High Expense 403b or Taxable

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Topic Author
Homebrew
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Joined: Fri Jan 15, 2010 9:53 am

High Expense 403b or Taxable

Post by Homebrew » Thu May 07, 2015 9:03 am

I am eligible to contribute to a 403b plan at work. Unfortunately, the only options to invest in are actively managed mutual funds with expense ratio’s ranging from of 1.2% to 2%; a 2.5% load on every new contribution and no match. I currently max out my roth (index funds) and would like to put more money into equities. Should I invest in the less-than-great 403b plan or put the money into taxable passive/index funds. As I see it, I have the following pro’s and con’s of investing (in a less than desirable) 403b plan.
Pro’s
-Able to contribute up to $18,000 per year in 403b
-Reduce tax burden due to pre-tax contributions
-Plan on being at job for the foreseeable future (10 plus years) to contribute to 403b plan

Con’s
-Invest in less than desirable actively managed funds
-Much higher cost to invest in 403b plans
-Style drift of active management

Bottom Line: Should I invest in high expense 403b with no match or invest in taxable passive/index funds with additional monies? Does math favor 403b investment or taxable investment in long run? Thank you in advance for your insight.

Equity Funds available in 403b:
Clearbridge Aggressive Growth Fund (SHRAX) 1.15% ER
Clearbridge All Cap Value Fund (SHFVX) 1.34% ER
Clearbridge Appreciation Fund (SHAPX) 1.02% ER
Clearbridge Equity Income Fund (SOPAX) 1.18% ER
Clearbridge International Small Cap Fund (LCRNX) 2.00% ER
Clearbridge International Value Fund (SBIEX) 1.45% ER
Clearbridge Large Cap Growth Fund (SBLGX) 1.24% ER
Clearbridge Large Cap Value Fund (LLIVVX) 1.13% ER
Clearbridge Midcap Core Fund (SBMAX) 1.28% ER
Clearbridge Mid Cap Growth Fund (LCBGX) 1.50% ER
Clearbridge Small Cap Growth Fund (SASMX) 1.24% ER
Clearbridge Small Cap Value Fund (SBVAX) 1.34% ER
Last edited by Homebrew on Thu May 07, 2015 3:14 pm, edited 1 time in total.

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ruralavalon
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Re: High Expense 403b or Taxable

Post by ruralavalon » Thu May 07, 2015 11:19 am

The 403b may useable, but some more information is needed.

What are the expense ratios and tickers on each equity fund you listed?

What are the bond fund choices, their tickers, and their expense ratios?

Is a Stable Value Fund offered? If so, what interest rate is it paying?

You can simply add this information to your original post using the edit button.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

retiredjg
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Re: High Expense 403b or Taxable

Post by retiredjg » Thu May 07, 2015 11:48 am

Have you assumed there is a load on these purchases or have you actually checked? Many times the load is waived in a 401k or 403b.

I think this would be a tough choice if the load is actually charged. If there is a stable value fund, there probably is not a load on that, so that might lessen the pain a little.

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BL
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Re: High Expense 403b or Taxable

Post by BL » Thu May 07, 2015 11:54 am

This Boglehead has a link to a spreadsheet that might be useful (I have no knowledge about it):
http://thefinancebuff.com/alternatives- ... -plan.html

Topic Author
Homebrew
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Re: High Expense 403b or Taxable

Post by Homebrew » Thu May 07, 2015 3:19 pm

ruralavalon wrote:The 403b may useable, but some more information is needed.

What are the expense ratios and tickers on each equity fund you listed?

What are the bond fund choices, their tickers, and their expense ratios?

Is a Stable Value Fund offered? If so, what interest rate is it paying?

You can simply add this information to your original post using the edit button.
-Expense ratio's and tickers have been added
-No Stable Value Fund offered
-Want investment in equities not bonds.
Thank you

Topic Author
Homebrew
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Joined: Fri Jan 15, 2010 9:53 am

Re: High Expense 403b or Taxable

Post by Homebrew » Thu May 07, 2015 3:26 pm

retiredjg wrote:Have you assumed there is a load on these purchases or have you actually checked? Many times the load is waived in a 401k or 403b.

I think this would be a tough choice if the load is actually charged. If there is a stable value fund, there probably is not a load on that, so that might lessen the pain a little.

-Spoke with 403b provider, load is 2.5% on new purchases. Not waived, load is normally 4% according to provider
-No Stable Value Fund

Topic Author
Homebrew
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Re: High Expense 403b or Taxable

Post by Homebrew » Thu May 07, 2015 3:55 pm

BL wrote:This Boglehead has a link to a spreadsheet that might be useful (I have no knowledge about it):
http://thefinancebuff.com/alternatives- ... -plan.html

-Thank you for the link.

ThisTimeItsDifferent
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Re: High Expense 403b or Taxable

Post by ThisTimeItsDifferent » Thu May 07, 2015 4:04 pm

2.5% load on everything?!
I question whether the administrator is meeting the fiduciary responsibility.
http://www.dol.gov/ebsa/publications/fi ... ility.html

retiredjg
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Re: High Expense 403b or Taxable

Post by retiredjg » Fri May 08, 2015 7:38 am

A bad 403b is worth using for the tax-deferral and frankly I don't know if the load changes that or not. It would be nice for one of the math people to comment on the load.

Clearbridge Appreciation Fund (SHAPX) 1.02% ER <--I'd probably use this fund; it has the lowest expense and it is a large cap blend and follows the 500 index pretty well.

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grabiner
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Re: High Expense 403b or Taxable

Post by grabiner » Fri May 08, 2015 11:42 am

My rule of thumb is that the product of the extra expenses and the number of years you will have them needs to exceed 30% for a taxable account to be better than a bad 403(b). The 2.5% load (If you pay it) and about 1% extra expenses makes the break-even point about 27 years. Thus, unless you are confident you will stay with this employer for a full 27 years, it's better to use the 403(b), intending to roll it over to an IRA when you leave the employer.

You should still invest in other tax-favored options in preference. If you are married, max out your spouse's IRA, and his or her 401(k)/403(b) if it is decent. If you have children, invest in a 529 for their college savings. If you have a high-deductible health plan, max out the HSA (this is worthwhile even if you have a good 401(k)).
Wiki David Grabiner

retiredjg
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Re: High Expense 403b or Taxable

Post by retiredjg » Fri May 08, 2015 12:33 pm

grabiner wrote:My rule of thumb is that the product of the extra expenses and the number of years you will have them needs to exceed 30% for a taxable account to be better than a bad 403(b). The 2.5% load (If you pay it) and about 1% extra expenses makes the break-even point about 27 years. Thus, unless you are confident you will stay with this employer for a full 27 years, it's better to use the 403(b), intending to roll it over to an IRA when you leave the employer.
Using your rule of thumb, the extra 1% in expenses would have a break-even point of 30 years. So what you are saying is that the 2.5% load makes some difference, but not much.

I find that very surprising. I expected it to make much more of a difference than that.

So Homebrew, even if you do expect to be there more than the 27 years, there is always hope that the plan will change, especially if the employees push for change.

In the Wiki, search for the word campaign to find information about working toward a better plan. Sorry I can't post the link because it does not work. Also, see this current thread.

viewtopic.php?f=2&t=165334&newpost=2484560

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grabiner
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Re: High Expense 403b or Taxable

Post by grabiner » Fri May 08, 2015 1:57 pm

retiredjg wrote:
grabiner wrote:My rule of thumb is that the product of the extra expenses and the number of years you will have them needs to exceed 30% for a taxable account to be better than a bad 403(b). The 2.5% load (If you pay it) and about 1% extra expenses makes the break-even point about 27 years. Thus, unless you are confident you will stay with this employer for a full 27 years, it's better to use the 403(b), intending to roll it over to an IRA when you leave the employer.
Using your rule of thumb, the extra 1% in expenses would have a break-even point of 30 years. So what you are saying is that the 2.5% load makes some difference, but not much.

I find that very surprising. I expected it to make much more of a difference than that.
The reason is that a load is a one-time cost, while extra expenses cost you every year; paying 1% per year for 30 years will cost you 26% of your money, which is far more than the load. For similar reasons, it is usually worth paying a cost now (say, in taxes) to switch to a lower-expense fund.
Wiki David Grabiner

retiredjg
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Re: High Expense 403b or Taxable

Post by retiredjg » Fri May 08, 2015 3:34 pm

Thanks David. :happy

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SkierMom
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Re: High Expense 403b or Taxable

Post by SkierMom » Fri May 08, 2015 4:31 pm

Just so that I understand it, this OP will lose 3.5% of their investments yearly due to fees/expenses (union cronyism?), and that the consensus is that this 403 plan should still be used over maxing out a Roth + using a taxable investment account?

How would you figure out the threshold point for bad employer-sponsored retirement plans?

Got it - I just re-read and understand that the 2.5% is a front load and not an annual expense. I also see where the 27 year break even point comes into play. Interesting.

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