Author Topic: High fee 403(b) vs. after tax investment account  (Read 1425 times)

Allison_D

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High fee 403(b) vs. after tax investment account
« on: November 09, 2014, 03:39:02 AM »
I just started with a new company.  (Coincidentally, in the dame day that they went to a new 403(b) administrator).  The plan fees are AWFUL.  .95% of account balances are taken as a fee every year.  In addition, of course, the funds themselves charge fees.  For actively managed funds its 1-2%.  I'm an index fund investors ... Thise funds charge .6-.75%.  So, my annual fees are 1.55%-1.7% vs. .05% for admiral shares at Vanguard.  OMG.  My company offers a 50% match on the first 4%  .  So their 2% pretty much just covers the extra fees i am paying for the honor of investing through the plan.  And, since the fees are based on my annual assets and the match is only on my annual salary, every year the imbalance would get worse. 

So, I, who always maxes out all retirement accounts am close to saying no way and, instead, investing the same amount in a vanguard after tax portfolio.  The only thing is that decision feels so WEIRD.  And my 403(b) does offer a roth option.  Anyone have any thoughts/suggestions?  Changing 403(b) administrators is not an option for at least a few years.  Am I wrong in my analysis somehow?

Seņora Savings

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Re: High fee 403(b) vs. after tax investment account
« Reply #1 on: November 09, 2014, 07:42:49 AM »
You still want to get the match.  You can have either $100 in your hand or $150 in the account.  Let say you invest 4% in the 403(b) and there is a 0% return on investment (the worst case scenario for high fee account), and are in the same tax bracket when you withdraw the money as now (again, worst case scenario for the retirement account).  It will still be 27 years (150*.985^27=$99.74) before the fees eat away your money.

If you invest beyond the 4% depends on a few things;

1. How you think you will stay at the company
2. What your marginal tax bracket is now
3. What your expected marginal tax bracket is at retirement

If you pay 25% taxes on $100 now and leave in 5 years, you'll have something like 75*1.05^5 = $95.72 in taxable accounts.  If you invest it in the retirement account and roll it over to an IRA in five years you'll have something like 100*1.03^5 = $115.92 in the retirement account, but Uncle Sam is still going to take his cut.  I used a 5% return on investment, once you have your actual numbers and how long you might work there, you can play around with some different situations.

All that being said; I am pretty spiteful and would rather avoid giving my money to high fee fund managers, even if that meant I would have to pay more in taxes and would lose money.

seattlecyclone

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Re: High fee 403(b) vs. after tax investment account
« Reply #2 on: November 10, 2014, 10:58:02 AM »
You're right that those fees are atrocious. Think about it this way: you get a fixed benefit (employer match plus tax deferral on up to $17.5k) each year, in exchange for a perpetual 1.5% drag on your investment growth compared to a taxable account. So you start out ahead with the 403(b), but the slope of the growth curve for your taxable account is slightly higher, so those lines will eventually cross. You'll have to do the math for your own situation, but generally you're better off accepting even fees that high as long as you don't intend to remain at your current employer for a decade or more. Hold your nose and pay the fees for now, and roll over to Vanguard when you switch jobs.