Focus On: DCSD Retirement Plans (401k/403b/457 Plans)

Summary: Choose the PERA 401k plan and invest as much as you can.

 

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The first part of this post repeats the information in the LPS Retirement Plans post, then the rest of it is specific to the choices you have in DCSD.

The idea of retirement is a fairly new one. It wasn’t until early in the 20th century that the concept of retiring from work and “living a life of leisure” was even a concept. Many employers started offering pension plans and then Social Security came along in 1937. Then in 1978, the idea of a tax-deferred savings plan (401k) was created, although it’s original intent was not the way we’ve ended up using it.

Social Security was really designed to be part of a “3-legged stool” concept of retirement, that retirees would draw from their company pension, from social security and from their personal savings. As pension plans have gone out of favor and 401ks have taken their place (particularly in the private sector), it has really become a two-legged stool (which is somewhat problematic). For public school employees in Colorado, PERA is a social security replacement plan, so basically covers those two legs, leaving the personal savings leg for you to figure out on your own. That’s where employer-offered tax-deferred savings plans come in.

All PERA employers offer the PERA 401k plan to their employees, and some employers also offer access to the PERA 457 and the newly created PERA Roth 401k/457 plans. Many school districts also offer additional, non-PERA options for tax-deferred accounts. This post will focus on what’s offered in Douglas County School District, but you should check with your employer to see what options they offer.

DCSD allows you to choose between PERA and MetLife for retirement savings vehicles, offering the PERA 401k and the MetLife 403b, 457, and Roth 403b plans. There are subtle differences between 401k, 403b and 457 plans that can be important but, for the purposes of this discussion, we’ll treat them as roughly the same, with the important exception that you have separate contribution limits for 401k/403b and 457 plans which gives you the ability to save more if you have the cash flow to do that.

This post is not intended to be an in-depth explanation of 401k/403b/457 plans (or their Roth versions), but let me try to briefly describe them (if you decide to work with me we can dive deeper if need be). The idea behind 401k/403b/457 plans is to save money in a tax-deferred account, which means that you are not taxed on your income that you place into those accounts now, nor are you taxed on the earnings in those accounts as they accumulate, but you are only taxed when you make withdrawals which will hopefully be when you are retired. The traditional thinking is that most folks will be in a lower tax bracket when they are retired, so not only do you reap the benefits of saving “extra” all those years by not paying taxes up front, but when you do pay taxes upon withdrawal you will pay a smaller amount.

More recently Roth 401k/403b/457 plans have been created (along with Roth IRAs, which don’t flow through your employer) that take a different approach. For these plans you do pay taxes on any income you invest, but the earnings grow tax free and all withdrawals in retirement are tax free as well. In other words, pay the tax up front, never have to worry about taxes on this money again. For folks who think their tax bracket might actually be higher in retirement, this is a better option.

The obvious conundrum is how do you know for sure whether your tax bracket will be higher or lower in retirement? You don’t, which is why many folks choose to put money into both types of accounts to hedge their bets and give themselves more flexibility in retirement by giving them the option to withdraw from whichever account makes the most sense based on their current tax situation. (There are also some really nice benefits of a Roth if you are trying to leave an inheritance.)

Many employees, especially younger ones, kind of throw up their hands at all this. Retirement seems like a long way off, the choices can be complicated, and of course choosing not to spend money right now can be difficult for some folks. But the beauty and power of investing is compound interest, and it’s most effective the more time you give your money to grow, so the sooner you start, the better (and easier) it is to generate the retirement savings you want.

Many folks thinking about 401k/403b/457 plans also don’t take into account the effect on the tax-deferral on their current income. They think about putting say $100 a month into a 401k, but then worry they can’t do without that $100 a month. But they’re missing that their actual paycheck won’t go down by $100, but more like $70 (if you are in the 25% federal bracket, plus 4.65% for Colorado taxes). The government is basically saying, “invest $70 and we’ll give you $30” (always remembering that eventually they are going to tax you on that when you withdraw it). If you choose the Roth options, you don’t get that tax break up front, so your paycheck will decrease by $100 (but the potential for tax-free growth over time is tremendous).

So, with that overview, if you are a DCSD employee, should you choose PERA or MetLife? Well, again, that depends on your individual circumstances and I’d be happy to discuss those with you, but for most people PERA is the better choice because of lower fees.

PERA offers a choice of several funds or a self-directed brokerage account if you want more control. For most folks, the funds are the better choice. In 2011 PERA chose to go with a “white-label” approach to investments. Research has shown that many folks make poor investment choices when given too many choices so, instead, a “white-label” approach has you choose among asset allocation choices instead of picking individual funds.

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I’ll write more in future posts, but there are basically three things you can control when saving for retirement:

  1. How much you save.
  2. What asset allocation you choose.
  3. How much in fees you pay.

By going with a white-label approach and trying to keep fees low, PERA has tried to simplify the second and third choices for you. For each of their asset classes, PERA has typically gone with a combination of a passive (index) approach and an active (managed) approach. This combination gives you lower fees than a fully active approach, but higher fees than a strictly indexed approach. PERA thinks that they can achieve higher returns than the index this way. I’m a big fan of index funds, so I’m not totally convinced of this approach but, so far in their short lifespan (since 2011), they have mostly achieved this to a small extent.

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PERA does also give you a self-directed brokerage option (for an additional fee), which allows you almost unlimited choices in investments. For most folks, the additional complication of choices and fees make this sub-optimal, but it’s there if you want it.

selfdirected

For some reason, DCSD and/or MetLife have made it extremely difficult to get information about the plan. It took me three weeks of emails and calls to finally get the information we needed. (The way they currently have it set up, you can only find out information about investment choices and fees after signing up and giving them money, which is less than ideal. They are working on fixing that.)

MetLife gives you access to a small set of individual mutual funds, which is one of the reasons the fees tend to be a bit higher (0.34% administrative fee plus the underlying fund fees, some of which are pretty high). Here’s a comparison of fees for a large-cap investment in the PERA white-label fund, the PERA self-directed brokerage option invested in a large-cap index fund (they require you to keep $500 in PERAdvantage funds), and the MetLife option invested in the same index fund. (You can view comparisons for other asset classes here.)

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If you look carefully, you’ll notice that the cheapest option is the PERA self-directed brokerage option (as soon as you pass about $20,000 in your account), with the PERAdvantage funds coming in second, and MetLife coming in last. Since the middle and third columns are essentially the same choice in terms of what you’re investing in, there’s no reason to choose the higher fee MetLife option over the PERA option. If you are investing a lot, you can save in fees by going the self-directed brokerage option, but this is where PERA would argue that they think they will outperform the index and make up those fee differences. The differences are small enough between the first two columns that, for most folks, it’s probably best to stick with the PERAdvantage options.

Importantly, this fee difference gets much more extreme if you choose anything other than the three Vanguard choices in MetLife. The MetLife Target funds have a total fee of 1% (compared to 0.18% for PERA), and the International Fund is 1.48% (compared to 0.52% for PERA). This is really, really bad, and you should avoid these at all cost (pun intended). The only reason to choose MetLife is if you’ve maxed out your 401k and want to contribute additional money to a 457 (since their contribution limits are separate, and DCSD has chosen not to allow contributions to the PERA 457 plan). I hope that DCSD considers adding the PERA 457 option in the future as an alternative to the high-priced MetLife.

In future posts I’ll write more regarding possible asset allocations (which fund(s) should you choose), contribution limits (and the fact that you get separate limits for 401k/403b vs. 457, allowing you to save much more if you can), and the power of compounding. But, for now, this gives you an idea of where to start. The key thing is to start now and put as much as you can into one or more of these vehicles so that your “stool” will be sturdy enough to support you in retirement.

Focus On: DCSD Health Insurance

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I recently posted about the health insurance offered by Littleton Public Schools, this post will focus on Douglas County Public Schools. The first part of this post will be very repetitive from the LPS post, as some of the background information is essentially the same (hooray for copy and paste). So, if you’ve read that other post, you might just want to skip down to the comparison part of this post.

Healthcare and health insurance are complicated. Each person/family has unique needs, and many families have two employer plans to choose from. Therefore it’s really important to look at each person/family individually, so this blog post is going to be a general overview of the health insurance options currently offered by Douglas County Public Schools, but your needs may require additional considerations that this post won’t cover.

As a long-time public school employee, I’m very familiar with the benefits that school districts offer. I’m also very familiar with the fact that many people don’t like to think much about benefits and aren’t really aware of the different options and what they might mean to them. Again, while each person/family has specific needs, let’s take a look at some general observations about the health insurance options that DCSD currently offers.

DCSD still offers a choice of two different insurance carriers (which is increasingly rare), CIGNA/Allegiance and Kaiser, and then two plans from each provider (a more traditional, low-deductible plan, as well as a high-deductible plan). So the first decision most people have to make is whether to go with CIGNA or Kaiser. This discussion often ends up being similar to the Apple vs. PC discussions that happened a while back, with folks having very strong opinions on both “sides,” but let me try to share what I know.

The main consideration for most folks is how important it is for them to be able to choose their own doctor. If you have an existing relationship with a doctor (not at Kaiser), and you have perhaps some on-going, chronic conditions that doctor is helping you with, that could be a strong argument for CIGNA. But I’d suggest you really give some thought to both of those conditions to see that they both apply. If either does not, then you have some more thinking to do.

One of the frustrations over the years when I’ve discussed health insurance with folks is the assumptions they make. Many (not all) assume that CIGNA must be better than Kaiser, both because it’s more expensive and because it is not “managed care.” That assumption is not correct. CIGNA is not bad, but Kaiser consistently ranks very high in both quality of care and customer satisfaction (and typically higher than CIGNA). That doesn’t mean that Kaiser is perfect, some folks have had bad experiences with them, but the structure of Kaiser is why their quality of care is so good.

Managed care has a bad reputation, but all health insurers – including CIGNA – are practicing managed care. The difference is that at Kaiser there is a dedicated team to identify best practices based on the research evidence, and that is then disseminated to the doctors, nurses and other staff members to follow. Under plans like CIGNA, doctors have more freedom (which many people like), but the quality of care is more variable from doctor to doctor. An interesting result of all of this is that when folks have a bad experience with a doctor at Kaiser, they typically blame Kaiser, but when they have a bad experience with a doctor with CIGNA (or other carriers), they typically blame the doctor. I am not trying to convince you to change to Kaiser, just to examine your assumptions and make sure you are basing your decision on your needs and the actual evidence.

Once you’ve made the decision between CIGNA and Kaiser, you then have to decide between the two plans they each offer, a more traditional low-deductible, copay/co-insurance type of plan, and the newer (and increasingly more popular among employers) high deductible plans. It is beyond the scope of this blog post to discuss all the pros and cons and the nuances of high deductible plans, but we can look a bit more carefully at the actual out-of-pocket costs under each plan and many folks will find the result surprising.

Before we do that, just a little background. It’s important to look a little bit at how much DCSD contributes toward your premiums. Unlike LPS, there does not seem to be a particular formula DCSD uses (at least it’s not apparent if there is one). DCSD appears to have made the strategic decision to keep premiums lower but have deductibles and max out of pocket be higher. They definitely do contribute some toward dependent coverage, but I’ve been unable to discern a consistent percentage amount.

Whether that is personally good for you depends, of course, on whether you are covering dependents :-). In effect, employees who choose employee only coverage end up helping subsidize those who choose any of the dependent coverage options. (And, by the way, employees who choose Kaiser end up subsidizing those who choose CIGNA.)

A second piece of background is to understand the purpose of insurance, and particularly group insurance. Folks who grew up in my generation tend to have the view that the purpose of insurance is to “pay for our healthcare costs.” While that would be nice, it’s unfortunately not sustainable. The purpose of insurance (from an individual’s perspective), is to cover outliers. If something bad happens to you (or your family), it prevents catastrophic healthcare costs that you might be unable to pay. (Prior to the Affordable Care Act, medical bills were the leading cause of personal bankruptcies, it will be interesting to see what happens going forward.)

By pooling your risks with those of a group, it becomes affordable for the group as a whole to pay those really high healthcare costs for the (hopefully) few individuals who need it. In effect, those folks who don’t end up with high costs subsidize those that do. When insurance rates go up, it’s not just because the insurance companies are greedy (Kaiser, in fact, is non-profit), it’s because the cost experience of the group (in this case, DCSD employees who’ve chosen each particular plan) has been more than the premiums that are paid in. It just takes one or two very expensive cases (a premature baby with complications, brain cancer, etc.) to require higher premiums. To be clear, this is not a bad thing, this is the reason for group health insurance. If you never get sick, the best option would be not to buy health insurance at all. This is the reason for the controversial “individual mandate” in the ACA, for health insurance to work you have to have healthy people involved in order to pay for the sick people.

So now let’s look at the premiums. When folks look at the rate sheet put out by DCSD each year, they often skip down to the employee portion of the premium, think about the deductible amount and perhaps maximum out of pocket, and then make a quick decision. For many folks, the idea of a “high-deductible” and paying costs out-of-pocket up front is scary, but if you stop to do the math, the story turns out a bit different. This table shows the total out-of-pocket costs for each plan choice under a couple of sample scenarios. Obviously, your experience will most likely not match the sample scenario, but I tried to pick scenarios that people typically worry about (which is costs that come in right at the deductible amount for the high-deductible plans).

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It turns out that under the CIGNA plans, the high-deductible plan is cheaper for almost everyone under almost every scenario. (I think it is actually everyone and every scenario, not just “almost”, but I can’t check every possible scenario so I didn’t want to overstate it.) Check out this google doc for a bit more detail but, basically, with the amount you save in premiums under the high-deductible plan, plus the amount that DCSD contributes to your HSA (I’ll write a post soon talking more about HSAs, they are a very attractive option), you come out ahead over the OAP plan even when you have large medical bills. Even better, if you have years where you don’t have large medical bills, you not only come out ahead, but the amount in your HSA (DCSD contribution plus whatever you might choose to contribute) rolls over. So not only do you pay less that year, you have “money in the bank” for future healthcare costs.

The math is not quite as straightforward on the Kaiser side, because under the DHMO you have both copays and coinsurance after you meet the deductible, and what those might end up being varies greatly depending on exactly what kind of care you end up needing (plus, ironically, since the premiums are lower than CIGNA, the difference between the two Kaiser plans is not as stark). But, in general, the story is fairly similar to CIGNA, for any of the dependent coverage plans, the high-deductible plan is better – for employee only, the DHMO might be better. When you have “good” healthcare years with low costs, you will definitely come out ahead with the high-deductible plan and can carry over any money in your HSA. When you have “bad” years with higher costs, you may still come out ahead with the high-deductible plan, but there are certainly scenarios where the DHMO would end up being cheaper. (And, of course, when you compare to the CIGNA plans, Kaiser is less expensive under all scenarios.)

So, which carrier and which plan should you choose? It depends. You also have to look at the benefits offered by any spouse’s plan, your existing health and any conditions you might have. as well as your personal preferences. That’s certainly part of what we’d do if you decide to work with me.

Additional Resources (2017-18)
DCSD 2017-18 Rate Sheet
CIGNA/Allegiant Plan Summary
Kaiser Plan Summary (appears to be HDHP only, didn’t find one for DHMO)
DCSD Benefits Summary
Medical Plan Comparison Chart