Tax-deductible 403b vs. taxable Vanguard ETF

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whompy
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Tax-deductible 403b vs. taxable Vanguard ETF

Post by whompy » Thu Jul 05, 2018 8:37 am

I cannot figure out how to do the math to figure out the answer to my question: Should I continue to contribute to my 403b since contributions are tax-deductible, or should I take that money instead, and purchase ETFs from Vanguard on a monthly basis? The issue is the expense fee with the 403b. I am currently paying 2.5% fees for the 403b- not outrageously high, but it is high. The ETFs I would buy from Vanguard have extremely low fees: VIG is .08%, VHT is .10%, VTI is .04%, and MGK is .07%. The 403b is NOT a roth 403b. My employer does NOT match anything.

I already max out my regular IRA with Vanguard, so I am putting an additional $300/month into the 403b. I am a teacher in Illinois. Tax rates are federal: 22%, State: 4.95%. My goal is to retire in 15 years. If Illinois' finances completely fall apart and my teacher pension suffers, my retirement plans may be.... altered.

So is it worth it to keep the higher-fee 403b since my contributions are tax-deductible, or should I stop the 403b and invest that money in the low-cost ETFs? How to do the math?

Thanks for your help!

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Artsdoctor
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by Artsdoctor » Thu Jul 05, 2018 1:09 pm

Actually, I think that your 403k fees truly are "outrageously high." It wasn't long ago that a lot of people had fees like this but fees have come down substantially over the past 5 years. Usually, fees are related to the number of employees in the plan but with a school, I can't believe your fees would be this high since I'm sure there are many participants.

As a rule, you're going to get the biggest benefit from using a tax-deferred account. However, there are exceptions, as always. Here, your marginal tax rates are modest, your employee doesn't match anything, the fees are "outrageously high," and you're planning on working there for a long time. This could be one of those exceptions where you'd be better off investing in a taxable account with extremely low fee ETFs or mutual funds which are very tax-efficient.

In the meantime, I would have a talk with HR. There are a lot of data out there which you could present (comparing fees with similar-sized organizations). If it's truly 2.5% all-in fees that you're paying, they should really be ashamed of themselves.

MNGopher
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by MNGopher » Thu Jul 05, 2018 1:28 pm

I was in the same conundrum in the past, except my high expense ratios were averaging 1.7 instead of your 2.5% which does seem really high. What I did was max my Roth IRA first while contributing small amounts in the 403B and taxable account, for tax diversification.

Luckily about 4 years ago my school district added Vanguard and Fidelity as provider choices to go along with all the high priced insurance companies. At this time I exchanged my high price option over to a Vanguard 403B and began maxing it out, while continuing to fully fund the Roth.

MotoTrojan
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by MotoTrojan » Thu Jul 05, 2018 1:29 pm

2.5% is criminal. 1% is outrageous. Can you transfer to an IRA at Vanguard?

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goingup
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by goingup » Thu Jul 05, 2018 1:34 pm

Those fees are ridiculous. Maybe an Illinois teacher can weigh in here to help. Is it possible there are 403B options you haven't discovered yet? Do you have access to a 457 plan?

If the admin fee is truly 2.5% I'd probably pass and save in a taxable account, using tax-efficient funds.

jeremyl
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by jeremyl » Thu Jul 05, 2018 1:54 pm

That is a horrible plan. We had one as well but I lobbied hard to our plan fiduciary (happened to be our CFO) and our union president. Ask Human Resources who the plan fiduciary is for your corporation and then go see or call him/her directly. Explain that the plan's fees are extremely high and that it is costing everyone who invests in the corporation plan hundreds of thousands of dollars over their career. There are calculators on 403bwise that can help you show how much those fees are costing you, all staff in the corporation and even the plan fiduciary him/herself. That is what I did. We were able to get our plan changed to a much better option than before but I an still lobbying for a true self-directed option (we have to pass through our provider first, which is BS to me). If you are not in a year where the district can do an RFP (Request For Proposal-offers from mutual fund companies to run your plan with better options) then request to be allowed to do the NEA Direct Invest (I'll be bringing this up again to our union president and fiduciary again). Here is a link to their site. http://www.nearetirementprogram.com/enrollment

Because Illinois is a financial mess, a co-worker of mine and her husband were hired by my district (Indiana). We are much better off financially as of right now. Apply to Indiana districts and see what happens. If you can of course.

Good luck.

AlphaPilot
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by AlphaPilot » Thu Jul 05, 2018 2:16 pm

Though you may not be mentioning everything in your portfolio, I would recommend obtaining a Roth IRA through your favorite company if you have not done so already. Vanguard has them if you plan on using vanguard funds, eliminates the trade expense and they are a favorite around here (rightfully so). Max that baby out as it will be a great vehicle for retirement funds. Like others have said, 2.5% seems very steep.
Edit: Just re-read everything and either I missed it or it was added that you max your IRA. Sorry!
Last edited by AlphaPilot on Thu Jul 05, 2018 4:10 pm, edited 1 time in total.

whompy
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by whompy » Thu Jul 05, 2018 3:53 pm

Thanks for your responses, everyone. Since basically all of you agreed that 2.5% fees for a 403b is incredibly high, it made me wonder if I am misunderstanding the fees I am being charged. Here's a screenshot of the fee table for all of the choices that are available to me.ImageScreen Shot 2018-07-05 at 3.37.56 PM by devomp, .....It very clearly has a column stating "total fees & charges", so I think I'm reading it correctly. Currently, I'm investing in the AF SMLCAP (2.6%) and LA Value Opp (2.4%) funds. This is through MassMutual.

Am I missing something? Those fees really are that high, right?

Thanks again!

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Artsdoctor
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by Artsdoctor » Thu Jul 05, 2018 4:49 pm

Is this some sort of a variable annuity? The mortality and expense fees are usually charged by insurance companies when offering various (high-priced) annuity products.

See if your plan offers something other than variable annuities, or the like.

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grabiner
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by grabiner » Thu Jul 05, 2018 10:07 pm

2.5% annual fees are extremely high. However, that is only one part of the cost; how long are you paying those fees? When you leave the employer, you can roll your 403(b) into an IRA, getting the benefit of low fees while keeping the tax deferral.

My rule of thumb is to consider taxable investments if the product of the extra cost and the number of years you expect to be stuck with those fees exceeds twice your tax rate on qualified dividends and long-term gains (15% rate if you don't pay state tax). You are paying an extra 2%, which means that you might be better of with a taxable investment if you will spend more than 15 years (no state tax) or 20 years (5% state tax) with this employer. (Even then, contribute enough to get any employer match, and max out an IRA, and an HSA if appropriate, and fund your children's college with a 529 plan, before making taxable investments.)
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Earl Lemongrab
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by Earl Lemongrab » Fri Jul 06, 2018 1:35 pm

MotoTrojan wrote:
Thu Jul 05, 2018 1:29 pm
2.5% is criminal. 1% is outrageous. Can you transfer to an IRA at Vanguard?
I'm not sure why this keeps getting a mention. Unless the OP is age 59-1/2, the law prohibits in-service districution of employee deferrals.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

krow36
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by krow36 » Fri Jul 06, 2018 10:43 pm

OP, if you are a public school teacher, please list all the 403b vendors your district allows you to use. This list will hopefully include vendors that offer mutual fund based 403b plans. Your current plan is an annuity based 403b plan with many added expenses including the M&E charge. Check with your HR office or their Third Party Administrator.

whompy
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by whompy » Sat Jul 07, 2018 4:35 pm

Ok, thanks everybody. I was not aware this plan was annuity based. Today, I checked out my online account with MassMutual, and never could find an explanation of what the "funds" I was investing in actually WERE. I just assumed they were mutual funds. I looked all over, but never saw the words "annuity", but I never saw "mutual fund" either.

It's irritating that simple information like that is so difficult or impossible to find. And we wonder why more people aren't saving for retirement...

Thanks for your help. I will talk to HR to see what options I have and update you all.

retiredjg
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by retiredjg » Sat Jul 07, 2018 4:54 pm

I think, but am not sure, that anything that has a "mortality expense" is an annuity.

As mentioned, since you are a teacher, there may be other vendors who offer retirement plans to teachers in your school district. And there might be a state 457b plan available as well. These are often better than the 403b plans offered.

MNGopher
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by MNGopher » Sat Jul 07, 2018 7:28 pm

whompy wrote:
Sat Jul 07, 2018 4:35 pm
Ok, thanks everybody. I was not aware this plan was annuity based. Today, I checked out my online account with MassMutual, and never could find an explanation of what the "funds" I was investing in actually WERE. I just assumed they were mutual funds. I looked all over, but never saw the words "annuity", but I never saw "mutual fund" either.

It's irritating that simple information like that is so difficult or impossible to find. And we wonder why more people aren't saving for retirement...

Thanks for your help. I will talk to HR to see what options I have and update you all.
Yep, you can spot the annuity products because they don't have an actual ticker symbol that you can check from a real source, and they have goofy names like "world science fund" or "international opportunity growth fund".

magister
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by magister » Sat Jul 07, 2018 8:49 pm

If I were in your shoes, I would be looking hard to find another tax deductible option before contributing to this plan. As others have mentioned, you may have a 457 plan available, and these are sometimes better than the 403b plans sold to teachers.

Honestly, this is the sort of thing that would make me seriously consider looking for another job. With fees that high, you can be pretty sure that whoever’s administering the plan is totally incompetent, and you may never be able to cut through that thicket. Your post actually reminds me of an interview with a teacher I heard a few years back. He realized that his plan had very high fees, and since he was a big time saver, he was losing thousands every year. Because of his age, the only way to get the money out was to quit his job and roll the money into an IRA. He took a job at the district in the neighboring county, but eventually built up enough assets that he had to quit again. By the time of the interview, he had worked for something like half a dozen different districts.

krow36
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by krow36 » Sat Jul 07, 2018 11:21 pm

Even if your school district has a low cost 457 plan that would be a better first choice for your payroll contributions, you still need to find a better 403b plan that you can move your current 403b account to. Your HR office or TPA can tell you what vendors are available for both plans. If you list the providers here, we can help you find the lowest cost option. You are allowed to contribute up to 18.5k to both a 403b and a 457 plan.

whompy
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by whompy » Sun Jul 15, 2018 6:14 pm

Ok, thanks. That sounds good. So I emailed HR about this about 9 days ago, and haven't heard from them. Guess I'll have to call them or go to the office to get an answer. As soon as I know something, I'll post it. Thanks for the responses!

whompy
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by whompy » Wed Aug 08, 2018 9:09 am

It's been a major headache to get any information from anyone in charge at my school about this.

The business manager gave me the name of a guy at Edward Jones and said that he actually is the one to talk to about investment options within the 403b, even though it is through MassMutual. The Edward Jones guy was supposed to call me earlier this week, and hasn't. So I called MassMutual, they said my investment options ARE mutual funds, but I'll have the option to annuitize them if I want when I retire.

I was looking into converting my 403b to a roth IRA (I realize I'd have to pay taxes to do this, that's ok.) with Vanguard, but Vanguard said to check with MassMutual if this was possible, because I am still employed. MassMutual said I could not do that since I'm not switching employers.

At this point, I'm thinking I'll just stop contributing to the high-fee 403b and put that money into (extremely) low-fee ETFs with Vanguard. I don't know. It's frustrating.

EdLaFave
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by EdLaFave » Wed Aug 08, 2018 10:25 am

A 2.5% annual fee is obscenely predatory. If you assume a 6% return and 3% inflation, then after 30 years that 2.5% fee will have consumed 87.15% of your real profits.

I haven't done the math myself, but grabiner is right. The answer depends on how long the money will remain in the 403b as well as your current/future tax rate. So unless you're going to be leaving the district or quitting "soon" then I can't imagine it is in your best interest to pay the 2.5% fee.

You need to enumerate all of the 403b and 457b vendors. If you can post that list then we can help. I can't imagine Edward Jones is the right entity to provide that list.

Do you know who your Third Party Administrator is? If you figure that out then they likely have a website that'll list your vendors. For example, TSA Consulting Group is a popular Third Party Administrator and this page lists all vendors for the districts they service in Illinois. Maybe your district is on the list?

If you don't have a good vendor then I'd suggest lobbying your district to add Vanguard and/or Fidelity. I was able to do that in Orange County Florida. I've got a web site that you may find helpful where I layout investing 101, document a bunch of 403b/457b vendors, and talk about the journey to reform the retirement plans in Orange County. Best of luck to you!

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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by niceguy7376 » Wed Aug 08, 2018 10:41 am

There should be a way to bring these dumbos of school administration and the mass mutual and EJ guys into public notice by the teachers association (or the individual teachers) using the various social networking tools.

I pity any employees that has to go through these scenarios.
Please start communicating within the teachers group and see if there is a traction.
Would love to get updates from OP on their attempts.

EdLaFave
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by EdLaFave » Wed Aug 08, 2018 10:48 am

niceguy, speaking as somebody who has tried to reform this industry, I just wanted to throw in my two cents.

This exploitation ultimately persists because teachers don't do anything about it. You can argue "why" that is, but the end result is the same. I think you can make a strong argument that the districts, who are often financially ignorant and have prioritized other agenda items, should be doing more, but at the end of the day if those who are being impacted aren't working for reform then reform is highly unlikely. That is the reality of the 403b/457b world in schools.

Rupert
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by Rupert » Wed Aug 08, 2018 10:54 am

EdLaFave wrote:
Wed Aug 08, 2018 10:48 am
niceguy, speaking as somebody who has tried to reform this industry, I just wanted to throw in my two cents.

This exploitation ultimately persists because teachers don't do anything about it. You can argue "why" that is, but the end result is the same. I think you can make a strong argument that the districts, who are often financially ignorant and have prioritized other agenda items, should be doing more, but at the end of the day if those who are being impacted aren't working for reform then reform is highly unlikely. That is the reality of the 403b/457b world in schools.
+1. Sadly true. People who run public schools are not business-oriented in general, and teachers often have pensions in addition to 403b plans so no one pays that much attention to the 403b. And these K-12 plans typically are not ERISA plans, so they get little to no oversight and attention from regulatory agencies, plaintiff's lawyers, etc. The folks at 403bwise and Ron Lieber at the New York Times have tried their best to publicize the problems and make change happen.

whompy
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by whompy » Fri Aug 10, 2018 8:13 am

Thanks everyone for your comments/advice.

For those of you suggesting I post a list of all possible vendors- I already have! I'll post it again. Here are all my choices: MassMutual

That's it. I think we only have one choice because this plan is only for my school (a charter school, so we're separate from the rest of the district), not an entire school district. I don't know how many teachers participate.

I don't know if MassMutual and Edward Jones are in cahoots or something, but he directed me to call an Edward Jones guy with my questions.

I am currently trying to convince him that we need to switch to Vanguard. If he balks, as I think he will, I guess I'll turn it over to the union and see if they can convince administration otherwise.

I will post updates when I have them. Thanks!

whompy
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by whompy » Fri Aug 10, 2018 8:20 am

And thanks, EdLaFave for the links. I think I'll be using those!

retiredjg
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by retiredjg » Fri Aug 10, 2018 8:40 am

There is still one thing to check. Your school MIGHT be eligible to use a state 457b plan. If not eligible, they MIGHT be eligible to be eligible if someone does the legwork. State 457b plans are frequently better than 403b plans. You need to check this out.

I think a 2.5% or thereabouts cost is unreasonable. For that reason, it is reasonable (to me) to use the union to try to achieve what you want. However, I would not say "we need to switch to Vanguard". Instead find at least 3 (maybe 4 or 5) companies that will offer you something better than what you currently have. Vanguard can certainly be one of them.

You don't want this to look like a tantrum to get what you want. You want it to be an overall solution that benefits everyone even if you don't get exactly what you want.

I'm all for using plans at work. Even bad ones are often worth using. But yours is really bad. Not sure I would use it myself unless there is a match.

Keep in mind that you've probably ended up with this awful plan because the people in charge just don't know any better. They have probably reached out to someone they know assuming it would be ok. If you can find and show a better way, you might be successful. Be prepared to do some work.

retiredjg
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Re: Tax-deductible 403b vs. taxable Vanguard ETF

Post by retiredjg » Fri Aug 10, 2018 8:46 am

One of our posters here, Steve Schullo, has done a great deal of work on this expensive 403b issue. Here is a link to information about him. He has several books and there is also a free download book available. This could be helpful knowledge if you decide to undertake a union action.

https://www.google.com/search?client=sa ... or-uD4eydI

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