Finally taking the 457 plunge!

[jubilantjill]

Hi all! Seeking some mustachian advice on investing in my company's 457. I've read through jllcollins stock series and opened a Vanguard IRA and taxable account, BUT-
After getting burned on taxes last year I've decided that this year I would very much like to max out my company's 457 plan for both my husband and myself (we're both nurses at the same hospital). I have two options for the 457-Valic or Lincoln Life.
Valic appears to have the cheaper fees, but maybe I'm missing something. The rep said they only have 3 levels of expense ratios- 0.5, 0.85, and 1% with their index funds being in the 0.85 grouping. He said the expense ratios are higher than Vanguard because there is an annuity component of the funds that he explained only comes into play if I die before retiring. He said there are no annual maintenance fees or any other fees other than the expense ratios.
So I guess my first question is: am I missing something here? I was expecting much higher fees. Is there some hidden cost I'm not seeing. My VTSAX expense ratio is only 0.05%, but if Valic is really only 0.5-0.85% I'd be an idiot to not max my contribution right?

Some other info: We're 25-28% tax bracket. No employer match. We have some sort of pension, but I never qualify cause I work part-time and can't manage to get in 1000 hours per year (poor me, I know) which is the minimum requirement.

Assuming I go with Valic (Lincoln ERs were in the range of 0.6-1.85%) I can't find a total market index, but there are small, mid, and large cap indexes, a NASDAQ-100 index and S&P 500 index.  Could anyone offer some advice for how to piece small, med, and large cap indexes together to mimic the total market. Is it as simple as a three-way equal split?

The Valic rep hasn't given me tickers, just a performance sheet that lists the funds under ambiguous headings like "Mid Cap Index Fund (SunAmerica)".  I'm planning to meet with him in a week or two- he lives far away and only makes it to our little town once every 3 months so I want to get things sorted pretty soon.
Thanks for your time!
Cheers!

[sherr]

The benefit of investing in a tax-deferred account when you're in the 25%-28% brackets will absolutely demolish the benefit of investing at 0.8% lower expenses. So yes, I'd say maximize your contribution. I can't tell you without knowing your plan if there are any hidden fees but I'd suspect not, 0.85% sounds about right for what you described.

Creating your own mix of funds that matches exactly what a total-market index fund would look like is not going to be an easy task, but it's easy to get "close enough." The S&P 500 is about 80% of total US equity market capitalization, so 80% in the S&P500 fund, 10% in the small-cap fund, and 10% in the mid-cap fund is probably pretty similar.

[jubilantjill]

Thanks so much for the reply. I've spoken with the Valic rep again and they do have a total stock index but the total fees are 1.16%. Apparently in a variable annuity and that's all I can get. I didn't know much about annuities and a quick Google search basically says they're an excuse for higher fees and have no place in a 457 plan. Nor sure what my employer is thinking. I guess it's still worth it even with the higher fees. In going to go for it this year and start trying to convince our CEO to get a vanguard plan on board. Cheers!

[Another Reader]

It sounds like you have two overpriced annuity peddlers to pick from.  Ugh.  Yep, I would be all over the HR people about that. 

There is another thing that you should understand that might make you think twice about signing up for this 457.  If the hospital is private, your 457 plan assets are not your property.  If the hospital goes bankrupt, your 457 plan assets may be considered the property of the hospital company and subject to the claims of the creditors. 

Rolling over the variable annuity into an IRA if you left this employer might also be a problem.  You could be stuck with the Valic annuity or at least have to pay a lot in fees to get out.  In your shoes, I would carefully review the plan documents before I enrolled.

[jubilantjill]

The valic guy said no surrender charges or fee for rolling over to an IRA when I quit, but he's not that trustworthy so I'll definitely be reviewing the docs. Thanks!

[Hamster]

I just want to second what Another Reader said. Assuming you are part of a non-governmental hospital, the 457 assets belong to the hospital, not you, until the day you actually receive them. If the hospital fails, you have to get in line with the other creditors to get what's left of "your" money.

In your case, my advice would be to make sure you have maxed out all of your other options - 403(b), Roth (including backdoor if applicable), etc. before contributing to the 457.

If you work for the government, then I understand the 457 is structured differently -  the money is held in trust for you, so you are protected should your employer go bankrupt.

You might also want to clarify the issues around roll-overs:

Governmental 457 plans may be rolled into other types of retirement plans with few restrictions beyond the normal ones for any other type of employer provided plan, which includes separation of service or disability. This includes other 401(k) and 403(b) plans and also IRA's. IRA's have much greater flexibility in withdrawal and conversion privileges. In contrast, non-governmental 457 plans can only be rolled into another non-governmental 457 plan.

I was hesitant to defer any of my comp in our hospital's 457 plan for the reasons above, so initially I didn't put anything in the 457. After thinking about the value of the tax deferral I came up with sort of a compromise. My current plan is to first invest in qualified plans, then contribute to the 457 until my 457 assets reach $100,000. So far, our hospital's financials are very strong, but as you know, there are huge winds of change sweeping across the medical system. With value-based payment schemes and more on the horizon, money will likely be moving away from traditional hospitals toward ACOs, medical groups, or other outpatient provider organizations (which is why hospitals are buying up outpatient practices)... I don't want to have my job and a huge chunk of my assets tied up in the same organization if things go bad financially. If the hospital's financials start to go sour, then I will hopefully have enough of a heads up to quite the job so I can pull my 457 money out.

[bikebum]

Here's an article from the Bogleheads about how to approximate the total stock index, if you decide to go that route:

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