Navigating the CSU Transition to Fidelity


[Updated April 30 3:25 pm GMT-8. Rewrote the Introduction to Finance section.  Also revised that section in the User Guide. I rely on my readers to let me know when you find mistakes.]

[Update April 30.  There are a few mistakes in the User Guide. I’ll post another update when they’re fixed.  I think they’re minor, but will also include a change log.]

This post is intended only for CalPers retirees from the California State University System who have a 403(b) plan that is not managed by Fidelity Investments. The advice here is based on my good-faith efforts to understand what is going on.  While I have a Ph.D. in economics and have taught finance, I am not a certified financial planner.  If you have questions, call your fund manager.  Mine is TIAA.  They were extraordinaly helpful sorting this out. This post is about the CSU Fidelity transition.

If you’re not sure whether you are affected by this, an easy way to tell is if you received this letter from the Chancellor’s office:

Letter from Chancellor

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If you have a non-Fidelity 403(b) and did not receive this letter (part of a much larger package), you should contact the Fidelity at 800.343.0860.

Quick Start

If you’re sure you want to proceed, here are the links to download the Excel workbook and the User Guide to the Fidelity CSU website (pdf file).

Investment Vehicles

A Users Guide to the Fidelity CSU Website

Legacy Funds

These “legacy mutual funds” are managed by MetLife, TIAA, VALIC, and Voya.  There are two categories of funds: mapped and unmapped.  Mapped funds are those for which Fidelity offers a substantially equivalent fund.  If you have one or more of those funds, your balance(s) will be automatically transferred to the Fidelity equivalent in late May.  More on that shortly.

Unmapped funds have no equivalent offered by Fidelity.  The Chancellor’s office uses confusing language to describe them.  As far as I can tell, mapped funds are also called “existing account balances held in an annuity contract.”  It’s hard to imagine a less descriptive phrase.  But this is an important point. Unmapped funds will not be transferred to Fidelity. If the only funds you hold are unmapped you can breathe a sigh of relief and stop reading here.

Mapped Funds

The Chancellor’s office sent a packet to everyone who has a 403(b) account with one of the legacy companies. If you are unhappy with having your funds stolen transferred to Fidelity without your consent, you can do what I did: have your current manager set up a conventional IRA and transfer your balances there.  But work fast because your fund will have to get permission from the Chancellor’s office to do this.  And starting May 14, funds will enter a “blackout period” during which no activity will be allowed.  Not only will your funds be moved but there will be a period of about 10 days when you cannot access your account at all.

If you are comfortable with the transfer to Fidelity, there are still some things you need to know.  The packet sent by the Chancellor’s office is incredibly uninformative.  While it describes each available fund, the style is closer to a sales brochure than an investment prospectus.  Important information is missing.  This includes expense ratios and various sales and other fees.  I’ll include a section at the end of this document that describes why these are important.  This information is also included in the User Guide linked below.

The Excel Workbook

In this section I’ll describe what’s in the Excel workbook and what I’ve added.  If you don’t care about that, just download the workbook:

Investment Vehicles

I have created an Excel workbook that includes all of the funds offered by Fidelity in the CSU program.  There are two categories: Target Date Funds and Index & Actively Managed Funds. Each is on a separate tab in the Excel workbook. All of the Target Date funds are managed by Vanguard, a long-time leader in low-cost funds.  I did not bother looking up cost figures for any Vanguard fund (including those in the Index & Actively Managed Funds).  (The User Guide below contains detailed instructions about how to find this information.)

The Fidelity website gives the short name of the fund, when it was started, the asset class,the category, and various measures of the rate of return.  Frankly, this is what’s usually included in sales brochures.  It is emphatically not all the information you need to make informed decisions.

I’ve added the following information to that provided on the Fidelity website:

  • the full name of the fund
  • its ticker symbol
  • the gross and net expense ratios
  • the management fee
  • the 12b-1 fee
  • total expenses
  • the turnover rate
  • any comments from me

For example, here’s the information about the BlackRock Total Return Fund Class K Shares.

Example

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The net expense ratio, 0.39%, is not too bad.  But the turnover rate of 806% per year is very high.  Lots of churn in the portfolio means high commissions and brokerage fees.

The User Guide

Navigating the Fidelity CSU website can be daunting, especially when you’re after cost information.  I’ve written a user guide that walks you through finding expense ratios and sales fees.  Here’s the pdf file:

A Users Guide to the Fidelity CSU Website

Introduction to Finance

Like most economists and financial analysts, I believe that markets are pretty efficient.  That means the current price of a security reflects all publicly available information.  Which implies that the only way you can “beat the market” is by discovering new information about a company before anyone else.  In my five decades of investing I’ve managed that twice.  I’ll reveal my two successes at the end of this piece.

The implications of “pretty efficient markets” are staggering.  It’s very difficult (costly in terms of time and effort) to outperform the market average.  It’s even more difficult to find a stock that is truly undervalued.  Therefore, most people will be better off if they simply pick an “index fund” that buys stocks aligned with a market index.  The Standard and Poor’s 500 is one popular index.  If 500 stocks isn’t enough, try the Russell 2000.  There are funds that buy both domestic and international securities.  There are bond funds, municipal bond funds, stock funds, and a host of other vehicles.  But there is one guiding principle I always follow: the expense ratios should be low.  For example, the Vanguard Total Bond Market Index Fund Admiral Shares has an expense ratio of 0.05% per year.  In general, Vanguard funds offer very low cost.

One of the great secrets of finance is that diversification can reduce portfolio risk without reducing the expected rate of return.  That’s why economists advise against buying individual stocks. My reading of the Fidelity CSU website is that you have the option of buying individual securities.  My advice: don’t.

Here’s why expense ratios and sales commissions are bad for you.  Consider the BlackRock Total Return Fund Class K Shares. The ticker symbol (used globally to identify securities) is MPHQX. Instructions for finding this information is in the User Guide. Here are the basics:

Black Rock basic expenses

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The gross expense ratio is 0.64%.  The net expense ratio is 0.39%.  And the turnover rate is 806%.  Let’s take a minute to unpack those.

The net expense ratio is the annual reduction in the rate of return you will earn on this fund.  For example, if the fund’s overall rate of return was 2.15% the fund would pay you
2.15% – 0.39% = 1.76%.  This is kind of important.

The turnover rate is the number of times per year the portfolio is completely replaced.  The higher the turnover rate, the larger the expenses created by trading (brokerage fees and commissions).  This fund turns over 8 times per year, a very high number.

[Update April 30 2:30 pm GMT-8: Clarified the definitions of the gross and net expense ratio.  Added examples. Also reorganized and rewrote the section explaining expense ratios and sales fees.]

The difference between the gross and net expense ratios can be created by a number of factors.  Some funds set a maximum expense ratio in their prospectus.  Others have a fee waiver.  In this case, we’ll need information from the prospectus to do the calculations.

You also need the prospectus to find out about 12b-1 and other sales fees. To get there, click the link in the summary window.  (If you can’t see this link, drag the right side of the window to make it larger.)

Fidellity CSU Screen09

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Scroll down and you’ll see this. (If you don’t see this and are working with two or more monitors, please see the note in the User Guide on page 6.)

Black Rock prospectus

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Management Expense is already included in both expense ratios.  But now we can see how the gross and net expense ratios are calculated.  The gross expense ratio (0.64%) is the sum of the Management Fee, Interest Expense, and Other Expenses (0.35% + 0.29%).  The net expense ratio (0.39%) is the Management Fee plus Other Expenses plus the (negative) Fee Waivers
(0.35% + 0.05% – 0.01%).

And we don’t have any information about sales charges and 12b-1 fees.  (Note that Black Rock does not charge any of these fees. In fact, none of the funds I looked at charge any sales fees.  Two charge redemption fees of 2% if you sell your shares within 60 or 90 days of purchasing them.) The following example is, therefore, hypothetical.  However some funds offer several classes, largely used to separate groups of customers.  The William Blair Small-Mid Cap Growth Fund Class I fund charges no fees.  But their Class N fund charges a 0.25% 12b-1 fee. These funds are bound by their contracts, so there won’t be any immediate changes.  But they can always shut a fund down.  Beware funds that have an inclination to charge these fees.

William Blair Small-Mid Cap Growth Fund Classes N and I

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In the jargon of mutual funds, sales charges are called the load.  A front-end loaded fund charges a sales commission when you buy shares in the fund.  A back-end loaded fund charges the commission when you sell the shares.  A 12b-1 fee is usually called a distribution fee.  In reality, it’s just another sales charge.

Loads and 12b-1 fees reduce the number of shares your money can buy.  Suppose there is a 2% front-end load.  If you have $10,000 available to buy fund shares, you will actually get
$10,000 x (1 – 0.02) = $9,800 worth of shares.

This is not good!! Economists and financial advisers usually recommend only considering no-load funds.  Those funds have a sales commission of 0.00%.  Your $10,000 will actually buy $10,000 worth of shares.  But beware of the 12b-1 fee.

Conclusion

I have no dog in this fight.  My funds will remain with TIAA.  I hope this has been helpful.  When you find mistakes, please let me know: tony@TonyLimaAssociates.com.

 


About Tony Lima

Tony Lima has been working with technology, economic modeling, forecasting, and market research for 40 years. His background makes him uniquely qualified to navigate this varied landscape. Begin with his education: B.S. in chemical engineering from M.I.T. , M.B.A. from Harvard, Ph.D. in economics from Stanford. His day job was professor of economics at California State University, East Bay. He retired in 2016 to devote his time to consulting and writing. But he has found time to: write (eight books and over 100 articles ranging from wine economics to detailed analyses of meta-language code generators) consult with companies ranging from Microsoft to CEDEX keep his expertise up-to-date, constantly reading and sorting through the avalanche of information available daily maintain three blogs: Wine Research, Wine Economics, and Economic Policy Local policy analysis: Los Altos Politico.com

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