403b Bad Choices!

[Sublime8700]

I'm trying to help a friend who is a 26 year old school teacher. He's contributing the max to a roth IRA in a standard Vanguard Retirement Fund (roughly 80/20). In addition to having ~ $17,000 in the Roth at this point. He's accumulated around $100,000 and has minimal expenses. He wants to begin investing beyond the relatively minimal Roth IRA. He's got a perfect mind-set and won't touch the money under any circumstances because, well, he just doesn't get it. So I've suggested he max-out the 403 b available at his school, as well as put the max of $10,000 (stat tax deductable max) into a 529 plan in Illinois. The 529 plan has fine fund options for low cost indexers. But the 403 b, which does NOT have an employer match, has really poor options.

The 403b is administered by Mutual of America, so there are a bunch of Mutual of America funds. The Equity index fund looks OK, but it seems to be the only one with a low ER. There some fidelity "VIP" funds, an Oppenheimer Main Street Fund, two DWS funds, and an American Century fund. I can basically tell by the names that none of these are going to make sense for a low cost indexer.

The only exception is two Vanguard funds -- the Diversified Value fund which looks pretty lousy, and the Vanguard International Fund which is obviously fine.

So I guess the question is: without the employer match, would you still invest in the 403b or would we prefer to just go with a personal account at Vanguard?

And would it make sense to go with something like let's say 70% Mutual of America Equity Index Fund, 30% Vanguard International Fund, and then get a cheap bond fund in the 529 plan? That would (roughly) work out to be in line with a 70/30 or so asset allocation which would be fine for this individual.

Or is there something really notably bad about the Mutual of America Equity Index Fund?

Finally, would it make sense for him to make it a Roth 403b or just a normal 403b?

Thanks in advance.

[Call_Me_Op]

I would still invest in the 403B for these reasons:

1.) Before-tax contributions
2.) Strong asset protection

I would also contact your HR department and see if you can have some better funds added. I have had very good luck working with my HR administrator in terms of improving investing options in our plan.

[Sublime8700]

What do you mean by "strong asset protection?"

Would you do a ROTH or normal?

And how might you phrase an e-mail to the HR dept asking for different funds? Just asking for a self-directed option? Or... what's worked for you?

[dickenjb]

Is there a "fixed account" offered by the 403(b)? Many times this pays 2 to 3% net of expenses and could be a good vehicle for the fixed income part of his portfolio.

[snyder66]

Have you checked with Vanguard or the school to see if they can be a provider? You have to do your own digging, but chances are, Vanguard can be used. It will not be easy. You have to contact HR. They will have no idea what you are talking about. Maybe contact Vanguard directly, first. We had the same issue with my wife's 403b. We are now with Vanguard. Just took a good amount of digging. Vanguard doesn't push their 403b offering like the rest of the vermin.

[Call_Me_Op]

What do you mean by "strong asset protection?"

Would you do a ROTH or normal?

And how might you phrase an e-mail to the HR dept asking for different funds? Just asking for a self-directed option? Or... what's worked for you?

Roth or Normal depends upon your current tax rate versus future tax rate. Roth may make more sense if you are young.

By "strong asset protection", I am referring to the ERISA rules that govern retirement accounts. In a nutshell, retirement accounts are generally exempt from creditor claims.

Find out who is in charge of your retirement accounts and ask for an appointment to talk with him or her. Explain that you are interested in a more diverse selection of low-cost investing options and see if they are willing to help. They should also be able to give you an overview of Roth versus Tax-deferred considerations.

[pingo]

And does your friend also have a 457b plan as well? That's another $17,500/yr that can be tax-deferred.

Not knowing the tax bracket and the expectations for Social Security and/or pension, it is hard to say if Roth 403b contributions make more sense than Traditional. Traditional tax-deferred contributions are the default suggestion and they usually win out over Roth 403b contributions for most people, but your friend might not be most people and it might be just as reasonable to strike a balance between the two.

[runner9]

Same issue here, but then found other 403b plans that looked better and then 457 plans, including a great 457 plan. I'd suggesting he contact HR and see if there are other options available but not advertised.

[JW Nearly Retired]

But the 403 b, which does NOT have an employer match, has really poor options.

The 403b is administered by Mutual of America, so there are a bunch of Mutual of America funds. The Equity index fund looks OK, but it seems to be the only one with a low ER. There some fidelity "VIP" funds, an Oppenheimer Main Street Fund, two DWS funds, and an American Century fund. I can basically tell by the names that none of these are going to make sense for a low cost indexer.

The only exception is two Vanguard funds -- the Diversified Value fund which looks pretty lousy, and the Vanguard International Fund which is obviously fine.

So I guess the question is: without the employer match, would you still invest in the 403b or would we prefer to just go with a personal account at Vanguard?

These are really good options compared to many plans. Equity Index with a low ER & Vanguard International are fine you said. So build on that by supplementing with a good bond fund in the IRA. Gives friend a great 3-fund portfolio. Just saving the IRA allowable is not going to cut it.

http://www.bogleheads.org/wiki/Three-fund_portfolio
JW

[Sublime8700]

Wow! Great advice! Can he legally do a 403b and a 457? Meaning 17.5k in each + a 529?

[Sublime8700]

And presumably he could diversify his tax risk by making the 403b Roth and the 457 traditional...

[MN Finance]

Typically the state 457b will have a better set of choices at a lower cost. The reason being that the state runs one plan with one provider and is substantial in asset size so they can negotiate a competitive arrangement whereas school districts generally don't do this and are multiples smaller.

I would verify that mutual of america does not also charge a management fee on top of the Vanguard funds, which would by typical of 403b providers (I have no experience with mutual of america).

I would second the use of a stable value fund since the yield quoted will likely be net of all fees.

Yes, you can contribute the 17.5K to each the 457 and 403 plans each year.

[Sublime8700]

and any teacher in a public school is eligible for both 403b and 457?

[runner9]

and any teacher in a public school is eligible for both 403b and 457?

Per the IRS, yes; but only if the district offers both. Probably they do, but you never know.

[Dogs]

The 457 contribution limit is considered separately from the 401k and 403b limits (those, however, are shared - you can't contribute 17.5k to a 401k AND 403b in the rare event that both are offered).

[Sublime8700]

so basically if the school offers a 403b or a 457 I should be able to do it through Vanguard, not Mutual of America, regardless of what the HR person tells me about it being a group plan etc. And in order to make this happen, I should call Vanguard if that's what I'm understanding?

[snyder66]

That's what I did. I would start with Vanguard and see if they what they say.

[Sublime8700]

ok. Ill call VG and report back!

[NHRATA01]

so basically if the school offers a 403b or a 457 I should be able to do it through Vanguard, not Mutual of America, regardless of what the HR person tells me about it being a group plan etc. And in order to make this happen, I should call Vanguard if that's what I'm understanding?

I don't know about that. My wife's school's plan provider dropped Vanguard (and Fidelity) for the 403b so they can not be used.

The State 457 primarily uses Vanguard funds, so at least we have access to them there. But we are out of luck for 403b providers and left with only high cost options.

I did make a recent thread about 403b/457's so might be of some use, I also had been unaware that the 17,500 max deduction was separate for both accounts.
viewtopic.php?f=1&t=110015

[Sublime8700]

I just spoke with Vanguard at length. They basically told me that the school had to offer Vanguard as a provider or I was out of luck. I'm definitely curious how and what year those of you who got around this did so (without mobilizing the entire school to petition the HR office to add Vanguard because that's not going to happen in my situation...) I'm not sure if I didn't approach the conversation correctly, or if the rules have changed (they mentioned something changed in 2007...)

[runner9]

District should have a list of approved vendors, maybe they're on there but probably not. This site, and this specific link might be helpful.

http://403bwise.com/participants/takeaction_choices.html

[NHRATA01]

I just spoke with Vanguard at length. They basically told me that the school had to offer Vanguard as a provider or I was out of luck. I'm definitely curious how and what year those of you who got around this did so (without mobilizing the entire school to petition the HR office to add Vanguard because that's not going to happen in my situation...) I'm not sure if I didn't approach the conversation correctly, or if the rules have changed (they mentioned something changed in 2007...)

Only thing is in many cases it's not the HR office doing this. The district (and in many cases like my wife's, a consortium of multiple districts) will simply farm out the role to a firm, in her case it is Omni. I have not yet figured out how to lobby the intermediary to offer alternative providers, but would love to hear any such success stories.

[Sublime8700]

interesting! so districts, and not schools, have a list of providers that are acceptable. Is there a way to cross check whether my district has anything besides what the HR woman who doesn't know much about this says? Some database or something?

[runner9]

My K-12 district: went to HR, asked for list and I received a two page list of insurance/annuity type companies.

Wife's college employer: googled name of employer 403b and came up with list.

I've read the colleges have better offerings as higher ups want to use 403bs there. I only did a little research but I believe that to be the case in our situation, that her offerings are better for whatever reason. Soon found the state 457 plan and have chosen it.

[Clark & Addison]

Your district office will be able to tell you what companies are approved. My corporation only has 3 approved 403b providers. All of them are poor choices that require the 403b be put into an annuity. From what I've recently found out, prior to 2009 (I think the legislation passed in 2007) you used to be able to do what was called a 90-24 transfer. This allowed you to transfer money out of the bad 403b and put it into a better choice like Vanguard. Unless you had the 90-24 transfers set up prior to 2009, you are no longer allowed to do so.

Fortunately for me (or unfortunate that we don't have enough to put away), my wife's 401k offers fairly good choices since it is with Fidelity. All I contribute to my 403b is enough to get the match, then after maxing our Roths, we are not close to matching her 401k. If/when we get to the point when we can max her 401k, I will be lobbying my district (only 113 teachers) to add Vanguard as an approved vendor.

[Beelzebozo]

Mutual of America is one of the worst out there. I have never seen a single case where they were priced competitively. There is absolutely no way to change they list of investments they offer. That list is basically repackaged mutual funds with an extra fee of .50 - 1.25%.

Remember, you don't need to add Vanguard as a provider in order to get Vanguard funds. Adding TIAA-CREF, Great-West, Fidelity, Nationwide, or VALIC will give you access to an open architecture mutual fund based (instead of annuity) platform. You just have to ask them for it. You can get an all Vanguard lineup at every single one of these places. TIAA-CREF will take any 403(b) but the others have asset minimums which are probably satisfied if we're talking public school district.

It's a no brainer but unfortunately the people who make these decisions tend to be lazy, misinformed, or otherwise unmotivated to do the right thing. They're also not subject to the regulatory penalties non-governmental 403(b)s are. Best of luck.


Disclosure: I work within the retirement plan industry and over just the past year have analyzed more plans than almost anyone in the nation. I am an Investment Advisor Representative of a fee-only Registered Investment Advisory firm and receive no compensation from plan providers nor investment companies. This post is for education purposes only and should in no way be considered investment advice or a solicitation of business.