Author Topic: Surrender Charge vs High Fees - am I looking at this right?  (Read 1921 times)

BlueDove

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Surrender Charge vs High Fees - am I looking at this right?
« on: November 23, 2017, 07:06:54 PM »
Hello all-

Thanks to the MMM blog, I have been taking a look at my current investments in tax deferred 403(b) plans (same as 401k but for non profit employers).  I was shocked to see the high fees I am paying (more than 1% for an S&P 500 Index Fund!), and even more shocked to see there is a "surrender charge" for switching from this ripoff to another company (which I plan to be Vanguard). These are annuities invested in mutual funds which were the only choice offered by my employer (and the only choice of many non profit employers in my area).

I believe that what I have are what's described in this article "Retirement Plans from Hell"
https://www.forbes.com/forbes/2009/0713/group-annuity-aig-retirement-plans-from-hell.html#66d0a6fb219f
 

I've calculated the figures and though the surrender fee is high, I think I'm better off switching now and getting those employees working in low cost index funds at Vanguard.  Can you weigh in on whether I'm looking at this right?

Here are the facts:

Current value: $140K

Split between three funds:

Delaware VIP Small Cap (Service Class)
$34,000
Expense ratio: 2.09%

LVIP SSgA S&P 500 Index Fund
$72,000
Expense Ratio: 1.49%

LVIP SSgA Small-Cap Index
$34,000
Expense Ratio: 1.65%

Surrender Charge:
Before September 2018: 2% of present value
Before September 2019: 1% of present value
After September 2019: 0
(it's a graduated system that starts at 6% and goes down over 9 years and I am in the beginning of Contract Year 7 (2% surrender charge)

Desired New Investment
Vanguard Stock Index funds such as VTSAX
Expense Ratio: .04%

So, by my calculations, assuming similar performance, I will save between 1.45 to 2.05% in fees on each fund by switching.

Performance in the three current funds is below VTSAX (from barely to a lot) on the 1yr, 5 yr and 10 yr time frames. 

So to decide whether to stay or go, I assumed 7% annual return and took today's value, increased it by 7% and then took out expenses. 

The surrender charge right now is $4,210 (ouch)

However, I would pay the following in "extra" fees (difference between these expense ratios and 0.04%)

September 2017-September 2018: ~$2400
(I guess I've already paid some of that since it's almost December, but just for simplicity's sake, I'm calling it $2500)
September 2018 to September 2019 (on a sum that went up by 7% and down by the fees: ~$2600

Total extra expenses = 2400+2600 = $5,000

since $5,000 in extra expenses over the next two years is more than the current surrender charge of $4,210, I'm thinking I should bite the bullet and move these funds to Vanguard.  A bonus is taking business from a company with really high fees and a company that makes it difficult to understand the terms of our arrangement.  (for example, in order to find the fund with the lowest expense ratio, I have to click on each of the 50 or so funds.  Also, the expense ratio listed at the SEC on these funds is about 1/2 of what you find when you finally find it on the company website). 

I am 48 years old and 8 years from FIRE. 

Am I looking at this right?  Would you move the funds in this circumstance? 

Thank you. 

MDM

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Re: Surrender Charge vs High Fees - am I looking at this right?
« Reply #1 on: November 23, 2017, 07:24:38 PM »
Your numbers appear good.

Bigger question: does your 403b plan allow you to switch to Vanguard?

BlueDove

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Re: Surrender Charge vs High Fees - am I looking at this right?
« Reply #2 on: November 23, 2017, 07:29:57 PM »
Thanks!

The 403b company said they would send me a check and I presumed that if I sent that check to Vanguard immediately, I'd be good.  I was also thinking of signing up on the Vanguard website and having them deal with the current company.

How could they prohibit me from moving the money where I want and rolling it over into an IRA? 

MDM

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Re: Surrender Charge vs High Fees - am I looking at this right?
« Reply #3 on: November 23, 2017, 08:28:59 PM »
Thanks!

The 403b company said they would send me a check and I presumed that if I sent that check to Vanguard immediately, I'd be good.  I was also thinking of signing up on the Vanguard website and having them deal with the current company.

How could they prohibit me from moving the money where I want and rolling it over into an IRA?
They can't prohibit it if you no longer work there.  If you still work there, the law says your employer can't allow it.  E.g., see https://www.sapling.com/6103458/cash-out-early-403b.  Wasn't clear whether you still work there or not (or I just missed that).

BlueDove

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Re: Surrender Charge vs High Fees - am I looking at this right?
« Reply #4 on: November 23, 2017, 08:45:52 PM »
Thank you!

I don't think I mentioned it was a former employer. 

I don't work there anymore.  Haven't for about 3 years. 

MDM

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Re: Surrender Charge vs High Fees - am I looking at this right?
« Reply #5 on: November 23, 2017, 08:50:28 PM »
I don't work there anymore.  Haven't for about 3 years.
In that case, given your stated preference, see https://investor.vanguard.com/401k-rollover/vanguard-ira and proceed, oh, let's see...maybe tomorrow?

BlueDove

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Re: Surrender Charge vs High Fees - am I looking at this right?
« Reply #6 on: November 23, 2017, 09:40:28 PM »
EXACTLY.  TOMORROW!

I read the fine print and they don't charge a surrender fee on taking 15% out in a year, so I'm going to try to take out 15% and then next week take it all with a lower surrender fee. 

NoStacheOhio

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Re: Surrender Charge vs High Fees - am I looking at this right?
« Reply #7 on: November 27, 2017, 09:27:44 AM »
EXACTLY.  TOMORROW!

I read the fine print and they don't charge a surrender fee on taking 15% out in a year, so I'm going to try to take out 15% and then next week take it all with a lower surrender fee.

Alternatively, take out 15% now and 15% in January 2018, then move the rest. Assuming they mean calendar year and not 12-month period.