Author Topic: My 457b has extra fees -- is it still a good deal?  (Read 4442 times)

mustachianteacher

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My 457b has extra fees -- is it still a good deal?
« on: March 17, 2015, 06:12:04 PM »
My employer recently added a 457b plan as an option, and I was very excited because all of our 403b options are terrible. After spending quite a bit of time on the phone with TIAA-CREF (the company servicing our 457b plan), I found out that my employer has added extra fees to the otherwise very good options, and now I'm not sure anymore if it's such a good deal, or if I'm overreacting.

Here are the specifics: I want to open a 457b account and put my money into the Vanguard index funds offered and/or the Vanguard Wellington fund. Naturally, they all have very low fees, most around 0.20%. It turns out, though, that my employer assesses a 0.37% fee quarterly on any money held in the 457b. (Whhhyyyyy???) It pisses me off that my employer is basically trying to make money on employee contributions, but on top of that, it seems like 0.37% assessed quarterly will end up effectively amounting to more than 0.37%, right? Do correct me if I'm wrong on that.

So now I'm left wondering if it is still such a good deal, and if I can move past my irritation at my employer for doing this. Thoughts?

Abe

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Re: My 457b has extra fees -- is it still a good deal?
« Reply #1 on: March 17, 2015, 07:38:44 PM »
0.37% assessed quarterly will be roughly 1.5% per year. It's clearly just a money grab. The real question is what are the costs of your other options in the 403b? The amount you save in tax deferments + lower income in retirement will hopefully be more than the 1.5% annually.  If you are already in a lower income tax bracket, and have a large account such that 1.5% of the total value is comparable to what you are saving on taxes, it may not be.

Secretly Saving

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Re: My 457b has extra fees -- is it still a good deal?
« Reply #2 on: March 17, 2015, 08:16:00 PM »
One thing to consider is the fact that the 457 is more flexible than the 403b. -- Most important: no early withdrawl penalty at retirement or upon termination of employment. 
Have you considered funding both of them? 

mustachianteacher

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Re: My 457b has extra fees -- is it still a good deal?
« Reply #3 on: March 17, 2015, 08:57:59 PM »
My 403b options are basically all insurance companies offering tax-sheltered annuities that have high fees and relatively low returns. In fact, the name of the company that administers the plan is TSA Consulting. Scary. We used to have USAA's mutual funds as an option, and at that point I contributed, but unfortunately, they were removed from the list. Due to the crummy options, we've just been contributing to our Roth IRAs instead. That's on top of the 9% pretax that goes to the pension.

Abe, 1.5% annually makes sense, but I wasn't sure if it really was that straightforward to figure out. I'm amazed that's legal! I mean, my employer pays me, I choose to invest the money, and yet they're allowed to charge a fee like that to use a system I don't have any say over!
« Last Edit: March 17, 2015, 09:01:41 PM by msjd123 »

Abe

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Re: My 457b has extra fees -- is it still a good deal?
« Reply #4 on: March 17, 2015, 09:49:12 PM »
Yeah, your 403b choices are terrible. Secretly Saving has a good point - 457 does not have early withdrawal penalty once you retire / quit.

Assuming $100,000 portfolio:
Annual Vanguard fee: $200
Annual Employer fee: $1500

You would thus need to save at least $1500 extra from tax deductions and invest that somewhere (taxable account will do) to compensate for the employer's fees. If your tax savings per year are above $1500, then it is worth it.

Also remember that when you leave, convert it to an IRA with Vanguard and then you are left with only Vanguard's fee.

johnny847

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Re: My 457b has extra fees -- is it still a good deal?
« Reply #5 on: March 17, 2015, 09:51:48 PM »
A nice rule of thumb I found on the Bogleheads forum was to take the difference in expense ratio between your 457b's funds and that you could get outside the 457b, and multiply it by the number of years you expect to stay at that company. If the product is 30% or less, the tax benefits of the 457b are probably worth the extra fees.

That advice was really for 401k's. Because of the extra flexibility of the 457b, the threshold for this rule of thumb should probably be higher. Especially because I'm assuming you want to retire earlier than the typical Boglehead.


Yeah, your 403b choices are terrible. Secretly Saving has a good point - 457 does not have early withdrawal penalty once you retire / quit.

Assuming $100,000 portfolio:
Annual Vanguard fee: $200
Annual Employer fee: $1500

You would thus need to save at least $1500 extra from tax deductions and invest that somewhere (taxable account will do) to compensate for the employer's fees. If your tax savings per year are above $1500, then it is worth it.

Also remember that when you leave, convert it to an IRA with Vanguard and then you are left with only Vanguard's fee.
You can't calculate it this way because the fee is compounding, the same way that market returns are compounding.

Cathy

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Re: My 457b has extra fees -- is it still a good deal?
« Reply #6 on: March 17, 2015, 10:56:06 PM »
The fee of "0.37% assessed quarterly" doesn't necessarily mean >1% annualised. That is one possible interpretation, but it could also mean that each quarter you are charged 0.0925% of the balance, which works out to slightly over 0.37% annualised (on average, because the money you paid to fees would have otherwise been invested). There's a large difference between the two possible interpretations, so your first step is to figure out which one is correct.
« Last Edit: March 17, 2015, 11:02:41 PM by Cathy »

GGNoob

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Re: My 457b has extra fees -- is it still a good deal?
« Reply #7 on: March 18, 2015, 06:45:32 AM »
The fee of "0.37% assessed quarterly" doesn't necessarily mean >1% annualised. That is one possible interpretation, but it could also mean that each quarter you are charged 0.0925% of the balance, which works out to slightly over 0.37% annualised (on average, because the money you paid to fees would have otherwise been invested). There's a large difference between the two possible interpretations, so your first step is to figure out which one is correct.

I agree with Cathy and that it may not be as bad as you guys think. Dig deeper and figure this out for sure before making any more decisions on what to do.

Abe

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Re: My 457b has extra fees -- is it still a good deal?
« Reply #8 on: March 18, 2015, 12:18:12 PM »
That's true, it may be only 0.37% annually. These types of accounts usually provide statements every quarter, so they may just determine the fee at that point.

regarding my example of $100k, that is just to have a rough idea of how much fees will eat into savings per year. It will of course increase each year due to compounding & your contributions. Here is a fee calculator you can use for your own numbers: http://www.bankrate.com/calculators/retirement/investment-fee-calculator.aspx

mustachianteacher

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Re: My 457b has extra fees -- is it still a good deal?
« Reply #9 on: March 18, 2015, 01:06:52 PM »
Thank you for all the feedback!

When I asked the TIAA-CREF rep about the quarterly assessment, he phrased it as follows: "They're going to charge you 0.37% every quarter." It seems to me that would be add up over the course of the year, but I'm no expert on this, so I'll defer to your collective expertise on this one. I'll have a look at the Bankrate calculator as well.

Johnny847, I expect to stay with my employer at least 15 more years. The Vanguard funds I'm interested in (index funds and the Wellington fund VWEIX) are ones I could invest in through my Roth IRA as well, and I already have Vanguard index funds in my 403b, when that was possible. I just love the 457 as a vehicle for FIRE savings because it doesn't have that age restriction for withdrawals, and it would be ideal as a source of income for the 5-7 years between when I stop working and when I want to start tapping my pension, IRA, and 403b. Of course, I could always set up a SEPP plan with the IRA or 403b, but the 457 just seems like it's ideally suited to my needs and the needs of other early retirees.

dandarc

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Re: My 457b has extra fees -- is it still a good deal?
« Reply #10 on: March 18, 2015, 01:15:00 PM »
When I asked the TIAA-CREF rep about the quarterly assessment, he phrased it as follows: "They're going to charge you 0.37% every quarter." It seems to me that would be add up over the course of the year, but I'm no expert on this, so I'll defer to your collective expertise on this one. I'll have a look at the Bankrate calculator as well.
Get a copy of the plan documents and find the fee.  Should be in there.  No need to defer to anybody to get this cleared up.

DavidAnnArbor

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Re: My 457b has extra fees -- is it still a good deal?
« Reply #11 on: March 18, 2015, 11:08:29 PM »
So you're a government employee so not sure this would work, but private employers have been sued for similarly high expenses. The law firms Aleshire, Robb & Sivils PC of Springfield, Mo., and Keller Rohrbach LLP of Seattle have sued Walmart for example because the 401(k) had similarly high expenses. An employer has a fiduciary responsibility with respect to 401(k) plans, which is a very high standard. Not sure if a government entity can be sued for a similar issue.

http://www.bogleheads.org/forum/viewtopic.php?t=17505&highlight=


http://www.nytimes.com/2013/06/22/your-money/driving-down-the-cost-of-investing-for-retirement.html?_r=0

The law firm Schlichter Bogard & Denton, has brought 14 similar lawsuits over the last seven years on behalf of 401(k) plan participants
Senior Partner
Jerome J. Schlichter
e-mail: jschlichter@uselaws.com
tel.: 314-621-6115