Author Topic: 403b questions  (Read 1249 times)

RollingGreen

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403b questions
« on: August 29, 2019, 04:04:02 PM »
Hi, everyone.

I'm looking ahead to get more serious about investing, which I'm planning on doing when I'm debt-free soon. I know very little about investing - it's a foreign language - but I just read The Simple Path to Wealth, so I'm a bit more apprised now.

I have a 403b plan through Mutual of America, so I'm trying to see if I'm on the correct path. As I looked through their fee disclosure, I noticed most of the expense ratios are very high - there really are no low options. Also, after reading The Simple Path to Wealth, I was hoping there would be VTSAX or VBTLX options, but there are not. There are some Vanguard options, though I'm not familiar with them.

Right now, I'm 100% in Mutual of America's 2050 Retirement Fund. I know Collins also says that target retirement funds TRFs are "the simplest path to wealth of all," but the expense ratio on the Mutual of America 2050 Retirement Fund is .95% - pretty high. Is he just referring to Vanguard?

Based on the list I've attached (these are my options), what would you do? Should I keep the 2050 Retirement Fund or distribute the allocations elsewhere? Also, how can I look into Vanguard otherwise if the allocations I have available aren't ideal? I don't yet have any IRAs or anything else, but I'm willing to do research.

Thanks for your help. I'll provide whatever further info you may need since I might have missed something.

dandarc

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Re: 403b questions
« Reply #1 on: August 29, 2019, 06:24:18 PM »
I'd probably hold my nose and put it all in the first one on the list - Mutual of America Equity Index Fund. Lowest ER on the list, but 0.73% for an S&P 500 index fund is absurd in 2019.

I'd also bring this up with your employer - better investment options help everyone in the company. Maybe read the plan documents to see if in-service outgoing rollovers are an option - put it into something shitty for a short time is not as bad if you can quickly roll it into an IRA with the investments you really want. Probably not, but worth checking for.

RollingGreen

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Re: 403b questions
« Reply #2 on: August 29, 2019, 06:43:09 PM »
Agreed. Thanks. It's a good topic to bring up with HR. Now that I have at least a semblance of knowledge, I can already see the options are trash. So I think I'll take your advice and move the allocation and mention it at work - I can almost guarantee you no other employees have even looked into this.

What's the best alternate option to get into VTSAX?

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dandarc

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Re: 403b questions
« Reply #3 on: August 29, 2019, 07:35:24 PM »
One thing I noticed - they seem to have a .6% fee tacked on to all of the investments. The funds themselves aren't so bad on the ER's, but the whole plan seems to have 0.6% annual fee added on to everything. That happens in 401K's and 403B's and 457B's, often but not always small ones, when the employer doesn't want to eat the cost of administering the plan. So you know, another thing to argue with your employer on.

As far as an alternate method to get into VTSAX:

https://www.bogleheads.org/wiki/Approximating_total_stock_market

As you can see, basically you put ~80% into the large cap index fund (first on your list), and then split the rest into the mid and small-cap options depending on the portfolios of the funds available. But 100% S&P 500 is a fine way to go too for your 403B - you can buy VTSAX in your IRA and taxable accounts.

RollingGreen

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Re: 403b questions
« Reply #4 on: August 29, 2019, 08:03:32 PM »
Great info. Thank you!

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RollingGreen

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Re: 403b questions
« Reply #5 on: September 02, 2019, 05:36:17 PM »
Ok, well, I moved my future allocations into the Mutual of America Equity Index Fund (the lowest ER of all options at .73%, replacing the previous ER of .95% in the fund I originally had.)

I'm thinking of next steps now. I'm only contributing up to the employer match currently in order to quickly pay off debt, which, as I said, should be done relatively soon. If after getting out of debt and establishing an emergency fund, should I

*Plan to max out the 403(b) contributions?
*Look into opening an IRA?
*If so, what kind (based on a $60,000/yr. income)?
*Open the IRA through Vanguard, focusing all contributions into VTSAX?

I'm learning as I go, but still new at this.

terran

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Re: 403b questions
« Reply #6 on: September 03, 2019, 06:18:47 AM »
Take a look at https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153, but the short answer is yes, open and fund an IRA before contributing beyond the match to a 403(b) with higher fees like that. Vanguard, fidelity, schwab, etrade, or td ameritrade (probably in that order would be good options).

RollingGreen

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Re: 403b questions
« Reply #7 on: September 03, 2019, 06:32:13 AM »
Thanks, terran. Is a traditional or Roth better for that income level?

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terran

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Re: 403b questions
« Reply #8 on: September 03, 2019, 07:01:54 AM »
Traditional vs Roth all comes down to marginal tax bracket now vs at retirement. See https://www.bogleheads.org/wiki/Traditional_versus_Roth

What is your filing status (married, single, etc)? Kids or other dependents you file on your taxes? Will you save anything in addition to your 403(b) match and an IRA contribution? How much in other pretax deductions comes out of your paycheck (like for health insurance, etc)?

RollingGreen

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Re: 403b questions
« Reply #9 on: September 03, 2019, 08:01:29 AM »
Single, no children.

This is based on a bi-weekly paycheck:

Fed Income Tax: -275.52
Social Security Tax: -143.19
Medicare Tax: -33.49
MA State Income Tax: -105.65

Dental: -7.41
Health: -90.96
United Way Donation: -2.00
403b: -48.16

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Greystache

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Re: 403b questions
« Reply #10 on: September 03, 2019, 08:23:04 AM »
Before we retired, my wife worked for a private (Christian) school. Her 403b was horrible! Crappy investment options and stupid high fees and expense ratios that were fairly well hidden (you had to really dig to find them). Apparently, one of the congregation, set up the 403b and probably made a ton of money on commissions. The only thing that made it worthwhile was the matching funds which were fairly generous.

terran

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Re: 403b questions
« Reply #11 on: September 03, 2019, 10:05:18 AM »
So with 26 biweekly pay periods it sounds like your annual deductions are 192.66 Dental + 2,364.96 Health + 52 United Way Donation* + 1,252.16 403(b) = 3,861.78. Subtract that from $60k income and you're at $56,138.22. Subtract $12,200 standard deduction and you're at $43,938.22 of taxable income which is $4,463.22 into the 22% federal tax bracket. Given that I would be inclined to say you should contribute at least that much to a traditional IRA or your 403(b) unless you expect to spend quite a lot in retirement.

Beyond that, paying 12% to contribute to Roth is probably kind of tossup. If you stay single and withdraw between $21,900 - 51,675 from tax deferred accounts in retirement then it doesn't matter, below that would favor traditional, above would favor Roth. If you get married that range would be $43,800 - 103,350.

This ignores state taxes, so if you expect to move to a lower/no income tax state when you retire that would favor tax deferred contributions. If you expect to move to a higher income tax state then that would favor Roth now.

If tax rates go higher than they are now, that would favor contributing to Roth. After 2025 tax rates will reset to the 2017 rates, which were slightly higher, under current law, so if nothing changes that would (slightly) favor Roth, and if things change towards higher taxes, that would also favor Roth. If things change to lower taxes that would favor traditional.

So, basically, if you expect to stay single, move to a high income tax state, spend a lot in retirement, and think that tax rates will go up in the future (or some combination thereof) then contribute to Roth after you've contributed about $4500 to traditional to get below the 22% bracket. If you expect to get married, move to a low/no income tax state, spend little in retirement, and think tax rates won't change too much (or some combination thereof) then contribute as much as you can to traditional.

Personally, if I were you I would be pretty confident that I would stay in the 12% bracket in retirement (maybe 10% if I got married, but that's only a 2% savings), and that tax brackets wouldn't change too much at that income level (but maybe back up to the pre-2018 15%), so I would base the decision mostly on my expectation for state taxes. If I planned to stay put I would contribute to Roth, if I planned to move to a no income tax state I would probably favor traditional.

* I don't know how the  United Way donation works. It's unlikely that you itemize (unless you have a large mortgage or lots of other donations), so you wouldn't normally be able to deduct charitable donations, but it's possible there's some kind of program through your employer that makes this non-taxable regardless. At only $52 it's not likely to make a big difference to what I've written above, just don't cut things too close without confirming whether it's taxable.

RollingGreen

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Re: 403b questions
« Reply #12 on: September 03, 2019, 11:38:53 AM »
Great. Thank you for the detailed response, terran. You know your stuff! I will look into what you suggest here.

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RollingGreen

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Re: 403b questions
« Reply #13 on: September 03, 2019, 11:50:30 AM »
Before we retired, my wife worked for a private (Christian) school. Her 403b was horrible! Crappy investment options and stupid high fees and expense ratios that were fairly well hidden (you had to really dig to find them). Apparently, one of the congregation, set up the 403b and probably made a ton of money on commissions. The only thing that made it worthwhile was the matching funds which were fairly generous.
I agree. And apart from the high (and sometimes hidden) fees, the options available to you for allocations aren't even that great. Wondering if I should really max it out at $19000 or not ...

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RollingGreen

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Re: 403b questions
« Reply #14 on: September 07, 2019, 04:38:50 PM »
Just a little update: I brought up the high ERs to our CFO, and she agreed - coincidentally she had been considering switching out of our current provider. We're now looking into other plans that have better options. Anyone out there have experience with others and some recommendations? Is there a way I could advocate for acquiring Vanguard as the 403b provider?
« Last Edit: September 07, 2019, 04:43:17 PM by RollingGreen »