Some lessons on teachers’ retirement fund
.bodytext {float: left; } .floatimg-left-hort { float:left; margin-top:10px; margin-right: 10px; width:300px; clear:left;} .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 10px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 10px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 10px; } .floatimgright-sidebar { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} Dear Mr. Berko:
I participate in the TIAA-CREF 403(b) plan, and it certainly was not good to me last year. My asset value actually went down, although not by much. I’m writing for two reasons. In a column published in November, you said TIAA-CREF earned high commissions from selling the TIAA-CREF variable annuities. Well that’s wrong. My brother-in-law works for them, and he tells me that you are very wrong. He is paid a salary and does not earn a commission. My next question concerns our 11-year-old son. We have a $39,000 inheritance from my father, which we will use for our son’s college expenses. We want to establish a 529 plan for him and need your advice on the best mutual fund to help us pay for his college costs, which we believe could be as high as $80,000 to $90,000. Our Merrill broker has selected three of his firm’s funds that he believes are good, but we would like your recommendations, too.
W.P., Westport, Conn.
Dear W.P.:
Mea culpa, and you’re right as angels and rainbows.
I was given incorrect information by two Teachers Insurance and Annuity Association-College Retirement Equities Fund (TC) employees last October, one of whom I suspect may not be a gruntled employee. Brian Browdie, a top TC honcho, told me that consultants receive a salary, not commissions, plus an incentive bonus “that emphasizes client service.” That’s gospel. Browdie also told me that TC does not, in any way, make contributions to any teachers union. And that’s gospel, too. But certainly some TC employees do, though not in the name of TIAA-CREF. Thanks, Brian, for giving me the straight skinny.
I think 529 plans are fantastic and golden opportunities for the mutual fund industry, brokerage firms and insurance companies. Conversely, I think 529 plans are a monstrous joke at the expense of John Q. Public and his family.
Most 529 plan portfolios are invested in a medley of mutual funds that pay your broker, your insurance agent or your bankster a sizable one-time commission (usually 5 percent) plus a yearly trail commission (as high as 1 percent) for as long as you own that mutual fund. And unless you were fortunate enough to own several of the 50 or so top-performing funds, you are probably on the far side of the eight ball.
The mutual funds in many 529 plans are proprietary funds owned by Merrill Lynch, Morgan Stanley and other brokerages. In most instances, proprietary funds have terribly unattractive performance records plus high annual expense costs levied against the shareholders. And I challenge you to find a Merrill fund that ranks among the top 20 funds monitored by Kiplinger, Forbes, Business Week or Morningstar.
In other instances your broker probably pushes his favorite from the “fund of the month club” selection because he hasn’t got enough brain cells to locate and research the better funds. There are hundreds and hundreds and hundreds of millions of dollars in commission generated by 529 plans, and most investors are generally dissatisfied with their plan’s performance.
Now your lad is 11 years old and you’ve got six to seven years till he leaves home for that exciting $80,000 playground often called college. I’m sure that during some of those six or seven years the stock market is going to be flat; some of those years the market will tank; and in some of those years it will prosper. But that’s just not enough time for your investments to grab a toehold in your 529 portfolio, especially if you’ve selected average mutual funds and especially if you need to withdraw money when the market is tanking.
I strongly encourage you to put your $39,000 in risk-free certificates of deposit. Be mindful if a mutual fund falls 25 percent next year that it must recover by 60 percent the following 12 months to give you a 10 percent average return for two years. Not many funds can do that. But at 5 percent, a CD will grow to $55,000 in seven years, which is 70 percent of your boy’s inflated and estimated college cost.
I don’t think it’s wise to risk $39,000 in the market, because you have such a short window of opportunity. However, if you must own mutual funds, consider investing just half of your $39,000 cash cache in the following no-load funds: $6,500 in the Bruce Fund, $6,500 in the Fidelity Convertible and $6,500 in T. Rowe Price Capital Appreciation. Each of these funds has a 20-year average annual return in excess of 12.5 percent. I don’t think that Merrill kid will appreciate my recommendation, but his firm doesn’t have a single fund that can hold a candle to those that I recommended.
And I think that you must be dumber than a bar stool to consider spending that kind of dough on your kid’s college education.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.© Copley News Service
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