High-fee 457 vs. low-fee Roth IRA

[fallstoclimb]

I had another post up about all the portfolio decisions I'm weighing right now, but I've really clarified my thinking and just have two questions remaining at this point, so I thought I'd start a new thread.

Brief financial picture/summary: We are 30, just started maxing my TSP.  We also have some money in a rolled-over IRA with Vanguard.  DH puts aside about 9K a year in retirement funds - we are slowly increasing this - and receives no matching funds.  At his old county we put 100% into a 457 plan with AXA.  Now we are considering options at his new county.  Portfolio is around 70K right now due to prior focus on now-paid-off loans.  E-fund is low at 5K, think it will be at 15K in a year, we also have 9K set aside for DH tuition which we could rob if we needed to.  We are in the 25% tax bracket (after adjustments we are just in it by a hair though).  Future tax bracket is unknown - we will both get pensions but if we leave work early as planned (see below) they will be pretty nominal.

Early retirement plan:  Leave our jobs at 45 (if we want to), stop contributing to retirement, but work part-time or at do-gooder jobs - basically cut our income in half.  We hope to not touch any retirement accounts until around age 60, but I was maxing the 457 at DH's prior county because really all I want is max flexibility. 

Current issue:  The 457 plan at DH's new county kind of sucks, fee-wise.  Only two funds (both S&P 500) have expense ratios under .5 (they are .3 and .4).  The remainder, including the lifecycle-style plan I'd likely want to do, are around .65.

The 457 plan at old county kind of sucked too. I am still working with AXA to try to get the expense ratios for our funds in the 457 plan (this has been annoyingly difficult), but my notes indicate that they range from .5-.7

The upside is that the 403b plan at new county is actually pretty great (has some Vanguard funds).  We are definitely putting a portion of DH's contributions into the 403b to take advantage of the tax-defferred growth. 

But I like flexibility.  I want some money available in case of a dire emergency, and to give us as many options as possible down the line.  (And I do know that there is the pipeline option, etc, but I like to keep life simple). 

Questions:

1) Is it better to direct the remainder of DH's contributions (the money that is not going to the 403b) towards the tax-deferred but high-fee 457 plan, OR should we instead open a low-fee Roth IRA with Vanguard and max that out?

2) Should we leave the old 457 with AXA (at .5-.7 expense ratio), roll it into a 457 at the new county (.65 expense ratio), or do something else with it that I haven't thought of?

[MDM]

1) Is it better to direct the remainder of DH's contributions (the money that is not going to the 403b) towards the tax-deferred but high-fee 457 plan, OR should we instead open a low-fee Roth IRA with Vanguard and max that out?

See http://www.bogleheads.org/forum/viewtopic.php?f=9&t=18149&start=250#p2594426 and links therein for comments and tools to help with this question.

2) Should we leave the old 457 with AXA (at .5-.7 expense ratio), roll it into a 457 at the new county (.65 expense ratio), or do something else with it that I haven't thought of?

If all else is equal, always go for the lower expense ratio.  Also see http://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts for some thoughts.  You might want to take the absolute lowest fee in the "overall high fee" 457, then adjust your asset allocations in other funds to match your overall target.

[fallstoclimb]

Thanks MDM -- your link got me this ordered list from bogleheads, which is similar to what I was trying to find:

"Investors who are able to place their investments in several different kinds of accounts (such as taxable accounts, 401k, or IRA) need to decide which ones to prioritize. In order to maximize the tax efficiency of a portfolio . This is a general account funding priority that often works well for many people (all points will not apply to everyone):
1) contribute to the work-based plan (401k, 403b) enough to get the full employer match (the match is like free money, your best possible investment),
2) pay off high interest debt (a guaranteed high return, the next best thing to free money),
3) contribute to a health savings account (HSA) if available (unlike many other tax deductions, there are no income restrictions to contribute to an HSA),
4) contribute the maximum to an IRA, traditional or Roth, depending on eligibility and personal circumstances,
5) contribute the remainder of the maximum employee contribution to the work-based plan,
6) contribute via the backdoor Roth technique,
7) contribute to taxable investing,
8) non-deductible IRAs or annuities."

I see this a lot (usually simplified but same ideas).  What I don't quite get, though, is why people like IRAs more than work-based plan.  Is that mostly about the low fees?  Tax diversification?  Fund and withdrawal flexibility?  All of the above?

[dandarc]

falls - I'd say everything but tax diversification.

The order of 4/5/6 will heavily depend on individual circumstances.  If you have a really good 401K, it could make sense to contribute there before an IRA.

[fallstoclimb]

2) Should we leave the old 457 with AXA (at .5-.7 expense ratio), roll it into a 457 at the new county (.65 expense ratio), or do something else with it that I haven't thought of?

If all else is equal, always go for the lower expense ratio.  Also see http://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts for some thoughts.  You might want to take the absolute lowest fee in the "overall high fee" 457, then adjust your asset allocations in other funds to match your overall target.

Does this mean that it wouldn't be the worst idea to just put 100% into S&P 500 for the new 457, and then for the new 403b just don't do large cap stocks at all? 

Did the Bogleheads reading, still confused on 457 vs Roth IRA.  Am kind of leaning towards a scattershot approach of contributing a little bit towards everything so I don't have to deal with this issue.  Bad idea??

[MDM]

Does this mean that it wouldn't be the worst idea to just put 100% into S&P 500 for the new 457, and then for the new 403b just don't do large cap stocks at all?

Correct.

Did the Bogleheads reading, still confused on 457 vs Roth IRA.  Am kind of leaning towards a scattershot approach of contributing a little bit towards everything so I don't have to deal with this issue.  Bad idea??

That you will be investing at all is a good thing.  There is a good chance that you are close to understanding the whole 457/403b/IRA thing.  You might take a little time and put some numbers on a page - whether that is an electronic page (e.g., Excel) or a paper page is up to you.

By "some numbers" I mean at least these:
1) The asset allocations in each individual account, and the resulting overall asset allocation.
2) The fund fees in each individual account, and the resulting overall expense ratio.

If you do that it might be enough to clarify things for you.  If not, posting the results of that exercise would at least allow for some very specific feedback and that may also help.

[fallstoclimb]

That you will be investing at all is a good thing.  There is a good chance that you are close to understanding the whole 457/403b/IRA thing.  You might take a little time and put some numbers on a page - whether that is an electronic page (e.g., Excel) or a paper page is up to you.

By "some numbers" I mean at least these:
1) The asset allocations in each individual account, and the resulting overall asset allocation.
2) The fund fees in each individual account, and the resulting overall expense ratio.

If you do that it might be enough to clarify things for you.  If not, posting the results of that exercise would at least allow for some very specific feedback and that may also help.

OK.  I kind of did this.  I don't really know how to take into account future contributions so i just set it up as:
1) My TSP, where it stands now  (60K)
2) DH's rolled over 403b, currently headed into a Vanguard IRA (Vanguard Retirement 2045), and  (5.9K)
3) The 457, if we rolled the whole thing over into the lifecycle fund with nationwide at the new county (5.9K)

So with that.....our weighted expense ratio is .09.  (Thank you, TSP!)
Our weighted allocation is 23% bonds/cash, 55% domestic stocks, 22% international.

(Note:  the lifecycle fund with nationwide is like 11% cash and 1% bonds - is that worrisome?  seemed kind of weird).


Or we could look at it this way:

Currently, our retirement assets (my TSP and DH's rolled over 403b) have a .04 weighted expense ratio, at 23.67% bonds/cash, 54.13% domestic stocks, and 22.20% international stocks.
We have an additional 5.9K available roll over somewhere and are looking for a place to put an additional ~9K annually.


Some thoughts I'm having based on this - let me know if I'm on the right track:
1) Thanks to the TSP our weighted expense ratio is very low, so maybe a high-fee 457 isn't the worst idea in the world
2) Our international stock exposure is a little light and our bonds are a little heavy  (this is all driven by the TSP).

However - I'm a set it and forget it kind of investor - I really like being in lifecycle funds that take care of themselves.  Also, the Vanguard Retirement 2045 fund is at about 10% bonds/cash and 35% international, so that will do a pretty good job offsetting the TSP. 

I am thinking:
1) Start a Roth IRA in DH's name and invest that also in Vanguard Retirement 2045 - low fees, tax diversification, no RMD, good lifecycle fund to offset the TSP
2) Roll the old 457 into the new county - either do the lifecycle fund or go all-in with the S&P lower-fee fund - and make small contributions moving forward
3) Contribute to the 403b as well:  (ticker/expense ratio)
10% bonds (the bonds in this plan kind of confuse me, i'll ask the dude about them - exp ratios are .4-.85, though)
15% small cap (VSMAX/.09)
15% mid cap (VIMAX/.09)
30% large cap (FUSEX/.10) --- unless we do the 457 as all S&P and then I will drop this entirely and adjusted remaining percents
30% international (FSIIX/.20)
....and then adjust this one to increase the bonds as we age.

The TSP will always be our largest account so to me it makes sense to have everything else kind of offsetting its biases a bit...

Any huge holes in my logic?  We may be meeting with a 403b person tonight so i have to get this all sorted out!

[MDM]

(Note:  the lifecycle fund with nationwide is like 11% cash and 1% bonds - is that worrisome?  seemed kind of weird).

Holding a lot (11% is a lot) of cash while charging you to do so is not a good thing for you.  If it were me I'd avoid that fund.

Some thoughts I'm having based on this - let me know if I'm on the right track:
1) Thanks to the TSP our weighted expense ratio is very low, so maybe a high-fee 457 isn't the worst idea in the world

Being good on average doesn't make a bad 457 a good idea.  But, there are certainly worse 457 plans than the one you have.

2) Our international stock exposure is a little light and our bonds are a little heavy  (this is all driven by the TSP).

Maybe, maybe not.  Probably not worth worrying about a few percent one way or the other in overall asset allocation.

Any huge holes in my logic?

Not that I can see.  Good luck!

[fallstoclimb]

(Note:  the lifecycle fund with nationwide is like 11% cash and 1% bonds - is that worrisome?  seemed kind of weird).

Holding a lot (11% is a lot) of cash while charging you to do so is not a good thing for you.  If it were me I'd avoid that fund.

Thank you!  I didn't know if that was a red flag or not.  That simplifies things.  The lifecycle plans with Nationwide are confirmed to be Sucky^(TM), so I will instead go all in S&P 500 there, and skip the S&P 500 fund in the 403b to balance. 

That said - one last check....

After our Roth contributions we will now have $275/pp for DH to invest between the 403b and the 457.  So I think we'll do:

$100/pp into the 457 -- 100% large cap stocks  (or MAYBE 95% large cap/5% bonds for peace of mind despite the .65 expense ratio)

$175/pp into the 403b:
15% bonds
15% small cap
25% mid cap
5% large cap (just to have a nominal amount)
40% international

That asset allocation looks insane, but I plugged in the numbers and that's the actual $s per fund works out the same as it would if I had just one account that was 10% bonds, 10% small cap, 15% mid cap, 35% large cap, and 30% international.

So this is a thing people do, right?  It isn't batshit insane to have one account with a crazy allocation if your overall portfolio is balanced?? 

And thank you again for all your guidance on this. 

[MDM]

It isn't batshit insane to have one account with a crazy allocation if your overall portfolio is balanced?? 

That is correct: not insane, and the overall portfolio is more important that what is in any single account.

Again, you are doing a good thing by investing at all and the more you can do the better.  You are looking 15 years out and are already well ahead of the general population.  Keep up the good work!