403(b)

[uneven_cyclist]

Hi all,
I am hoping that the forum might be able to offer some advice about 403(b) plans.  My basic situation is that I just took a new job at a public school that offers a 403(b) plan with a percentage match -- they make a matching contribution that based on a percentage of my wage. 

I have a month to sign up for the plan, and I plan to do so, but I am hoping that the forum might be able to help me with a few questions/concerns that I have been struggling with finding answers to:

First concern: Fees. the plan that the school offers lists a number of fees, and I do not really understand them. The Gross Expense Ratio for the fund that I am interested in (an S&P 500 Index fund through Nationwide) is 0.56%; the "Total Annual Operating Expense" is listed as 1.51% or $15.10 per $1000; finally, the plan lists an annual custodial fee that is charged pro rata (proportionally) of $500 and a Single Sum Record Keeping fee that is charged pro rata (proportionally) of $300. 

What is the forum's take? Is this a reasonable operating cost / expense ratio for a plan like this? Any thoughts on the pro rata / proportional charges? And...even if the fees are high, do I really have any choice in the matter or any options?

Next concern/question: Is it possible to invest in a 403(b) in any way other than through payroll deduction through an employer? e.g. might it be possible to find a bank or a credit union that offers a more competitive fee structure / expense ratio for investing, and thus avoid the 1.51% operating expense and the Record Keeping Fee / Single Sum Fee, etc.?  Any thoughts or experience or suggestions in this regard?

I would be grateful for any advice or suggestions that might be useful in my situation.

I am working on communicating with Nationwide and with the HR department at the school, but I thought that it would be useful to get suggestions from the forum too since I have no doubt that there are things that I might overlook, and since there is not unlimited time available to sign up.

Thanks all.

[Zamboni]

Greetings!

I highly recommend the book "Millionaire Teacher" by Andrew Hallam. It's an easy read and is geared at normal people who have no special knowledge of the financial world, but the advice is sound and fees are one of the topics discussed.

I'm not an expert on plan fees, but those fees do seem high to me. The least concerning of the fees is the 0.56%, although that is quite a bit more than I am paying for index funds (I just looked to confirm that the Vanguard market index funds I have invested in my 403b are in the 0.02-0.08% range, just as a point of reference, with the lower end being in the "institutional shares" category which always has the lowest fees.) I don't think 0.56% is crazy, though, as I've seen funds in the 1-2% range.

The record keeping and custodial fees you list make less sense to me in terms of magnitude. Are they charging you personally $800 per year regardless of your balance? That is just crazy if it is the case. As a point of reference, I paid $27 in plan fees which I suspect are that type of fee for the first half of this year, and my 403b balance is several hundred thousand dollars.

Does your employer's plan have a way for you to either talk on the phone or sit down with an advisor from your plan administrator? You are right to ask your questions about fees, and you have a right to understand what the fees are in the available plan.

Is there someone in your county's HR who is responsible for helping you with benefits enrollment? Your employer has a fiduciary responsibility to make sure that the fees in their plan are fair and reasonable for the services being provided by the investment company. I've never heard of anyone being able to invest in a 403b plan outside of the payroll deduction method . . .

Finally, at what you are likely being paid, you should open a Roth IRA and max it in addition to the 403b. It is probable that you should also invest in the 403B at least up to the maximum employer matching level, because otherwise you are leaving free matching money on the table and losing the tax-deferred benefit, but making sure you understand those fees this month is a good idea.

[slugsworth]

Next concern/question: Is it possible to invest in a 403(b) in any way other than through payroll deduction through an employer? e.g. might it be possible to find a bank or a credit union that offers a more competitive fee structure / expense ratio for investing, and thus avoid the 1.51% operating expense and the Record Keeping Fee / Single Sum Fee, etc.?  Any thoughts or experience or suggestions in this regard?

On that one, the answer is basically 'no' it is a payroll deduction based system. However, whenever you change employers you can roll it over to Vanguard (or your preferred brokerage) into a lower cost IRA. 

I agree with Zomboni's recommendation that you should contribute enough to at least get all of your match funds.  In an ideal world you would put in the full $19,000 permitted as it reduces your tax liability.

[The Gecko]

Schools and their selected 403b providers do not have the same Fiduciary responsibility as a 401k administrator with a business. Most school districts offer 2 or 3 insurance vendors who they have pre-approved and it ends there on getting any more guidance. The law is written so the schools are involved as little as possible in screening funds or providers and the responsibility is placed on the workers.

Based on the above you will see high fees on most funds in the 1-2% range and most funds have buried in the fine print roll over or termination fees (3-6% to move your money to a new provider) or also staged termination percentages to make it costly to leave. Most 403b are actually structured as an annuity with retirement and survivor benefits. This is the reason the companies claim they need to charge more on their funds even when they match the same index fund as a Vanguard or other provider. If you are on the FIRE path just be aware of the hit you will take to get your money out.

My wife is participating in a 403B through AXA Equitable which at the time was better than the Met Life and Lincoln Financial offerings in her district. Now that she has been in it for over a decade if we want to change we will take a hit on her balance to move it to a new provider. She is lucky in our state there is still a traditional pension so we look at the 403b as just future fun money. When we both retire (early is the plan) we will probably leave the money in the 403b until closer to 60 to avoid penalties and then convert to an annuity with a monthly payout.

[Zamboni]

^Good grief, what you are describing in terms of lack of fiduciary responsibility and termination fees is terrible!

I teach and my employer's plan is a 403b, and it does have some reasonable, very low fee broad market index funds available. It's not set up like an annuity at all in my case . . . it's more similar to my previous private industrial employer's 401k. So, I guess there is a lot of variety in these plans.

OP, please just try to learn as much as you can about the plan options available to you. Don't be intimidated, as it really isn't that hard to sort out and it is worth your time. In any case, invest as much as you can in tax-advantaged accounts now while you are young . . . .older you will be quite grateful some day!

[uneven_cyclist]

Hey all, thanks for the input. I think that it will make good sense for me to invest in this 403(b) even if I were to assume a worst-case scenario of paying the 1.51% operating cost + $800 in custodial + other fees. Even if the fees were *this bad*, then I would *still* come out okay in the sense that my employer provides a contribution that equates to a small but significant percentage of my wage. It is never ideal to get hit with high fees, but the benefits would be more than worthwhile in terms of minimizing my tax exposure and in terms of putting away $$ for retirement. 

I am working on learning as much as I can about this plan, from HR, and also from Nationwide. 

I'll post back here if I learn anything new that is relevant/worthwhile.  Thanks again!

[MDM]

See also 403bwise :: The K-12 403(b) is broken. Together we can fix it..