Help Offsetting Bad 403(b) Options with Index Funds

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TopplingGoliath
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Help Offsetting Bad 403(b) Options with Index Funds

Post by TopplingGoliath » Mon Apr 10, 2017 3:10 pm

My wife and I (mid 30s) both work for the same employer, and so we have the same 403(b) fund options. We contribute the minimum required in order to get the full match from our employer, but due to a generous match, this ends up being about a third of what we invest each month.

Since our choices are not great, we have just gone with a target date fund with an expense ratio of 0.79%. The 403(b) provider takes another 0.25%, for a total of 1.04%. We also contribute to a 457 that has several Vanguard Index funds available.

I'm not sure if I missed it, or if they are recent additions, but I now have three low cost funds available! None of the "total market" index funds that help keep things super easy and simple... but maybe something I can work with? They are:

Code: Select all

Ticker  Fund Name                                                       Fee

VMFXX   Vanguard Federal Money Market Fund Investor Shares              0.36%   (0.11% + 0.25%)
VIPSX   Vanguard Inflation-Protected Securities Fund Investor Shares    0.45%   (0.20% + 0.25%)
VMGIX   Vanguard Mid-Cap Growth Index Fund Investor Shares              0.45%   (0.20% + 0.25%)
So, I'm looking at VMGIX. Does it make sense to transition our 403(b) contributions, either partially or fully, to VMGIX? Is it crazy to have that fund make up a third of our contributions? I have a spreadsheet detailing my asset allocations according to MorningStar (Cash/US/Non-US/Bond/Other) so it wouldn't be hard to adjust other contributions to keep my overall allocation the same, even with a big chunk moving to "US stock".

Cutting a significant chunk of our portfolio from 1.04% down to 0.45% seems worth the rebalancing hassle, right?

Thanks!

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Duckie
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Re: Help Offsetting Bad 403(b) Options with Index Funds

Post by Duckie » Mon Apr 10, 2017 6:11 pm

TopplingGoliath, welcome to the forum.
TopplingGoliath wrote:The 403(b) provider takes another 0.25%, for a total of 1.04%. We also contribute to a 457 that has several Vanguard Index funds available.
List your options for both plans. We need the fund names, ticker symbols, and plan expense ratios.
Does it make sense to transition our 403(b) contributions, either partially or fully, to VMGIX? Is it crazy to have that fund make up a third of our contributions?
Mid caps are about 6% of the US stock market. Unless you have a lot of money outside your retirement plans, focusing on VMGIX is not good.
Cutting a significant chunk of our portfolio from 1.04% down to 0.45% seems worth the rebalancing hassle, right?
Yes, but not VMGIX (or at least not just VMGIX).

GrandMasterBlaster
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Re: Help Offsetting Bad 403(b) Options with Index Funds

Post by GrandMasterBlaster » Mon Apr 10, 2017 7:30 pm

I'm sure you've already done your due diligence, but you might be rewarded if you keep looking for an employee-directed option. They obviously don't want to advertise these and lose out on the commissions/expenses, but I was able to find just such an option from my wife's district that featured many Vanguard funds. I had to work through a few different reps telling me no such thing existed until I found the option for my wife's 403b. Specifically, if you have Lincoln/Legend Group as a provider (Lincoln recently acquired Legend), Legend will tell you there is no such option, while a Lincoln rep will do you right if you press them.

BashDash
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Re: Help Offsetting Bad 403(b) Options with Index Funds

Post by BashDash » Mon Apr 10, 2017 7:41 pm

Hi can you list all providers you have available? Like grandmaster mentioned there may be a diamond in the rough. Aspire? Security benefit direct invest?

Elbowman
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Re: Help Offsetting Bad 403(b) Options with Index Funds

Post by Elbowman » Mon Apr 10, 2017 8:26 pm

Wow, that's a tough one. The 0.59% difference between VMGIX and the target retirement is a big deal, but you would have to endure a lot of tracking error. Still, at 154 different companies VMGIX is reasonably diverse, I wouldn't be surprised if that was the right long term move.

Duckie, would your opinion be different if it was mid cap value? :twisted:

WallStreetPhysician
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Re: Help Offsetting Bad 403(b) Options with Index Funds

Post by WallStreetPhysician » Tue Apr 11, 2017 7:11 am

TopplingGoliath wrote:My wife and I (mid 30s) both work for the same employer, and so we have the same 403(b) fund options. We contribute the minimum required in order to get the full match from our employer, but due to a generous match, this ends up being about a third of what we invest each month.

Since our choices are not great, we have just gone with a target date fund with an expense ratio of 0.79%. The 403(b) provider takes another 0.25%, for a total of 1.04%. We also contribute to a 457 that has several Vanguard Index funds available.

I'm not sure if I missed it, or if they are recent additions, but I now have three low cost funds available! None of the "total market" index funds that help keep things super easy and simple... but maybe something I can work with? They are:

Code: Select all

Ticker  Fund Name                                                       Fee

VMFXX   Vanguard Federal Money Market Fund Investor Shares              0.36%   (0.11% + 0.25%)
VIPSX   Vanguard Inflation-Protected Securities Fund Investor Shares    0.45%   (0.20% + 0.25%)
VMGIX   Vanguard Mid-Cap Growth Index Fund Investor Shares              0.45%   (0.20% + 0.25%)
So, I'm looking at VMGIX. Does it make sense to transition our 403(b) contributions, either partially or fully, to VMGIX? Is it crazy to have that fund make up a third of our contributions? I have a spreadsheet detailing my asset allocations according to MorningStar (Cash/US/Non-US/Bond/Other) so it wouldn't be hard to adjust other contributions to keep my overall allocation the same, even with a big chunk moving to "US stock".

Cutting a significant chunk of our portfolio from 1.04% down to 0.45% seems worth the rebalancing hassle, right?

Thanks!
Agreed that you need to give more details about your 403(b) options. But from what you've listed, I would put your money in VMGIX. The 0.59% in expense ratios that you save is very valuable. I wouldn't fret too much that you are in mid-cap as opposed to large-cap or total-market. Remember that a lot of people put all of their money in S&P 500.

aristotelian
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Re: Help Offsetting Bad 403(b) Options with Index Funds

Post by aristotelian » Tue Apr 11, 2017 8:26 am

I have a weird plan like that where Emerging Markets is the only stock fund with a low ratio. How bad is the expense ratio for your target date or total equity/S&P funds?

I would not be afraid to do a strong tilt toward Mid-Cap Growth, but I probably would not want my full equity allocation in it. As long as you are contributing to IRA's and taxable, you can put S&P 500 or total market funds in those accounts and probably end up with a good balance.

TopplingGoliath
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Joined: Mon Apr 10, 2017 2:12 pm

Re: Help Offsetting Bad 403(b) Options with Index Funds

Post by TopplingGoliath » Tue Apr 11, 2017 10:57 am

Wow... thanks everyone! I am still waiting for a list of options from one last provider, and then I'll post the Google spreadsheet I'm putting together. It will make it much easier to compare my options.

Thanks!

NYC_Guy
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Location: New York

Re: Help Offsetting Bad 403(b) Options with Index Funds

Post by NYC_Guy » Tue Apr 11, 2017 11:11 am

TopplingGoliath wrote:Wow... thanks everyone! I am still waiting for a list of options from one last provider, and then I'll post the Google spreadsheet I'm putting together. It will make it much easier to compare my options.

Thanks!
Assuming, for simplicity, you are 100% invested in equities and 33% of your portfolio is in these accounts, I would put 50% of the 403b funds in the midcap growth fund, then balance out in taxable as much as possible with S&P 500 (eg, VOO or MF equiv), Int'l (e.g, VXUS or MF equiv) and SCV (eg, IJS). Probably 50% S&P 500, 40% Int'l and 10% SCV in taxable.

That would put you at 33% large cap blend, 26% int'l, 17% midcap growth and 7% SCV. The other 17% would be in the target date fund or the TIPS fund if you want to allocate to fixed income.

Edit: I ran the suggested portfolio against a 75% US / 25% Int'l total market. The results are identical to my suggested allocation. See: http://bit.ly/2o0mBwn

TopplingGoliath
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Joined: Mon Apr 10, 2017 2:12 pm

Re: Help Offsetting Bad 403(b) Options with Index Funds

Post by TopplingGoliath » Tue Apr 11, 2017 2:02 pm

Here are the options I have available. My employer will only match funds in my 403(b), but not 457. :annoyed

https://goo.gl/SMYyBS

So, 1/3rd of our contributions must go to the 403(b) provider, but I can balance them out with the 457 options at the bottom (and Roth IRA if needed).

Currently we're all into the Target Date funds @ 1.04%. NYC_Guy's idea of a 50/50 split between VMGIX and Target Date and then balance out the overall asset allocation with other funds seems reasonable.

On the flipside, I'm hearing from others that having 33% (or even 17%) of my contributions go into just 6% of the stock market is more risky than the broad diversity of total market index funds - and that greater risk isn't worth the 1.04% --> 0.45% expense ratio reduction for that part of my portfolio.

aristotelian
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Re: Help Offsetting Bad 403(b) Options with Index Funds

Post by aristotelian » Tue Apr 11, 2017 2:30 pm

How much are you allowed to contribute to each plan?

I would not hesitate to do a combination of Inflation Protected Securities and mid-cap growth in your 401k, and then Institutional Index and Total Bond Market in 457. It's not idea, but some years it may work out in your favor, and at least you can guarantee that your costs are low.

NYC_Guy
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Location: New York

Re: Help Offsetting Bad 403(b) Options with Index Funds

Post by NYC_Guy » Tue Apr 11, 2017 2:43 pm

IMHO, 60 bps is worth just a tiny bit of complexity. Here's what I would do

VIIIX is an S&P 500 fund. Large cap blend. In my example, I suggested VOO. VIIIX is the mutual fund equivalent. I would do 60% of the 457 in that.

VTPSX is a good international choice. I suggested VXUS. VTPSX is fine. I would do 40% of the 457 in that.

In the Roth IRA, I would balance out with a SCV mutual fund or ETF. If you had $100k in the 403 and $200k in the 457, I would put about $25k of the Roth IRA in SCV to tilt back to neutral.

This weighting will perform, for all intents and purposes, like a 75% US / 25% International total market fund.

That leaves roughly 17% of your overall portfolio (plus any remaining Roth IRA space) to allocate to fixed income, if you want a fixed income component. Or put it in a target date fund that's available.

Edit: Here's the comparison using your available choices: http://bit.ly/2owzeDe

TopplingGoliath
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Re: Help Offsetting Bad 403(b) Options with Index Funds

Post by TopplingGoliath » Tue Apr 11, 2017 3:51 pm

Such helpful people here. Thanks for taking the time to look at this.

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