Should I use Fidelity or TIAA CREF for the University of Michigan’s Retirement Plan?
The University of Michigan is one of the top educational facilities in the world. It only follows, that a top educational institution offers great benefits to the people who help make it so great.
While there are numerous decisions to be made when you are hired at the university and when enrolling in the benefit plans, I’m going to discuss the 401k/403b/401a options.
Choices, choices, choices
We all like to have choices, but when enrolling in benefits plans it’s easy to be overwhelmed. Things like where to save, what insurances to choose, and analyzing the costs, pros, cons, etc create an immense amount of information to process and is exhausting just listing out the things to consider. I help my clients review these and make informed decisions about these as one of the many services I provide. If you don’t work with a financial advisor, here’s some information that I hope will help inform your decisions and make the process a bit easier.
When choosing what custodian to use to invest your retirement savings with, there are a few things I think are important to consider.
First, let’s break down some of the jargon.
What’s a custodian? There are two different options for your custodian in the University of Michigan’s retirement savings plan. Fidelity and TIAA CREF. So, what’s a custodian? A custodian (in this context) is an institution who holds your money for you. Why is this important enough to care? The main reason is while the custodian is holding your money for you, there are different investment vehicles you may park your money in. Each custodian offers significantly different options and each could be appropriate, but they are dramatically different.
Why all the numbers and letters? Each of these is an identifier in the Internal Revenue code that present different benefits for different types of institutions. The University of Michigan offers multiple options because each has different benefits and by them offering all of these, it gives the employees the ability to save more.
I’ll oversimplify it here a bit for you.
The 401a is an EMPLOYER ONLY account. That is to say only the university may add to this account. It’s where the matching contributions go that they provide for you.
The 403b is a retirement savings plan for non profit organizations. The University of Michigan is a non profit, so they’re eligible for this type of plan.
The 401k option is the same as a 403b, but for for-profit organizations. So, why both a 403b and 401k? I won’t go into the technical details, but it basically provides higher income employees the ability to save more to their retirement accounts. The technical details are for another blog, another day.
Point is, don’t worry about where you’re savings are going, you’ll be adding to the 403b or 401k and they have the same treatment for retirement saving purposes as an investor.
Fidelity Versus TIAA CREF
Which custodian should you choose? Sorry to disappoint, but there’s not a universally correct answer here. It’s going to depend on your goals, priorities, and risk tolerance.
One thing to consider is the solvency of these custodians. You wouldn’t want to invest with a custodian who is going to fail as a business entity. In this case, I think both are great organizations and aren’t going anywhere. TIAA has a really strong foothold with educational organizations, and for good reason. Fidelity has a strong foothold with private companies and a very competitive plan.
I think a strong reason one would choose TIAA CREF for their retirement savings is stability. TIAA offers many investment options that have relatively low risk. Accordingly, they will provide relatively low returns, but that’s the trade off you’d make.
All that is to say, you are seeking lower risk and are willing to sacrifice the possibility of greater returns for it.
I think the main reason you’d choose Fidelity is to get growth. Fidelity has a strong track record of performance and they offer many investment options to build a diversified portfolio. Accordingly, you will be taking on many risks to get the possibility of growth, but that’s the trade off you’d make.
All that is to say, you are seeking higher returns and are willing to accept volatility for it.
Now, risk and return aren’t the only way to frame this and if you’re not a financially minded person, you may not think in those terms, so here are some other ways to consider this.
If you have a long time before you plan to withdraw these funds, you will generally have the ability or capacity to take more risk. A couple examples are if you’re young or have more than 10 years until you plan to begin withdrawing these funds. Fidelity is probably better in those cases.
If you are retiring in the next few years or plan to start withdrawing these funds in the near term, you don’t have as much ability or capacity to take on risk. A couple examples are if you’re retiring in the next 5 years or may need to access the funds in your retirement account soon. TIAA is probably better in this case.
Another consideration is what other assets do you have? Perhaps you already have a pension, annuity, or other fixed income source that will provide cash flow to you. Perhaps you have a stock portfolio. Considering how this account will fit into your total investment portfolio is another way to decide which custodian to choose as it gives you the ability to balance your other assets.
If your existing investment portfolio is very conservative or low risk, you could realize diversity benefits from taking more risk with this account.
If your existing investment portfolio is very aggressive or high risk, you could realize diversity benefits of having a more conservative investing approach with this account.
But wait! There’s more. . .
Choosing your custodian is not the only decision you need to make here, you need to make sure 1) you are saving to these accounts, 2) elect Roth IRA or Traditional IRA savings, and 3) the money you are saving is being invested in accordance with your financial plan. You have to do a bit more work, but again, that’s way too much to go into here.
Choosing where to invest your assets can be a complicated process. As with all financial decisions, there are pros and cons to all decisions. I encourage everyone to either work with a professional to make an informed decision or to spend the time to research what’s best for you.
Once you’ve selected your custodian, make sure you are deferring to these accounts, make sure you’ve considered the tax location of the savings (i.e. Roth, Traditional, or After Tax), and make sure the money you’re putting in is working for you.
If this is too much, feel free to give us a call to help ease the decision process. Telos Financial works with many employees of the University of Michigan and welcomes the opportunity to help you get on the path to financial success. Contact us today to schedule an introductory meeting.
Telos is a fee based, holistic financial planning firm serving Michigan’s high income and high net worth professionals, millennials, recent college graduates, and small business owners.
Thanks for reading the latest edition of Planning for your Purpose, Telos Financial’s blog, where I discuss different topics related to financial planning. CERTIFIED FINANCIAL PLANNER™ professional Dennis LaVoy is Plymouth, Michigan’s holistic financial advisor serving clients throughout the mitten as well as across the country.
The primary purpose of the blog is to introduce financial planning concepts and questions I receive from clients that I believe are important. I want to start discussions that will educate, benefit, and improve your financial life, ultimately, to help you focus on your telos!
Telos Financial is located in Plymouth, Michigan and focuses on serving young professionals and their families. Dennis LaVoy is a Certified Financial Planner® Designee and a Chartered Life Underwriter®. Dennis founded Telos Financial and to provide fiduciary financial services to families across Michigan including Plymouth, Canton, Ann Arbor, Detroit, and as well as all over the great United States of America.
The views expressed are not necessarily the opinion of FSC Securities Corporation, and should not be construed directly or indirectly, as a solicitation of either custodian. Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary.