Author Topic: My county's 457 plan seems like a bad deal  (Read 4140 times)

RocketSurgeon

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My county's 457 plan seems like a bad deal
« on: May 28, 2015, 06:52:57 AM »
Okay, so I finally paid off everything but my student loan, put 5500 into an IRA last year, and I'm hoping to join my employer's 457 plan in 2015. The 'advisor' is setting up a meeting with my department, and I want to be informed before that because we have some information about the plan which doesn't make sense to me.

Basically, this company will take our money, and portion it out over 8 different vanguard funds, depending on how the investor chooses (5 options from aggresive to conservative.) One of the fund breakdowns show them holding as much as 3.98% in cash.

For this they want (in addition to vanguard's fees) $10 a quarter and .61% a year. Now, my investing knowledge is still pretty basic but this seems like a bad deal to me? I've tried to find other examples of 457 plans to compare the rate to without luck. The .61% seems like a lot of money to just shuffle money between funds four times a year. Even if it is a weak offer, is it still worth it for the tax advantages? My taxable income is already below the 15% bracket. I can't figure this stuff out on my own and I don't trust a salesman on this.

Thanks for any help you can provide!

Another Reader

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Re: My county's 457 plan seems like a bad deal
« Reply #1 on: May 28, 2015, 07:02:44 AM »
What is the name of the plan provider and can you post or link to the plan description and options?

matchewed

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Re: My county's 457 plan seems like a bad deal
« Reply #2 on: May 28, 2015, 07:03:46 AM »
Get the paperwork.

Now if you're asking if the tax savings exceeds the costs it all depends on your taxes and how much you'd be contributing. Telling us your tax bracket isn't really all that helpful. Are you filing single? Married? How much would you contribute if you did?

Regardless of all those things you're basic calculation goes something like this. Invest X amount into your 457. Subtract ($40+.61%+the various expense ratios from the funds in proportion to amounts invested in each fund) from X. Or you could take your taxes out of X, invest the remainder (we'll call that Y). Now subtract the various expense ratios from the funds you choose in proportion to the amounts invested in each fund from Y. Whichever is greater you should go for. As your income increases or taxation changes run the numbers again.

But my above blurb shows why we would need a great deal more information to help.

RocketSurgeon

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Re: My county's 457 plan seems like a bad deal
« Reply #3 on: May 28, 2015, 10:01:58 AM »
The company is InR Advisory Services. (Their website plays music, so might not be work safe, fyi. I couldn't find plan information on there anyway.) They e-mailed us some PDFs with the plan information. I tried to boil it down to the pertinent stuff, I'll try and see if I can figure out a way to upload them somewhere when I get home tonight.

I was really just kind of curious as to how similiar this is to other 401/457 plans. They just seem like they're setting themselves up as an unneccesary intermediary, but I could be completely wrong.

As for myself, I'm single and hoping to contribute ~12k this year, going to cap of 18k in future years. I will try and get more information up, Thanks a lot for your feedback so far!

MDM

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Re: My county's 457 plan seems like a bad deal
« Reply #4 on: May 28, 2015, 10:18:24 AM »
Much will depend on your likely future income and consequential tax brackets for ordinary income and capital gains & dividends.

E.g., if you won't be paying taxes on annual dividends, nor on capital gains when selling, there is much less tax advantage in a tax-advantaged plan so the fees matter more....

RocketSurgeon

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Re: My county's 457 plan seems like a bad deal
« Reply #5 on: May 29, 2015, 06:43:28 AM »
OKay, here is the plan information they sent, along with the aggressive schedule. Is it normal for these plans to just parcel it out to other vanguard funds? To keep cash in reserve? I just don't understand what the company is doing to justify their fees and it's making me nervous. Thanks again to any one still looking at this post!

forummm

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Re: My county's 457 plan seems like a bad deal
« Reply #6 on: May 29, 2015, 07:01:54 AM »
Unless I'm missing something, this aggressive option looks like a really solid investment option as far as employer-sponsored plans go. The fees of the underlying Vanguard funds aren't displayed, but they are Vanguard funds, so the should be excellent (not sure if they are institutional or admiral--probably institutional). And the $10 plus 0.1525% account fee is pretty reasonable. You mention a 0.61% fee, which I don't see in the materials you provided.

Another Reader

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Re: My county's 457 plan seems like a bad deal
« Reply #7 on: May 29, 2015, 07:12:57 AM »
0.1525 x 4 is 0.61 percent.  That's high, but there are several layers of administrative stuff in this company's fees.  They pay others to do the work and their job is plan administrator.  Too bad the County could not find a low-cost administrator.

However, the expenses of the underlying Vanguard funds are reasonable, and an aggressive allocation among the funds listed is ok for a younger person with a lot of time for growth.

matchewed

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Re: My county's 457 plan seems like a bad deal
« Reply #8 on: May 29, 2015, 07:14:15 AM »
Whether you like having the middle man or not is irrelevant, they still need to get paid. The best you can do is approach your employer and look to change custodians. After that it's just a math problem. Like I outlined before are the fees greater than the taxes you would pay on the money?

You want to invest 18k a year.

Option 1 - Forgo the 457 plan and do an after tax investment. Well you have to pay taxes on the 18k first. Assuming a single filer you'd have to pay $2700 in taxes (I'm assuming you've already gone past the 10% mark for tax bracket purposes). That leaves you with $15.3k to invest. If you assume similar investments the returns don't matter.

Option 2 - Use the 457 plan. You get to invest the whole $18k. The only thing you have to subtract is $40 and .61%. That's a total of $149. That leaves you with $17.9k.

Investing with option 2 lets you keep $2.6k more in your pocket.

Even if you're somehow living single off of being in the 10% bracket (seriously you're living off of <$9k?) the math still works out. Option 1 adjusted for the 10% bracket still takes out $1800 in taxes. Option 2 still takes out $149. You still get to keep $1650 more money to invest.

I'll admit I'm ignoring Vanguards fees but there is no way they'll total up to $1650 for each $18k invested.

Unless I'm missing something, this aggressive option looks like a really solid investment option as far as employer-sponsored plans go. The fees of the underlying Vanguard funds aren't displayed, but they are Vanguard funds, so the should be excellent (not sure if they are institutional or admiral--probably institutional). And the $10 plus 0.1525% account fee is pretty reasonable. You mention a 0.61% fee, which I don't see in the materials you provided.

The .61% is the .1525%*4.

rubybeth

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Re: My county's 457 plan seems like a bad deal
« Reply #9 on: May 29, 2015, 07:44:07 AM »
Even if the plan options aren't that great, 457b plans are awesome for people who plan to retire early because there aren't age requirements to get your money out (or loopholes to monkey with like with 401ks and IRA rollover and Roth conversion ladders). As long as you leave your employer, you can start taking distributions from a 457b. I'm so super pumped about having access to one, and can't wait to max it out (right now only contributing $12,000/year).

RocketSurgeon

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Re: My county's 457 plan seems like a bad deal
« Reply #10 on: May 29, 2015, 07:51:35 AM »
Wow guys, thanks for the responses! I geuss with all the focus on fees I've seen, I just got a little nervous and needed some reassurance. I'll jump on it!

Scandium

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Re: My county's 457 plan seems like a bad deal
« Reply #11 on: May 29, 2015, 09:40:19 AM »
They just seem like they're setting themselves up as an unneccesary intermediary, but I could be completely wrong.

Congratulations, you have just figured out what financial advisors really are!

RWD

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Re: My county's 457 plan seems like a bad deal
« Reply #12 on: May 29, 2015, 10:28:07 AM »
I ran some rough spreadsheet calculations and came up with a break-even time of about 36 years (less if you count taxes on 457 withdrawals). Meaning if you contribute to the 457 for more than 36 years the fees will have eaten up the entire tax advantage. Assuming $18k contributed per year, 15% tax bracket, and 9% investment returns.

To go for maximum efficiency you need to think about how an individual year's contribution will do. Your first year's contribution reaches the break-even point at 23 years. If you can't move the funds out of this 457 within 23 years it [probably] won't be worth it. If you think you're going to be locked into this 457 for more than 23 years you should contribute to taxable accounts until your situation changes (e.g. plan on quitting in less than 23 years). That's a decently long time frame so you're probably fine contributing to this 457.

TheOldestYoungMan

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Re: My county's 457 plan seems like a bad deal
« Reply #13 on: May 29, 2015, 10:56:51 AM »
And if you do plan to stay there long term, you can identify who at the county administers the 457 plan and try to have a sit down with them to explain how the custodians are passing on the expense of running the plan to the employees.

It'd be nice if the person who selects the custodian has any clue what they are doing, but it is highly unlikely that a qualified individual is making that selection.

It is really cool that they have vanguard funds, and admiral shares in all those funds to boot.  They also look like index funds, which typically have lower fees.

When I buy vanguard funds I'm going for low fees, right?  So looking at one of the funds in the aggressive portfolio, VVIAX, expense ratio is .09%.

So vanguard buys the assets of the fund, tracks each member's contributions and withdrawals, offers up a slick easy-to-use interface, is compatible with things like turbotax, and does it all for 14.7% of the cost of this group.  And with no additional $10 fee.  For the cost of setting up an automatic payroll deduction to Vanguard, your county could dramatically cut the cost of the plan for the participants.

In your case, because you plan to take good advantage of it, as previous posters point out, it's not that big of a deal.

But imagine what someone first dabbling, who knows nothing, who invests $100 per paycheck.  That's $2600 per year, of which 2.1% will be lost to fees, independent of the performance of the underlying funds.

Absurd.

There is nothing stopping you from writing your local county officials and letting them know how stupid this is.  And once they find an affordable custodian, you can transfer your assets to the new vendor.

MDM

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Re: My county's 457 plan seems like a bad deal
« Reply #14 on: May 29, 2015, 12:22:30 PM »
My taxable income is already below the 15% bracket.

Does that mean your federal marginal rate is 15%, or 10%?  Marginal state/local rate? 

Best guess at marginal rate in retirement?  E.g., do you expect to have a pension and/or significant salary increases over time?

For someone in a 30% marginal (counting fed + state) bracket, with expectations of being in a much lower bracket in retirement, traditional plans (IRA, 401k, 457, etc.) are great.  For someone in a low bracket now, the advantages are not so great.

RocketSurgeon

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Re: My county's 457 plan seems like a bad deal
« Reply #15 on: May 30, 2015, 06:27:47 AM »
Well, the Fed is going to pay off my student loan for me in 7.5 years, at which point I'll hopefully be leaving this job (and the whole accounting profession) behind. I may try sending HR a letter with my concerns, but they aren't earning any gold stars lately: http://www.buckslocalnews.com/articles/2014/06/22/bucks_news/doc53a676a3014be962594857.txt
Might be a lost cause. :p