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		August 2004
	The State of Connecticut 403(b) Program

	As a participant in the State of Connecticut 403(b) Program, you have a range of investment options from which to choose. Since there are a variety of factors to consider when selecting which funds to invest in, operating expenses are often overlooked. This issue of Dollar Wise explains how operating expenses impact your account balance, and why you should consider a fund's total expenses as well as performance when choosing your investments.
	Nancy Wyman State Comptroller

How They Affect Investment Returns

Like any other business, managing a mutual fund costs money. Expenses are incurred from overseeing and marketing the fund, as well as from a host of other activities. Mutual funds have a variety of fees and charges associated with them, including management fees and administrative charges.

In every issue of Dollar Wise, there are charts titled "Comparison of Investment Options for the Connecticut 403(b) Program," which list performance and expense information for the quarter just ended. Along with the return on investments that each fund achieves, the following expense information is also shown:

While operating expenses vary from fund to fund, funds typically pay these expenses out of fund assets. That means the cost of operating the fund is passed along to you, the investor.

Let's look at an example of how fund expenses affect a fund's return. Let's assume you contribute $1,000 to a fund at the beginning of the year, and the fund's total expenses are 1.90% for that period. If the fund earns an annualized rate of return of 5.50% for the year, the return on your investment, as of December 31, will be 3.60% (5.50% minus 1.90%). This percentage would appear in the "1 Year" column. That's because the rates of return listed in this newsletter are net of expenses, which means the total expenses have already been deducted from the fund's return. The rate of return you see is the actual - or "real" - rate of return you are receiving for that time period.

Now let's examine the impact these expenses can have on your investments over longer time periods, since even small differences in fees can turn into large differences in returns over time. This is especially important to keep in mind when saving for retirement, when you presumably will be saving over a long period of time.

Let's say you make a one-time investment of $15,000 in a fund that has an 8% return before expenses each year, and the fund's annual expenses total 1.2%. After 20 years, you would have approximately $55,900 in the fund option. But, if the fund had total expenses of just .6% over the same period of time, you would have approximately $62,500 in the fund option. That is a substantial increase of $6,600! 

Remember that although all mutual funds and annuities incur operating expenses, high expenses can have a significant impact on your returns, especially when returns are down. For instance, if you invest in a fund that has been a strong performer in the past and has high expenses, you may hold onto it, since the real rate of return has been good. But as every investor knows, a fund's past performance is not necessarily an indication that the same level of performance will continue in the future. If a fund starts to be a poor performer, you will still have to pay high expenses.

So, while fund expenses are certainly not the only factor that you should consider when choosing your investments, they are important and should be taken into account, along with how well a fund fits into your overall investment strategy. As always, maintaining a diversified portfolio is the foundation for a strong financial strategy. If you would like more information about operating expenses, please contact your financial services organization directly.

Comparison of Investment Options for
the Connecticut 403(b) Program

Performances and Expenses as of June 30, 2004

Asset transfer provision for transfer of assets from other carrier: none

* In accordance with the requirements of the operating provisions of the 403(b) Program, Fidelity Investments will deduct a quarterly fee to all accounts on file beginning fourth quarter 2002. The purpose of this fee is to pay expenses associated with the 403(b) Program's limited scope third party administrator.

** FMR Co. has voluntarily agreed to reimburse shareholders a portion of the funds' management fee. This agreement can be terminated at any time. Without this reimbursement, each fund's yield would have been lower.

The Fidelity Capital & Income, Mid-Cap Stock, Low-Priced Stock, Small Cap Stock and Diversified International funds may charge a short-term trading fee.

The Low-Priced Stock fund charges 1.50% on shares held less than 90 days, the Small Cap Stock fund charges 2.00% on shares held less than 90 days and the Diversified International fund charges 1.00% on shares held less than 30 days.

Although the information contained above has been carefully verified, its accuracy cannot be guaranteed. All numbers are unaudited.

Asset transfer provision for transfer of assets from other carrier: lesser of 2% or actual deferred sales charge/surrender charge 

* The Declared Rate is credited through the close of the calendar year on contributions received during the designated calendar quarter. The rate for the 3rd quarter, 2004, is 4.00 %. For contributions received prior to July 1, 2004, the Declared Rate is 4.00%. Rates quoted are effective annual yields. 

Asset transfer provision for transfer of assets from other carrier: none

No annual maintenance fee.

* M&E expenses are expected to decrease as the level of total 403(b) assets increases under the State contract.

** The interest rate varies monthly. For July 2004, the rate is 4.00%. The rate is guaranteed to be no less than 3.80% through December 31, 2004.

Asset transfer provision for transfer of assets from other carrier: none

* Premium payments will be credited with the effective interest rate established for the date each payment is received. The current rate as of June 30, 2004, is 3.70%. The effective rate reflects the effects of daily compounding of interest.

Asset transfer provision for transfer of assets from other carrier: none

* In accordance with the requirements of the operating provisions of the 403(b) Program, TIAA-CREF will assess a fee for each active account on a monthly basis beginning December 2002. The purpose of this fee is to pay expenses associated with the 403(b) Program's limited scope third party administrator.

** Rates for the TIAA Traditional Annuity are quoted after all operation charges have been deducted. These charges are very low, averaging about 1/3 of 1% of assets. New contributions applied to the TIAA Traditional Annuity under a Group Supplemental Retirement Annuity (GSRA) contract during the period from June 1, 2004 through July 31, 2004, will be credited with an interest rate of 3.50%.

*** TIAA Real Estate Account and the NCREIF Index returns are presented one quarter in arrears due to a lag in the availability of the benchmark return.

Asset transfer provision for transfer of assets from other carrier: lesser of 2% or actual deferred sales charge/surrender charge

* Interest rate varies quarterly. The rate for the third quarter of 2004 is 4.25%.

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