Factoring in expense ratios when placing funds in 403b and 457

[Derrian]

Hi all,

I currently am maxing out my 403b through Vanguard. Our HR department in our city recently added a 457 plan through Nationwide This year, I will continue to max out the 403b and will contribute $9250 to the 457. Unfortunately, the fees that Nationwide charges are quite a bit higher than Vanguard. I am going for a simple 3 fund portfolio. My question is how should I factor in expense ratio when placing funds into different accounts? My initial thought was to put all of the 457 into the fund with the cheapest expense ratio (SP 500 Index) but, would it make more sense to put funds that I would expect to appreciate more slowly to keep the costs lower as the balance grows? Fund options are listed below.

403b with Vanguard

US Total Bond: VBTLX: 0.05%
US Total Stock: VTSAX: 0.04%
INTL Stock:VTIAX: 0.11%

457 with Nationwide
SP 500 Index: 0.92%
Total Bond Index: 1.18%
INTL Stock Index: 1.21%

Thank you!

[erutio]

Max out the 457, then the 403b.

The withdrawal benefits of the 457 outweigh the lower ER of your 403b.

I find it strange your employer wouldn't go with the same provider for both accounts.

[MDM]

Max out the 457, then the 403b.

The withdrawal benefits of the 457 outweigh the lower ER of your 403b.

Just how high would the 457 ERs have to be in order to flip this recommendation?

Derrian, see To 401k or not to 401k? That is the question. for some relevant discussion on expense ratios in employer accounts.

[terran]

Max out the 457, then the 403b.

The withdrawal benefits of the 457 outweigh the lower ER of your 403b.

Just how high would the 457 ERs have to be in order to flip this recommendation?

Derrian, see To 401k or not to 401k? That is the question. for some relevant discussion on expense ratios in employer accounts.

Yeah, I'm not so sure about that either. It's easy enough to get money out of a 403b via a Roth conversion ladder.

[erutio]

@MDM @terran, you guys are right, thanks for replying, and making me think about it more.

All else being equal, one should contribute to a 457 before a 403b/401k.  But in this case, it's not equal due to the different ERs.  So the answer to your question is, it depends.

How close are you to FIRE? 
Yes, you can draw from a 403b in early retirement through a roth conversion ladder, but you will still need 5 years of living expenses to bridge the gap.  So if you are just starting out in your career and your investment horizon is long, do as you are doing, maxing 403b, then 457.  If you are closer to RE, then start allocating more money into the 457 to bridge the 5 year gap in the roth conversion.

How much of a EF do you have?
You can use your 457 as an emergency fund.  The 5 year roth conversion ladder isn't going to help you if you get canned unexpectedly.  However, if you have the funds in the 457, you can draw from that in the event you lose your job, until you find your next job.  If your emergency is not a job loss, well you have a healthy chuck of money going into your retirement accounts which you can set to 0% temporarily.

Does this even matter?
You don't tell us your salary, but it looks like you have a decent savings rate, and this is what will ultimately determine when you can start your early retirement.  The asset allocation might make a difference of a few weeks to a month or two.  The allocations between 403 and 457 might make a difference of a couple of days.  The only thing in your control that will make a significant difference is your savings rate. 

[terran]

All else being equal, one should contribute to a 457 before a 403b/401k.  But in this case, it's not equal due to the different ERs.  So the answer to your question is, it depends.

Absolutely agree with this, although with the caveat for anyone else reading that we're talking about a government 457 here. non-goverment 457's are subject to the creditors of the institution so you need to be careful to consider the credit risk that brings with it.

[monarda]

Max out the 457, then the 403b.

The withdrawal benefits of the 457 outweigh the lower ER of your 403b.

Huh. Is this also true if I'm going to be 59.5 soon (less than a year).  I'm currently maxing the 403b and contributing as much as I can of what's leftover to the 457b. I haven't needed to withdraw from anything yet, but need to start thinking about a strategy to use these savings.

[MustacheAndaHalf]

Unfortunately, the fees that Nationwide charges are quite a bit higher than Vanguard. I am going for a simple 3 fund portfolio.

In other words, your employer is not acting in your best interest, which could be a violation of their fiduciary duty to you.  You can actually sue them for failing to find lower expense ratios, and since their failure would be ongoing, the time limit keeps getting extended.  At least, that's how I read Tibble v. Edison:
http://www.scotusblog.com/case-files/cases/tibble-v-edison-international/

Have you considered asking your HR department why they don't go with a lower fee provider like Vanguard?

[terran]

Max out the 457, then the 403b.

The withdrawal benefits of the 457 outweigh the lower ER of your 403b.

Huh. Is this also true if I'm going to be 59.5 soon (less than a year).  I'm currently maxing the 403b and contributing as much as I can of what's leftover to the 457b. I haven't needed to withdraw from anything yet, but need to start thinking about a strategy to use these savings.

No, if you're nearly 59.5 there is no advantage to a 457. In fact, depending on how your 403b is written just being 55 or older may mean you can withdraw penalty free (not tax free) from the 403b as long as you separate from service at 55 or older.

[Derrian]

Hi all,

Thank you for the responses. I contacted the provider of my previous 457 account and found out that they do accept rollovers even if I am not an active employee of the original plan. Given that I only plan to be with my current employer for 2 years, I decided it makes the most sense to max out the 457 before the 403b. Thank you all for the advice!