403b: How much is too much in fees?

[FIT_Goat]

I have mentioned, a few times, about the poor options with my 403b at work.  I looked into the various companies they work with.  I found only one 403b option, through my work, that allows investing in index funds.  It even seems like Vanguard is an option through them.  But, the fees are crazy high.

• "Internal Portfolio Management Expenses": 0.09%
• "Annual Investment Advisory Fees": 2.00%
• "Annual Account Service Fee": $50 + 0.025%  (Max $65)

That's 2.115% + $50 a year.

Relevant details:

• I have no employer match.
• 15% Tax Bracket (amount paid on last $1 earned)

I am not sure what else might be important.

At this point, I have maxed out my Traditional IRA, and I am putting money into after tax investments.  I am putting $220 a month into the 403b, but my current account returns less than 3%.  I could probably go as high as $1,250 a month into the 403b (with no after tax investing) if it made sense.  I would like to keep some of the money going to the after-tax account, as it would be available if the shit hits the fan.

[MDM]

But, the fees are crazy high.
...
That's 2.115% + $50 a year.

There may be worse, but that's the worst "lowest cost" I recall seeing.

See To 401k or not to 401k? That is the question. and How to campaign for a better 401(k) plan - Bogleheads.  The 403b may not be subject to ERISA, but the latter link might still be useful.

[FIT_Goat]

But, the fees are crazy high.
...
That's 2.115% + $50 a year.

There may be worse, but that's the worst "lowest cost" I recall seeing.

See To 401k or not to 401k? That is the question. and How to campaign for a better 401(k) plan - Bogleheads.  The 403b may not be subject to ERISA, but the latter link might still be useful.

You should see the combined fees for the actively managed funds.  It's like 2.5% or higher.

I started looking into that.  I ran the numbers, with what I currently think my assumptions are, and I got a -0.4% advantage for the taxable fund over the 403b.  So, not a huge amount.  But, I am going to have to read deeper and make sure I understand my assumptions.  I also am considering, and working towards, switching careers.  That would allow me to roll things over sooner.  That job also benefits me in that the pension starts paying in full at 55 and is twice what my current one is.

If my assumptions are correct, and the difference is only 0.4%, I might not use the 403b.

It looks like I have some homework over the next week.

[MustacheAndaHalf]

In 15% bracket, might want to use Roth IRA instead of Traditional IRA.  Let's you lock in the low tax bracket.

Index funds in taxable are fairly tax efficient.  If you buy and hold, the main thing you'll see is dividends, which I believe at taxed at 0% in your tax bracket.

[PhysicianOnFIRE]

Those fees are ridiculous! And the tax deduction is in the 15% bracket -- I don't think I'd bother with it.

In a taxable account, buy passive index funds and you'll experience very little tax drag. With VTSAX / VTI having a dividend of about 2%, you'll have "fees" in the form of taxes of 0.3% per year. Maybe 0.4% with state income tax, depending on where you live.

[aceyou]

How long to you intend to be at that employer?  When you sever your employment you are allowed to roll it over right to vanguard for .05% fees on VTSAX forever.  So, I don't think it's just a question of how bad the fees are.  It's a question of how bad the fees are weighted against the number of years you expect to pay them.  If only a few years, then the tax advantage will likely weight towards the 401k.  If you plan to be at  the company a long time, then the fee drag probably hurts more than the tax advantage helps.  Not sure what the cutoff point is, that's what you'd have to figure out I guess. 

[FIT_Goat]

In 15% bracket, might want to use Roth IRA instead of Traditional IRA.  Let's you lock in the low tax bracket.

Index funds in taxable are fairly tax efficient.  If you buy and hold, the main thing you'll see is dividends, which I believe at taxed at 0% in your tax bracket.

I currently have about $11.5k in the traditional IRA, and $12k in the after-tax VTSAX account.  I have maxed out the traditional already for this year, could I change it to a Roth or would I start next year?  Is there really a large advantage to going to the Roth if I expect my tax bracket to be similar in retirement?  I expect my pension and SS, combined, to come close to making up my current income.  So, maybe I should be preparing to have a higher income when I retire.

I am throwing $900 a month into the after-tax account (it's all I can do at the moment until I get the wife more on board).  I am unsure if the dividends are 0% or taxed as regular income.  That will be something I learn at the end of the year.

How long to you intend to be at that employer?  When you sever your employment you are allowed to roll it over right to vanguard for .05% fees on VTSAX forever.  So, I don't think it's just a question of how bad the fees are.  It's a question of how bad the fees are weighted against the number of years you expect to pay them.  If only a few years, then the tax advantage will likely weight towards the 401k.  If you plan to be at  the company a long time, then the fee drag probably hurts more than the tax advantage helps.  Not sure what the cutoff point is, that's what you'd have to figure out I guess.

This is something that I need to seriously consider.  I am currently lining things up to go to Fire School, EMT/Paramedic school.  My volunteer department will pay for those for me, if I wait long enough.  If I want to accelerate the process, I can pay myself.  It's not a huge sum of money.  In that case, I might be changing careers in 2-3 years.  That assumes that I can physically do the job and get hired, although I have an automatic "in" because of my history volunteering and interning with the local department.  Just matters on how long it takes for a job to open.  That career offers a better pension (same plan I am currently in but at 3% per year and it starts paying out at 55), and I keep my current years.

It's a spot where, if I change, I need to save up less.  If it doesn't work out, which I don't foresee but I always make sure I have a backup, I will probably stay with my current employer for 15-20 more years.  That or try to get back into programming, which is hard because my in-field experience there is 12+ years out of date.  All my current programming is personal need based or stupid code challenges to keep my brain functional.  There is a small, but very real, chance that I will stay in my current job for a long time.  The money I put there is locked there until I leave or retire.

[MDM]

Not sure what the cutoff point is, that's what you'd have to figure out I guess.

To 401k or not to 401k? That is the question addresses exactly that question.