017 10:02 pm
Pigeon wrote:
Tue Sep 05, 2017 11:57 am
...a 403(b) Tax Deferred Annuity Program.
Some historical background might be useful. Originally, annuities were the only investments allowed in 403b programs.

In 1974, certain custodial accounts in which contributions are invested in mutual funds were made available as funding vehicles. But the "annuity" descriptor persists, even when non-annuity mutual funds are available.

See also 403(b) - Bogleheads.
The annuity descriptor exists because each of these programs offer a lifetime annuity group option within them.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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FiveK
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Re: SUNY System 403(b) Annuity Options

Post by FiveK » Wed Sep 06, 2017 7:03 am

Grt2bOutdoors wrote:
Wed Sep 06, 2017 6:34 am
The annuity descriptor exists because each of these programs offer a lifetime annuity group option within them.
Perhaps, or it could be because section 403(b)(7) didn't change the original "annuity contract" wording but rather used "shall be treated as" language:
For purposes of this title, amounts paid by an employer described in paragraph (1)(A) to a custodial account which satisfies the requirements of section 401(f)(2) shall be treated as amounts contributed by him for an annuity contract

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CyclingDuo
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Re: SUNY System 403(b) Annuity Options

Post by CyclingDuo » Wed Sep 06, 2017 10:15 am

FiveK wrote:
Wed Sep 06, 2017 7:03 am
Grt2bOutdoors wrote:
Wed Sep 06, 2017 6:34 am
The annuity descriptor exists because each of these programs offer a lifetime annuity group option within them.
Perhaps, or it could be because section 403(b)(7) didn't change the original "annuity contract" wording but rather used "shall be treated as" language:
For purposes of this title, amounts paid by an employer described in paragraph (1)(A) to a custodial account which satisfies the requirements of section 401(f)(2) shall be treated as amounts contributed by him for an annuity contract

Correct. Technically, one can still call a 403b a tax sheltered annuity - because that is what it is, and according to the IRS comes in the following three flavors:

Individual accounts in a 403(b) plan can be any of the following types:

•An annuity contract, which is a contract provided through an insurance company.

•A custodial account, which is an account invested in mutual funds.

•A retirement income account set up for church employees. Generally, retirement income accounts can invest in either annuities or mutual funds.

The custodial account is the main one that most of us who work in education have with all of our funds invested in mutual funds. The pre-tax deduction, and the employer match makes it a very viable account to have.

Regardless, all three flavors are called a 403b.

https://www.irs.gov/publications/p571/ch01.html

The OP's plan of maxing out all the 403b and 457 plans is an excellent strategy to absorb the recent inheritance of $400K (especially if there are tax implications of that windfall), and to qualify for their child's free tuition by getting the AGI down. Even if the total ER and custodial fee for the $72K they contribute is say .5%, that's only $360 a year which would take a bunch of years to total up to what I assume is the value of the "free tuition".

On a personal note, we are both doing that this year contributing the max of $24K each into our 403b's to absorb some of the gains from an inherited annuity distribution we took this summer. So in effect, we are moving money from one previous tax deferred investment into another.

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