457 advice for not a knowledgable investor

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trudy
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457 advice for not a knowledgable investor

Post by trudy » Thu Mar 07, 2013 9:43 pm

I have a web friend who recently realized that what she "thinks is called her 457 plan" is not doing well. In fact, it is losing money, according to the plan's financial rep. (It is a 457 plan, in Missouri.)

I'm trying to help her out, but I don't know a lot about funds nowadays. I have Vanguard Wellesley and CDs, that's it. Years ago before I retired I actually bought individual stocks and watched the market closely. Those days are gone.

Also, she describes herself as "dumb about money."

She's rooting out the plan documents so we can talk, but in the meantime, I looked on the web and seem to have found the funds available in her plan, and could use some advice about them.

My plan is to suggest that she consider holding 3-4 funds and suggest some funds for her to choose from, and then monitor.

She's in her late 40s, works as a middle wage public employee, and owns her own small home with a mortgage, but probably has no other debt. She has a pension plan that will eventually pay 1/2 of her pre-retirement salary, and there's Social Security. Update: I'm trying to help without invading her financial privacy. My guess without asking is that by looking up salaries for her job, she makes $30,000 to $50,000.

I'm looking for a decent, conservative, minimally volatile return for her.

Her plan offerings are stuffed with Nationwide funds that look abysmal, just looking at the long term returns.

But there are other funds in there that look decent, and I'd appreciate any thoughts about them.

Brown Capital Management Small Company Fund (The) - Investor Class
JPMorgan Mid Cap Value Fund
Neuberger Berman Equity Trust(R) - Genesis Fund
Wells Fargo Advantage Discovery Fund Admin Cl
American Century Value Fund
Dreyfus Appreciation Fund, Inc.
Fidelity Contrafund
Fidelity OTC Portfolio
Fidelity Puritan(R) Fund
PIMCO Total Return Fund
Waddell & Reed Advisors High Income Bond Fund

Another possibility is the plan seems to allow a "self-directed brokerage account." That makes me quite nervous for her, but she presumably could buy better funds with that.

Thanks very much.
Last edited by trudy on Fri Mar 08, 2013 6:03 am, edited 1 time in total.

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BruceM
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Re: 457 advice for not a knowledgable investor

Post by BruceM » Fri Mar 08, 2013 4:14 am

Gov 457(b) plans almost never have an employer match, so all contributions would come from her.
I generally avoid these, due to their typically high expenses and poor investment choices.
As you've described her, her AGI may be low enough to be able to make a deductible traditional IRA contribution, which would be a much better option than 457(b) plan contributions. Even if she can't deduct a TIRA contribution, I think I would consider a Roth IRA contribution before I'd contribute to the 457(b) plan, as the excesss of expenses on the 457(b) will errode away the tax benefit of the contributions being before tax.

Investment options in the IRA are almost unlimited, which would allow her to choose simple-to-manage investment options such as a low cost target date fund.

BruceM

trudy
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Re: 457 advice for not a knowledgable investor

Post by trudy » Fri Mar 08, 2013 6:07 am

Thanks.

Does a 457 plan charge the employee expenses over the expenses associated with the funds in it, or does the employer pay the 457 plan expenses?

The plan is run by Nationwide.

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sometimesinvestor
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Re: 457 advice for not a knowledgable investor

Post by sometimesinvestor » Fri Mar 08, 2013 8:52 am

There may and probably are expenses to the plan going to the administartor but states usually get a decent deal. You will have to check plan documents to know.
For funds to pick the obvious choices are contrafund and Pimco Total Retunr but as already observe and depending on the desired amount that will be invested going outside the plan may be best
Last edited by sometimesinvestor on Fri Mar 08, 2013 12:40 pm, edited 1 time in total.

mur44
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Re: 457 advice for not a knowledgable investor

Post by mur44 » Fri Mar 08, 2013 12:35 pm

Nationwide offers Roth 457(b) and also
a Guaranteed Income Contract.

Their fee is 0.25% in addition to the
specific fund expense ratio.

The above information is for New Jersey.

YMMV

retiredjg
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Re: 457 advice for not a knowledgable investor

Post by retiredjg » Fri Mar 08, 2013 12:58 pm

I recently helped a friend with a Nationwide 457 plan. Several of the funds you listed were in my friend's plan as well. But the best choice I found was a target retirement type fund which contained mostly index funds. The ER was about .67% - lower than most of the individual funds offered.

The list you posted seems somewhat incomplete to me. Are you sure there isn't something else?

There might also be some kind of stable value fund that is specific to her governmental unit. That might be shown at the very bottom of the page, below the list of mutual funds offered.

I'd agree that maybe the first $5,500 she saves should be going into an IRA (instead of the 457) for lower costs. If she uses tIRA and deducts the contributions, she would get the same benefit as using the 457.

Without knowing the expense ratios of the funds, it is hard to say what the best choices are. I'd also guess PIMCO for the bond choice.

trudy
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Re: 457 advice for not a knowledgable investor

Post by trudy » Fri Mar 08, 2013 2:32 pm

retiredjg wrote:The list you posted seems somewhat incomplete to me. Are you sure there isn't something else?


I did a pass through a Nationwide list I found on the web. I won't know exactly what funds she has access to until she finds/gets the information from Nationwide.

I discarded a lot of the Nationwide funds which seemed to have poor long term records, and some conservative funds that were earning minuscule returns or even negative ones.

I do think she may have access to a stable value fund and even possibly a brokerage account. I'm trying to learn more about her fund options.

Thanks.

trudy
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Re: 457 advice for not a knowledgable investor

Post by trudy » Fri Mar 08, 2013 2:34 pm

retiredjg wrote:I'd agree that maybe the first $5,500 she saves should be going into an IRA (instead of the 457) for lower costs. If she uses tIRA and deducts the contributions, she would get the same benefit as using the 457.


As I understand it from reading up in the last few days, the 457 advantage is that you can take withdrawals before normal retirement age without getting hit with the 10% penalty. She works in public safety, where people tend to retire early, so that might be a factor, although she isn't in the physically demanding work. I've emailed her about her plans for that.

retiredjg
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Re: 457 advice for not a knowledgable investor

Post by retiredjg » Fri Mar 08, 2013 5:55 pm

trudy wrote:As I understand it from reading up in the last few days, the 457 advantage is that you can take withdrawals before normal retirement age without getting hit with the 10% penalty. She works in public safety, where people tend to retire early, so that might be a factor, although she isn't in the physically demanding work. I've emailed her about her plans for that.

Yes. She can start withdrawing from the 457 when she retires at any age. That might be a plus. But with the pension, if her 457 is large enough, she might be able to switch her future contributions (or some of her future contributions) to tIRA. There is also a way to get money from an IRA before age 59.5 without any penalty. Just a couple of hoops to jump through.

Obviously, there is much that is unknown at this point.

DesertMan
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Re: 457 advice for not a knowledgable investor

Post by DesertMan » Fri Mar 08, 2013 9:39 pm

I also have a Nationwide 457. Although what's available is going to vary depending on your state and employer, there should always be a stable value fund ("Nationwide fixed account") and an S&P 500 fund (mine has one from SEI and one from Nationwide, with the SEI having a slightly lower ER).

After asking about this on another thread, it sounds like one can treat the SVF as a bond fund, and it is likely that it will be better in terms of after-expense return than most if not all of the bond funds in the 457. But these SVF funds usually have severe trading restrictions. Mine only allows you to take out to 20% or so of the SVF per quarter.

What I wound up doing is going 50-50 on the S&P 500 fund and the SVF, thus turning the 457 into a balanced fund. As far as I can tell, that is as efficient as you can make it--the SVF does not appear to have any expenses of its own. Nationwide also has an AAR (auto asset rebalancing) function that kicks in every quarter. You can just change the AAR level if you want to bring down the equity allocation to meet your asset allocation. If you want to go UP on equities, do beware the trading restrictions on the SVF--you are probably better off just buying a TSM fund or somesuch in a Vanguard taxable account, as the 457 (like a traditional IRA) will turn all distributions from your stock funds into ordinary income when you start taking distributions.

trudy
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Re: 457 advice for not a knowledgable investor

Post by trudy » Sat Mar 09, 2013 11:17 am

I'm still chatting away with my friend.

She has a 401(a). I read up on these and realized I have an area of ignorance. I turned my 401ks into traditional IRAs when I left jobs, because I wanted to control them myself. The latter, of course, have mandatory minimum distributions at 70 1/2 plus maybe another year.

What happens with 401ks (and 401(a)s) if they don't get turned into IRAs? Is that a possible scenario? Do they stay 401ks and 401(a)s ad infinitum? Are there mandatory minimum distributions?

(I realize 401(a)s are a bit different from 401ks in other respects - more employer control on employee contributions, etc.)

Thanks.

retiredjg
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Re: 457 advice for not a knowledgable investor

Post by retiredjg » Sat Mar 09, 2013 12:15 pm

trudy wrote:I'm still chatting away with my friend. She has a 401(a).

Careful. She might have both a 457b and a 401a at the same time. Make sure she is not mixing this up.


What happens with 401ks (and 401(a)s) if they don't get turned into IRAs?

A 401k can usually stay a 401k. Most people do not find this desirable because choices might be limited and expenses are often higher. I would assume, but don't know, the same is true for a 401a.


Are there mandatory minimum distributions?

Yes.

trudy
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Re: 457 advice for not a knowledgable investor

Post by trudy » Sat Mar 09, 2013 1:23 pm

I should have been clearer. She turns out to have both a 457 and a 401(a). I think she is managing her finances very well, minimal debt, thinking about things, just has this black hole of knowledge about her 457 and 401(a) investment options. She actually has them both invested in a money market account (that somehow managed to lose money.)

Does the minimum distribution stuff for 401(a)s and 401ks treat them like IRAs - same calculations, etc?

retiredjg
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Re: 457 advice for not a knowledgable investor

Post by retiredjg » Sat Mar 09, 2013 1:45 pm

Obviously, money market is not her best choice. As far as I know, every account that is subject to RMDs is done the same way.

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BruceM
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Re: 457 advice for not a knowledgable investor

Post by BruceM » Thu Mar 14, 2013 2:42 pm

Trudy
If her gov employer is like most I've come across, the "401(a)" plan is an employer funded money purchase plan, where the employer will contribute a fixed % of her salary to an account and then give her a few broad investment options, such as a "conservative growth" or an "international" or a "government bond" or "money market" investment options, and she picks how much of her plan balance is invested in each. Some gov. employers will require the employee to make some or even all of this ongoing contribution (the Oregon PERs IAP is an example). But in either case, her investment choices will most likely be limited and she will not be able to rollover the plan balance to her IRA until she separates from employment.

You haven't spoken to it, but would she be able to deduct her contributions to her TIRA? If so, selecting that option over the 457(b) should be a no-brainer, even if she 'retires' prior to age 59.5 and needs to withdraw from her retirement plan, as she can do a 72(t) 'Substantially Equal Periodic Payments' from the IRA without the 10% penalty.

BruceM

nwffdiver
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Re: 457 advice for not a knowledgable investor

Post by nwffdiver » Thu Mar 14, 2013 4:52 pm

If she has a 457 and a 401a it is because as stated " No employer match can go into a 457b plan". I am also a public employee, and my employers match is put into a 401a account. So yes you can have both. I also have a PEHP account (post employment healthcare plan) for paying healthcare premiums after I retire. I think that's a 503c.

Most 457 plan costs are pretty high, but I choose the cheapest funds ( all index funds ) in the accounts. Using my VG Roth for the rest, and fulfill my AA. I just can't give up $17,500 a year in tax-deferred space.

Edit* yes you can access funds from a 457 prior to age 59 1/2. I plan to start mine at 55 (firefighting is a young mans game)
, I am unsure if you can access 401a funds early, but I plan to roll both into a VG IRA when I do retire.

retiredjg
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Re: 457 advice for not a knowledgable investor

Post by retiredjg » Thu Mar 14, 2013 5:07 pm

nwffdiver wrote:I plan to start mine at 55 (firefighting is a young mans game) , I am unsure if you can access 401a funds early, but I plan to roll both into a VG IRA when I do retire.

Careful. If you roll the 457b into an IRA, I'm pretty sure you lose the benefit of early withdrawal. You could still access the money through a SEPP (72t) arrangement though.

xram
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Re: 457 advice for not a knowledgable investor

Post by xram » Thu Mar 14, 2013 5:15 pm

These videos might help her a little. Very short and easy to watch.


xram wrote:short video introduction to boglehead philosophy
http://www.bogleheads.org/wiki/Video:Bo ... philosophy

further info on tax-efficient fund placement
http://www.bogleheads.org/wiki/Principl ... _Placement

good luck
xram
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