Financial Advisor Tim Hayes

403b Rollover • Should Massachusetts Educators Transfer Their 403b

Financial Advisor

Tim Hayes

Offices In Boston & S Dartmouth, Massachusetts

I am an Investment Adviser Representative at Cambridge Investment Research Advisors, Inc., a $44B Registered Investment Advisor (RIA) based in Fairfield, IA. I am also registered with Cambridge Investment Research, Inc., an independent broker-dealer with over 3,000 financial professionals nationwide.

The first introductory and fact-finding appointment can be in-person or by phone. The next meeting where I provide my recommendations should be in-person. 

Subsequent meetings during which we monitor your progress and investments can be done in-person or by phone, email, Zoom, or Skype—or, more likely, a combination of these meeting types.

Most clients pay fee-only or an hourly rate. The size and complexity of the client’s wealth management and financial and retirement planning determine that fee.

Some clients pay a commission, mainly those with smaller accounts, i.e., Roth IRAs, some public-school teachers with 403b retirement accounts, or parents or grandparents who set up a 529 college savings plan.

I’ve held an industry securities registration for 30+ years and am subject to SEC and FINRA oversight.

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Table of Contents

After making their Option A, B, or C Massachusetts State Teachers Retirement System election, a retiring educator’s next big decision is what to do with their 403b plan. Keep it in their school system’s 403b plan or roll it over into an IRA.

If they are eligible for Social Security, they must also decide when to start taking it. And what impact the Windfall Elimination will have. In addition, some school systems buy back unused sick time so deciding whether to defer it into a 403b or 457 or take it as taxable income.

New Rule from the SEC

Beginning June 30, 2020, broker-dealers (B/Ds) began operating under a new Regulation Best Interest standard. This requires them to better align their product recommendations and services with their clients’ best interests by eliminating conflicts of interest, such as proprietary product requirements, sales quotas, or sales contests.

Registered representatives will now be called financial professionals. Any advisors who are fiduciaries can continue calling themselves financial advisors. Some critics complain that the new standard does not meet the uniform standard’s original intent.

Financial professionals representing broker-dealers or insurance companies provide most of the 403b plans in the public schools. So going forward most purchases of 403b plans will fall under the Regulation Best Interest Standard.

New Fiduciary Rule

Finally, however, to many people’s surprise, President Trump’s Department of Labor, run by Eugene Scalia, Supreme Court Justice Antonin Scalia’s son, implemented the Fiduciary Rule.

They removed some of the more demanding requirements and possible legal challenges provided to clients. Still, they kept the core tenant that financial advisors advising retirement plans and participants are fiduciaries. Most advisors, when recommending a client roll over their retirement account to an IRA, are also fiduciaries.

403b Transfer

Remember, the Fiduciary Rule applies only to private-sector employer-sponsored retirement plan, such as 401(k)s, SEPs, SIMPLEs, and 403(b) plans under ERISA. The 403(b) plans of public employees, such as teachers, are not covered by ERISA, so they are not subject to the new fiduciary law. It only applies to them if they decide to roll over their 403(b) to an Individual Retirement Account (IRA). Roth’s, traditional, and rollover IRAs fall under the new rules.

The Obama administration believed the Rule was needed because conflicts of interest caused 401(k) participants and IRA owners to pay higher fees, resulting in smaller account balances.

What do I mean by ‘conflicts of interest’? For example, some firms paid their advisors bonuses and benefits if the financial advisors sold that firm’s proprietary products. This is no surprise, but it is surprising that these conflicts go on with retirement plans—given that ERISA forbids conflicts of interest.

But ERISA stipulated that the prohibition against conflicts applied only on five conditions:

  1. The financial advisor must render advice as to the value of securities or other property;
  2. The advisor must do so regularly;
  3. The advisor must do so under an agreement with the client;
  4. That advice will serve as a primary basis for the client’s investment decisions; and
  5. The advice is to be based on the particular needs of the investment or retirement plan.

Financial Advisor Tim Hayes Believes the DOL Got It Right

By striking a balance between new protections for consumers with additional burdens on the financial services industry, Financial Advisor Tim Hayes believes the Department of Labor (DOL) hit a home run with its new retirement advice rule.

Fixing the Law

By eliminating a 1975 rule, made when pension plans were much different than they are today, the Department of Labor rectifies the contradiction that financial advisors with conflicts of interest are providing financial advice to retirement accounts even though ERISA, the law governing these accounts, prohibits this from happening.

Lowering Fees

What does the new rule mean for consumers? “If you have a 401(k) or 403b, the advisor fees might come down. If you roll over the 401(k) or 403b to an IRA, the fees in the IRA should be competitive to what they were in the 401(k).

Retirement Planning – Employees who leave their employer can keep their 401k or 403b there or rollover to an IRA. If they decide to roll over, I help build their IRA portfolio. I also build portfolios for clients saving for retirement.

  • IRAs
  • Annuities
  • 403b Financial Advisor
  • Pension Max for Public Employees
  • IRA Rollover From Employer Plan

403 b Plan Financial Advisor for Massachusetts Educators

My Professional Designations

Financial advisors who hold the AIF® designation have:

  • Completed the AIF® Designation Training;
  • Passed the AIF® designation exam;
  • Met the designation’s prerequisites and qualification and conduct standards;
  • Accrued a minimum of six hours of continuing professional education, with at least four hours coming from fi360-produced sources;
  • Attested to a code of ethics.

Financial professionals who hold the CRPS® designation have:

  • Completed a course of study encompassing design, installation, maintenance and administration of retirement plans;
  • Passed an end-of-course examination that tests their ability to synthesize complex concepts and to apply theoretical principles to life situations;
  • Pledged adherence to the CRPS® Standards of Professional Conduct, and are subject to a disciplinary process in that regard.

CRPS® designees renew their designation every two years by completing 16 hours of continuing education, reaffirming adherence to the Standards of Professional Conduct, and complying with self-disclosure requirements.

Financial Advisor who hold the AWMA® designation have:

  • Completed a course of study encompassing wealth strategies, equity-based compensation plans, tax-reduction alternatives, and asset-protection alternatives;
  • Passed an end-of-course examination that tests their ability to synthesize complex concepts and apply theoretical concepts to real-life situations;
  • Agreed to adhere to the AWMA® Standards of Professional Conduct, and are subject to a disciplinary process in that regard.

AWMA® designees renew their designation every two years by completing 16 hours of continuing education, reaffirming adherence to the Standards of Professional Conduct, and complying with self-disclosure requirements.

CFS designation is awarded upon passing an examination on mutual funds, ETS, REIT’s, closed-end funds, and similar investments. Advanced studies on topics include:

·       Fund analysis and selection;

·       Asset allocation;

·       Portfolio construction;

·       Sophisticated investment strategies for risk management, taxes, and estate planning.

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San Diego, CA, November 13, 2020 – The Institute of Business & Finance (IBF) recently awarded Tim Hayes with the only nationally recognized tax designation, CTS (Certified Tax Specialist). This graduate-level designation is conferred upon candidates who complete an 135+ hour educational program focusing on personal income taxes and methods to reduce tax liability. The combined top state and federal bracket can easily exceed 40%.

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San Diego, CA, September 1, 2020 – The Institute of Business & Finance (IBF) recently awarded Tim Hayes with the estate planning designation, CES™ (Certified Estate and Trust Specialist™).

This graduate-level designation is conferred upon candidates who complete a 135+ hour educational program focusing on trusts, wills, probate, retirement benefits, caring for children, and what should be done after the death of a loved one. Over $50 trillion is expected to pass from one generation to another during the next half-century.

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The Accredited Portfolio Management AdvisorSM, or APMA® program, is a designation program for financial professionals. The program educates advisors on the finer points of portfolio creation, augmentation, and maintenance. Students will gain hands-on practice in analyzing investment policy statements, building portfolios, and making asset allocation decisions.

San Diego, CA, May 12, 2020 – The Institute of Business & Finance (IBF) recently awarded Timothy Hayes with the only nationally recognized annuity designation, CAS® (Certified Annuity Specialist®).

This graduate-level designation is conferred upon candidates who complete a 135+ hour educational program focusing on fixed-rate and variable annuities. Several trillion dollars are invested in annuities; it is estimated that at least one-third of all annuity contracts are not titled correctly.

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Employer-sponsored Retirement Plan

The advice must be given regularly and must be the primary basis for the client’s investment decisions. The DOL believes it allowed financial advisors with conflicts of interest to provide advice within employer-sponsored retirement plans without violating ERISA’s prohibition.

Plus, the DOL felt that the 1974 exemptions were put in place when there was no such thing as an IRA or a 401(k), and companies invested the retirement money for their employees. However, now that individuals are responsible for their own investment decisions, new rules are needed.

IRA Rollovers

For example, the DOL believes people are rolling over their 401k into IRAs when it would cost them less if they remained in the 401k. Moreover, under the old rules, rollover advice never fell under ERISA guidelines because the rollover happened once.

So, the new fiduciary rule reinterprets the five-part test so that now more financial professionals fall under the ERISA standard of who is a fiduciary. It also removed a previous ruling that rollover advice was not fiduciary advice. Instead, it requires that any advisor falling under these standards work in your best interest, including when they recommend a rollover.

Financial Services Industry is Adapting

More and more financial products, such as variable annuities and life insurance programs, can be fee-based. For example, a 403b tax-sheltered annuity can be part of a fee-based advisor’s assets to calculate your fee. As a result, the product is stripped of some of the costs associated with a commission-based product.

Firms are also removing conflicts of interest to align with the new Best Interest Standard. The DOL also now uses that standard in their interpretation of who is a fiduciary advisor under ERISA. When the investing public works with an advisor, they benefit from having a similar standard for conduct as Best Interest aligns closely with the fiduciary responsibilities in the 40 Act.

Should I Rollover My 403b to an IRA?

If you have a 403b and work with a financial advisor, now is an excellent time to review the financial planning arrangement, fee or commission, best interest, or fiduciary. Also, if you are thinking of rolling over a 403(b), ensure your decision is consistent with the new rule.

A rollover of a 403b might make sense for a retiring educator because most of them purchased their 403b under a suitability standard and any rollover to an IRA would be under either the new SEC Best Interest Standard or the DOL fiduciary standard. Hopefully, these new rules lead to lower costs and better choices for the 403b rollover.

Many school systems now use a TPA or Third-Party Administrator to help run their tax-sheltered annuity (403b) plans. In Massachusetts, the most common are TSA Consulting and the OMNI Group. Advisors process paperwork such as rollovers, salary reduction forms, loan forms, and withdrawals through the TPA.

Financial Solutions Advisor

I remain registered as an investment adviser representative (fiduciary) and as a registered representative (financial professional). Most of my business is as a fee-only investment advisor representative, where I charge a client a fee or an hourly rate for my advice. I like this arrangement because it is not product-based, and I can get paid to provide ongoing advice to my clients.

However, I keep my registered representative license because when I compare a commission product, it makes more sense for the client. For example, a new client who is 25 years old wants to purchase a 403b with $2,000—I cannot imagine charging them a fee for the next forty years.

Also, I like to use American Funds for some clients with big 401k or 403b, if I recommend that they roll over their money. If their 403b account balance is over a million, they pay no sales charge. And American Funds has some of the lowest management fees for actively managed funds. They also offer excellent funds for customers interested in generating retirement income. But I need to have a registered representative licensed to provide this option.

Boston, Massachusetts
Boston, Massachusetts

Social Security and Public Employees

Public employees in Massachusetts do not contribute to the Social Security system, but many of them contribute through other jobs. Some also have spouses who take part in the Social Security system. Both scenarios are affected by two federal laws.

  • The Windfall Elimination provision can reduce any Social Security income that a public employee earns by as much as 55%. For example, a retired teacher who receives a pension from MTRS and also qualifies for a monthly Social Security benefit of $1,000 might only receive $450 a month.
  • The Government Pension Offset provision affects the Social Security benefits of a spouse, widow, or widower. For example, if a married teacher receives a monthly pension from MTRS of $6,000, two-thirds of that amount ($4,000) will be credited against any benefit from their spouse’s Social Security.
    • Thus, if the spouse dies and the retired teacher is eligible for a $2,000 survivor benefit from Social Security, that teacher would receive none of it because the $4,000 would eat into all of it.
    • Very few married people who retire with a pension from MTRS will receive anything from their spouse’s Social Security.

Are There Any Workarounds?

There is a workaround for the Windfall Elimination Provision. Any public employee in Massachusetts with 30 or more years of ‘substantial earnings’ in a job where they paid into Social Security will receive their full benefits. In fact, after 25 years of such substantial earnings, any reduction in Social Security benefits begins to shrink.

Sick Buybacks

Public school educators, including university professors and administrators, can save more pre-tax than any other public or private-sector employee.

Educators are eligible for two retirement plans, both with unique catch-up options.

In 2022, educators can save $20,500 into a 403(b) and a 457 plan. Those fifty years or older can also contribute an additional $6,500 into one of the two .

The 403(b) catch-up allows educators who have low 403(b) savings and have worked fifteen years with the same employer to save an additional $3,000 per year for five years.

One problem with this catch-up is that any contributions over $20,500 are credited first against the 15-year rule. A teacher aged fifty or above could use up their 15-year catch-up without knowing it.

The 457 plan has a more considerable catch-up. It allows eligible employees to contribute $37,000 per year for three years before their “regular retirement date.”

The 403(b) catch-up can be used in conjunction with the age fifty catch-up and 457 plan. However, the 457-plan catch-up cannot be used with the age fifty catch-up, although the employee could still contribute to a 403(b).

Putting large amounts of your savings into a 403(b) and 457 plan does not reduce your income for the Massachusetts Retirement System calculations.

Not everyone can afford to save the maximum; however, it is good to know that educators have a well-deserved potential benefit.

Your school system provides you with a list of 403(b) companies. The 457 plan is different. The city/town usually provides one company. Both typically give you a broad range of investment options.

Notes:

  • School systems should think about eliminating the fifteen-year catch-up from their 403(b) plan, especially if there is no tracking system in place when the catch-up contribution starts.
  • Any employee who is saving the maximum in a 403(b) plan and wants to save more money can usually open up a 457 plan.
  • Remember, if you are eligible, you can use the 457 catch-ups with the 403(b) plan, plus the age fifty catch-up, making it an excellent option for any educator who wants to defer sick buybacks.

2022 Retirement Plan Limits

The federal government increased the annual contribution limits on some popular qualified retirement plans. So you will be able to put more into your workplace retirement account in 2022.
Name of Retirement PlanBasic Contribution LimitAge 50 and up Catch-UpBasic + Age Fifty
401(k) Retirement Plan$20,500$6,500$27,000
SIMPLE IRA Retirement Plan$13,500$3,000$16,500
SEP IRA Retirement PlanCannot exceed the lesser of: 25% of compensation, or
$61,000

N/AN/A
403b Retirement Plan$20,500$6,500$27,000
457 Retirement Plan$20,500$6,500$27,000
Public School Employees Are Eligible for Both a 403b and 457$41,000$13,000$54,000

Additional Resources and Information

  • Investor Profile Questionnaire (PDF) – Before creating your portfolio, it is essential to spend time learning about you and your unique financial situation.
  • Are You Ready to Retire (PDF) – You are not alone if you are overwhelmed with how to provide income for your retirement. Millions of Americans struggle to ensure that they have enough income to last them through their retirement years.

Please be sure to speak to your advisor to consider the differences between your company retirement account and a rollover investment in an IRA. These factors include but are not limited to changes to the availability of funds, withdrawals, fund expenses, fees, and IRA-required minimum distributions.

State, FINRA, SEC Securities Licenses

Passing the exam qualifies candidates as both securities agent and investment advisor representative.

Individuals who pass the Series 7 examination are eligible to trade all securities products: corporate securities, municipal fund securities, options, direct participation programs, investment company products, variable annuities contracts, etc.

The exam measures the degree to which each candidate possesses the knowledge needed to offer the products of investment and insurance companies, including the sales of mutual funds and variable annuities.

The exam qualifies candidates as securities agent within a state. Nearly all states require people to pass the Series 63 for state registration.

I am also licensed to offer life, health, accident, disability and long-term care insurance products, as well as fixed annuities.

Fee-Based Financial Planner, Hourly Rate, or Commission

Most clients pay fee-only or an hourly rate. The size and complexity of the client’s wealth management and financial and retirement planning determine that fee.

Hourly Fee

$ 150 /Hour
  • Ideal for clients who want financial planning, retirement planning, or wealth management advice
  • But do not want to move their accounts.

Fee-Only

Varies
  • The fee is 1% or less, depending on the size and complexity of your needs.
  • Custom money management
  • I am a fiduciary advisor.
  • Works best for clients with investable assets over $50,000

Commission

Varies
  • The commission varies by product
  • Ideal for smaller accounts (less than $50,000)
  • Roth IRAs and some 403b plans
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