Help with decisions on 457b or 403b plans

[Bluejay1975]

Hello mustachians.  I've been lurking on this site for about 2 years trying to off and on process the vast knowledge present on these forums.  Sorry in advance if I don't provide the correct/incomplete information. 

Me:
40 year old single dad
Teacher (17 years)
Roth IRA vanguard:  only $15,000 but will be maxing contribution the first of January.  I chose the 2035 target fund when I began since I didn't really know completely what I was doing and it seemed to be the right balance at the time. 
5 months of expenses saved in an emergency fund at Synchrony:  1.30 % interest
Only debt is house purchased 3 years ago:  4.1% on the mortgage. 
Saving 38 % of income each month, which will increase to 50% in 1.5 years.

I've been through a lot in the last 10 years.  Went through a divorce and really buckled down to improve my finances through hard work.  In addition to my teaching I have a few side gigs (mow 5 lawns and work on a farm during the summer).  I have managed to pay off all of the divorce related debt and paid off my car (ford focus) in 2 years.  I know I still have work to do but I'm proud of where I am at the moment. 

I am now at the fun part.  With all of my debt taken care of I am able to now max out my roth and can max out a 457b or 403b offered through my school.  We use VALIC but several schools came together to create a retirement trust through them with lower fees.  We also have access to a pretty wide variety of funds, including a lot of vanguard funds.  I met with the advisor/rep that works with our school district to see what he had to say and I wanted to get some feedback from you all. 

Funds available:
All vanguard target date funds
VTIAX
VSMAX
VMGRX
VINIX
VBTLX
and others but no VSTAX

The advisor recommended putting me in the American Balanced R6 fund RLBGX which is performing well but the ER is 0.29.  I have tried my best to learn about these different funds but the amount of information out there is pretty overwhelming and I'm nervous about making a poor decision moving forward. 

Any and all advice is welcome.  I am planning to start off with $500/month in a 457 and increase to $1000/month before the end of the year (2018). 

Thanks in advance. 

[maizefolk]

Congratulations on buckling down and digging yourself out of debt. If you're still feeling like you're in the steep part of the learning curve when it comes to investments, there is nothing wrong with sticking all of your 403/457 contributions into a fund like VLXVX (Vanguard 2065 target date fund, currently 10% bonds, 36% total international stock index, 54% total domestic stock index, 0.16% ER, I picked it because it's the farthest out target date fund Vanguard currently appears to offer and hence the most stock heavy).

There may be further optimizations you can make as you get more comfortable with the skill set, but in the meantime sticking it all in VLXVX means you don't have to worry having made any poor decisions while you focus on maximizing your savings rate and learning about investing.

Good luck!

[Bluejay1975]

Thanks for the reply.  That is also what I was thinking (a target fund from Vanguard) but since I was already utilizing one of those funds for my Roth then i didn't know if it would be better to go a different route in the 457 plan.  However, since I'm just getting started and won't have much skin in the game I doubt it would make a bunch of difference. 

My primary concern now with the 457 is to lower my marginal tax rate completely below the 25% bracket (or 22% bracket if the tax plan passes through by 2018).  I hope I'm using those terms correctly so someone correct me if I'm wrong.  I'll be taking the standard deduction at the end of 2018. 

Another question:  I have a small Roth IRA with Waddell and Reed that I started years ago that is horrible.  The fees are just ridiculous and on top of that the fund is not performing well.  I wish I knew then what I know now.  There isn't much in it but how easy would it be to move that into my Roth at Vanguard?  I was planning on calling Vanguard once Christmas break hits in a few weeks when I have time to process the information.  Would that affect the amount I can contribute to my Roth in January since I'm planning on maxing it out for the year?   Before someone asks there is a reason I didn't move it first when starting my other account. 

Thanks again, folks.  MMM has been a great education for me. 

[maizefolk]

It should be straightforward to roll the bad Roth IRA over into a Vanguard Roth IRA. I'm not sure if Vanguard can initiate it from their end or if you'd need to call Waddell and Reed, but either way the folks and Vanguard can walk you through the process. Doing a rollover like that doesn't count toward your IRA contribution limit for the year (only moving money that's not already in some kind of IRA or 401k/403b plan into an IRA uses up that limit) so you can make the change whenever you like (which is good because in December and April (tax season) Vanguard tends to get a bit overwhelmed with lots and lots of contributions and account changes so things take a bit longer to go through).

I wouldn't worry at all about using the same Vanguard target date fund in multiple accounts. There's a great post on this called "What if Vanguard Get's Nuked" http://jlcollinsnh.com/2012/09/07/stocks-part-x-what-if-vanguard-gets-nuked/

Long term as your stash grows there's an argument for holding all of your bonds in tax deferred accounts like IRAs/401s/403s/457s and all of your foreign stocks in taxable accounts which would mean moving away from target date funds, but it doesn't make much practical difference in the early accumulation stage, and the nice thing about investing in tax deferred accounts is that you can always rearrange your investments later into different funds without incurring any capital gains.

[Bluejay1975]

Thanks.  I went ahead and signed up for the target 2060 fund.  The advisor tried to talk me out of it and again wanted me to use the American fund.  Made me think about some other things.  I've been reading about fund turnover rates and saw that the American balanced fund is at 79%.   Why push for a fund that will have more fees when other funds exist that perform just as well?  Do these advisors get more money by pushing certain funds?  What type of advantages are there in buying the American balanced r6 fund to the vanguard fund?

[maizefolk]

Depends on the company running your plan and the company running the fund, but yes there are certainly cases where financial advisers get incentive payments from the companies running the mutual funds if the financial adviser steers more of their advisee's savings into that company's funds.

I don't know if you're a fan of John Oliver or not, but if you are he's got a great episode on the problems with high fees and conflicts of interest by advisers and plan managers when saving for retirement: https://www.youtube.com/watch?v=gvZSpET11ZY

[facepalm]

Another teacher here. I have investments  in both a 457 and a 403.

A question: You mention that your district and others formed a trust and use VALIC for individual plans. Does each district administer its own employees plans, or is there another plan administrator? The reason I ask is that school districts, depending on size, often hire a third party administrator to service employee plans and handle paperwork (of which there is a bunch). If not, then someone at your administrative office is more than likely tasked with this, and so you will have to go to them to find out plan specifics. 

Is there an expense difference between your 457 plan and your 403? and what is VALICs take?

If it were me, I would put my money into a 457(b), but only because you might still be able to take withdrawals before 59.5 without a penalty should you need to. This is possibly going to change with the new tax bill, if it is signed into law. But who knows.  I would also ask your plan administrator if you are allowed to contribute to both a 403 and 457 concurrently. It is one of the few perks that teachers enjoy, and it looks like the tax bill is going to allow us to keep the ability to contribute to both. But it will depend on how your plan is written. Later on when you increase your savings rate it would mean being able to set aside 36K per year, and would get you to your desired tax bracket pretty quickly.

VINIX and VBTLX are both fine funds. I have used VINIX in the past, and think that a fund that tracks the S&P 500 gives you plenty of exposure to the total market.