If you’re in or near retirement, guess what—you’re a real catch. Assuming you’ve been saving over a number of years in your 403(b), IRA, and/or spouse’s 401(k), your retirement account balance is probably becoming pretty significant, which is of great interest to investment brokers, financial planners, and insurance agents.
According to a June 2018 report by the U.S. Securities and Exchange Commission (SEC), Americans over the age of 50 currently account for 77% of financial assets in the United States. And as of the end of 2017, retirement assets for those 65 and older reached $28.2 trillion dollars! Just five years ago, that number was $16 trillion dollars. That’s a lot of money—and puts your assets on the radar.
Perhaps at this point in your career you’re wondering if you need to do something differently with your retirement savings. Or maybe you’ve been contacted by an investment broker and have heard something like this:
- “You can’t stay in your current plan now that you’re retiring, so you’ll have to move it.”
- “This new account will double in 10 years.”
- “It’s only a 1% fee to rollover.”
- “I don’t charge a fee for planning.”
While these statements may not be untrue, they may omit some of the facts. Whether this is by choice or through carelessness on their part, it’s critical to know if you’re missing some very important information needed to make the best decision for your circumstances.
If you’re considering making a move with your retirement account, we have some guidance for you to follow so you can be aware of some potential consequences of your choices as you navigate this important financial consideration.
Keep your emotions in check
It’s a fact—the decisions we make about money are often fraught with emotion. And the thought of making money last through a potentially long retirement can feel daunting. But first and foremost, do your best not to let your emotions overly influence your financial decisions.
One of the most common emotions driving our money decisions is fear. According to Brenda Echeverria, Financial Planning Supervisor at Member Benefits, “People are afraid they won’t have enough money, worry whether their asset allocations are appropriate, or hear about what others are doing and wonder if they should be doing it too. Emotions can be useful in driving people to take action, but they can also lead to disastrous results if they drive the decision.”
Educators in particular are natural helpers. It’s common to feel obligated to use the services of someone they know. “I often hear from people who know someone, like a friend or a neighbor, and feel like they need to go with them for financial help, products, or services,” adds Brenda. “They don’t want to hurt their feelings or risk hurting the relationship. But I tell them to keep in mind that this is a business transaction. They are not doing you a favor, they are making a living. And you have the right to make your own decisions on who you want to do business with.
“Money is personal. While you will certainly have feelings surrounding it, don’t let them take over your decision-making process and potentially jeopardize your financial security.”
Don’t believe everything you hear
Since older folks are a growing segment of investors, financial services firms are increasingly focusing their marketing and sales of investment products to investors in or nearing retirement. One common marketing approach is to invite seniors to an investment seminar and offer them a free meal. But as we all know, there’s no such thing as a free lunch. The seduction of high returns or quick profits are often touted at these events, but there’s usually a catch. And it can be difficult and costly to undo certain moves.
As a general rule, the more guarantees or promises you are getting with a product, the more restrictive the withdrawal options. Many insurance company annuities have surrender periods of five to seven years. This means that you are locked into the contract for that period of time and can’t withdraw your money without paying surrender fees. “It’s not uncommon for people to fall into that trap, hoping to get big rewards quickly,” Brenda says. “Unfortunately, they don’t realize until it’s too late that if they need to take their money out, they can’t do it readily.”
Annuities are complicated and can be very difficult to understand. “Wisconsin public school employees already have two forms of annuities in retirement: WRS and Social Security. There may not be a reason for another annuity in their financial plan,” Brenda adds. She encourages caution when being presented with annuity options.
“Our participants will say, ‘the broker I talked to said I have to move my money out of my 403(b) now that I’m retired or changed careers.’ This is not true of their Member Benefits account, and it could result in a poor financial decision for the participant.“
Secondly, our members frequently report getting misinformation from various brokers looking for their business. One common line is being told they have to move their retirement account because they can’t stay in the current plan or they can’t roll over into a new employer’s plan, even though that may not be true.
Brenda explains, “Our participants will say, ‘the broker I talked to said I have to move my money out of my 403(b) now that I’m retired or changed careers.’ This is not true of their Member Benefits account, and could result in a poor financial decision for the participant.”
Participants in our IRA and 403(b) programs can keep their accounts with us for as long as they want regardless of their employment status and continue to take advantage of our low fees. Your Member Benefits’ 403(b) and IRA accounts can remain with us whether you retire, change districts, move out of state, or change professions. Additionally, both can be “stretched” over your lifetime if you choose.
However, when you retire, you are no longer eligible to open a 403(b) account because you are not working. So once that account is closed, there’s no coming back. “I can’t tell you how many retired people I have talked to who want to come back after they moved their money and were unhappy to learn they no longer can,” Brenda explains. “Unfortunately, we have to disappoint them. It’s hard.”
Likewise, with the IRA, you can stay as long as you like, but if, for example, you close the account and move out of state, you may not be eligible to reopen an account.
Always validate the details given by your provider before you take any action in moving your account. When discussing investments, a broker or advisor should discuss all of the risks, restrictions, and costs with you and provide complete and accurate information.
Decide what is fair and reasonable
So how do you know what is a fair and reasonable price to pay? Before making a money move, you need to understand—really understand—the implications of your decision.
The bottom line is this: Do the benefits justify the cost? Know what you’re buying, exactly how much it will cost, and what you stand to gain (and/or lose) from the move. Dedicate some time to gather the necessary information, and do your due diligence. “It will be time well spent,” Brenda assures, “because this is your hard earned money and future income we’re talking about.”
Uncover the total cost
When you’re talking fees with the agent/broker, ask for a list of all of the costs and identify which are one-time fees and which are ongoing. Fees may include investment fees, advisory fees, and more. (Note: Brokers may use the terms “costs” or “expenses” instead of “fees” when referring to their products.)
For example, you may be charged fees associated with the product that the agent doesn’t receive, like mortality and expense (M&E) fees that go to the company. And, if you are adding premium services, such as ongoing investment advice, you’ll typically pay a percentage of your assets on top of fund fees.
Is it worth it? Maybe, but adding layers of fees can cut the chances that your money will last. Every dollar you pay in fees is not earning interest in your account. So consider the potential earnings you may be losing out on.
It may help you get a more accurate perspective by converting any percentages to actual dollars. “I often hear, ‘it’s just 1%,’ but when I convert that into dollars, it’s a real eye-opener for people,” says Brenda. “And these dollars are typically an annual, recurring expense.”
Our fees are in plain sight
Participants in Member Benefits’ 403(b) and IRA programs enjoy low fees (0.35% for our 403(b) and 0.45% for our IRA) that are capped annually. “Typically, the larger your balance, the more fees you pay in terms of dollars—but that’s not true here,” Brenda says. “Mutual funds do have their own fees. But the administrative fees for participants in our 403(b) are capped at $500 annually, and for the IRA, fees are capped at $600 for WEAC members and $750 for nonmembers. Our fee cap means more of your money stays in your account and continues to work for you.”
Here are the main fees you need to watch for and quantify (Member Benefits does NOT charge any of these fees):
- Mortality and expense (M&E) fee.
- Commissions (loads).
- Management fee (unless you participate in the WEA Financial Advisory Managed Account Solution).
- 12b-1 fee.
- Annual contract charge.
- Separate custodial fee.
- Surrender charge (withdrawal charge).
- Wrap account fee.
Remember, the general public does not have access to a program like ours—a very low-cost investment platform with licensed, non-commissioned staff.
Consider these tips when making decisions about your retirement savings.
- Be aware of how emotion can impact your financial decisions.
- Don’t just take someone’s word for facts—do your due diligence before making any decisions.
- Set realistic short-, medium- and long-term goals, then work backward to plan how to get there. Decisions become less complex when you have goals.
- Use financial tools to help. Visit weabenefits.com/calc to access many free financial calculators. Before you consider any investment, you need to understand risk and determine your personal risk tolerance. We recommend using our Investor Suitability Profile Questionnaire calculator to find out what kind of investor you are.
Participating in a financial planning service from Member Benefits can help you get a more accurate picture of your financial situation. You might want to discuss your future goals and get our help to create a plan to reach them. If you are closer to retirement, we can help you look at important factors you may not have considered, such as:
- How long should you estimate your retirement years to be?
- What tax bracket will you likely be in during retirement and how can you plan for it?
- How will you budget for things such as replacing cars?
- How do you draw from WRS?
Contact us at 1-800-279-4030 or firstname.lastname@example.org for more information.
Be a savvy investor—get the facts first and refuse to be rushed into any decisions. Rarely (if ever) do you have to invest your money on the spot. A good investment will be available tomorrow or next week or next month, when you are ready and understand where your money is going.
Do your homework before you make a move
Investment salespeople (who offer securities) must be licensed. The firm must be registered with FINRA, the SEC, or a state securities regulator—depending on the type of business the firm conducts. An insurance agent must be licensed by the state insurance commissioner where he or she does business.
Check them out
- For a broker or investment adviser, use FINRA BrokerCheck or call the FINRA BrokerCheck Hotline at 800-289-9999.
- For an insurance agent, check with the Wisconsin Office of the Commissioner of Insurance.
- For all sellers, contact the Department of Financial Institutions at 608-266-9555.
Ask questions until you are satisfied that you know what you are buying and understand the risks and costs. You should know the answers to questions like:
- What are the risks of this investment?
- How much does it cost initially to purchase the investment?
- What, if any, additional or ongoing costs will I have to pay?
- How liquid is this investment? If I need to sell or cash in the investment, how readily can I do so?
- What happens if I decide to sell or cash in my investment? Are there surrender charges? Other fees?
- For what type of investor is this investment a good/bad idea?
- Is the investment registered? If so, with which regulator?
If you have been defrauded
If you believe you or someone you know have been defrauded or treated unfairly by a securities professional or firm, you can send a written complaint to:
FINRA Investor Complaint Center
9509 Key West Avenue
Rockville, MD 20850-3329
Phone: 240-386-HELP (4357)
Complaints can also be filed online at finra.org.