Any benefit to a 403b with a 1.25% wrap fee vs a Taxable with zero Fees

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noviceinvestor82
Posts: 14
Joined: Tue Apr 01, 2014 7:18 pm

Any benefit to a 403b with a 1.25% wrap fee vs a Taxable with zero Fees

Post by noviceinvestor82 » Wed Oct 17, 2018 3:15 pm

Greetings,

I work in education and have the option to open a 403(b) or 457 account with Lincoln Investment group. They do have a Vanguard index fund available to purchase but they have a 1.25% Wrap fee. Note that I max out my ROTH IRA contributions of $5500 each year and I would do so regardless of putting the $18,000 into the 403(b). Therefore, my comparison is down to putting the 18,000 in a 403(b) vs a Fidelity Taxable Account.

I did some calculations and it appears as though I'd pay more in fees than what I would save in taxes. Please review my assumptions and calculations below and let me know if I made any errors or if I'm overlooking some other benefit of the 403(b) or 457. Note that my employer does not match any contributions.

I have the FZROX index fund which as a 0% fee in my taxable Fidelity account.
With a 457 account with Lincoln, I would be purchasing VFIAX at a 0.04% expense ratio plus the 1.25% fee.

The results from a calculator (https://403bwise.com/highered/calculator1) using some basic assumptions show the following. For my investment horizon, I would be paying a total of $181,000 in fees.
Assuming a 24% tax rate, I would be saving $105,000 on my contributions. Therefore, it would actually cost me about $76,000 to use a 403(b) or 457 versus simply paying the taxes on the money and putting it in my taxable account.

Sorry for the formatting below but I don't know how to insert a snip of the calculator image.

Current 403(b) balance $0
Years to invest 24
Annual rate of return 7%
Annual salary $100,000
Annual salary increase 0%
Percent to contribute 18.5%
Your 403(b) contribution* $18,000.00 per year
Your employer's 403(b) match/contribution $0.00 per year, 0% of salary
Total you will contribute $437,500.00
Total your employer will contribute $0.00
Total at age 60 $912,340
This total includes a 1.3% annual investment fee.
Without this fee your total would have been $1,093,643.
Total without employer match $912,340

BashDash
Posts: 585
Joined: Mon Nov 28, 2016 12:31 pm

Re: Any benefit to a 403b with a 1.25% wrap fee vs a Taxable with zero Fees

Post by BashDash » Wed Oct 17, 2018 3:24 pm

I think there might be a self directed Lincoln plan. What state are you in? Check out the search box for Lincoln self direct in the search box.

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BL
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Re: Any benefit to a 403b with a 1.25% wrap fee vs a Taxable with zero Fees

Post by BL » Wed Oct 17, 2018 3:28 pm

No comment on the math on that bad fee, but sometimes there is a state 457 at lower fees that is not widely known (nobody is benefiting from it). If you mention your state, someone here may have a suggestion for that or another (hidden) 403b with better costs.

Sometimes it still pays to defer taxes even with bad costs. You also need to check every possibility.

noviceinvestor82
Posts: 14
Joined: Tue Apr 01, 2014 7:18 pm

Re: Any benefit to a 403b with a 1.25% wrap fee vs a Taxable with zero Fees

Post by noviceinvestor82 » Wed Oct 17, 2018 3:30 pm

BL wrote:
Wed Oct 17, 2018 3:28 pm
No comment on the math on that bad fee, but sometimes there is a state 457 at lower fees that is not widely known (nobody is benefiting from it). If you mention your state, someone here may have a suggestion for that or another (hidden) 403b with better costs.

Sometimes it still pays to defer taxes even with bad costs. You also need to check every possibility.
I am in Chicago, IL. I found on a search here that there is a Personally Directed Plan, however, I called 4 different people to get information on it and the last person who knew what it was said they'll get back to me in 2 days which they still haven't (it's been 2 days).

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Any benefit to a 403b with a 1.25% wrap fee vs a Taxable with zero Fees

Post by retiredjg » Wed Oct 17, 2018 3:31 pm

I would not expect a 1.25% wrap fee for a 457b account. Are you absolutely sure?

Is the 457 a state plan? If not, educators can often use a state plan. See if you can. Might take some work on your part.

BashDash
Posts: 585
Joined: Mon Nov 28, 2016 12:31 pm

Re: Any benefit to a 403b with a 1.25% wrap fee vs a Taxable with zero Fees

Post by BashDash » Wed Oct 17, 2018 3:54 pm

Keep calling. Be relentless. It's possible the person you were taking to is benefiting from you paying high fees. I jumped thru a billion hoops to get thru a self directed plan. Huge sense of accomplishment and like getting a raise for life.

krow36
Posts: 1897
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: Any benefit to a 403b with a 1.25% wrap fee vs a Taxable with zero Fees

Post by krow36 » Wed Oct 17, 2018 4:00 pm

noviceinvestor82 wrote:
Wed Oct 17, 2018 3:30 pm
I am in Chicago, IL. I found on a search here that there is a Personally Directed Plan, however, I called 4 different people to get information on it and the last person who knew what it was said they'll get back to me in 2 days which they still haven't (it's been 2 days).
The Lincoln Investment Participant Directed Platform has been able to be used by a district in the Chicago area, so you may luck out. :) Keep at it!

There isn't a state 457 plan for IL K-14 employees currently, but there's one in the works.
http://board.403bwise.com/topic/6922-il ... st-option/

tarmangani
Posts: 106
Joined: Thu Dec 28, 2017 10:14 am

Re: Any benefit to a 403b with a 1.25% wrap fee vs a Taxable with zero Fees

Post by tarmangani » Wed Oct 17, 2018 5:59 pm

How long do you plan to stay here? David Grabiner has a nice rule to help you make a decision, as identified here (among other places on this forum):

viewtopic.php?t=238466
My rule of thumb is that you should only consider taxable investing if the extra cost, multiplied by the number of years you will be in the plan, exceeds twice your tax rate on qualified dividends (15% for most taxpayers, plus state tax). Thus even 1.5% is worth paying unless you expect to spend more than 20 years with the employer.

The reason the multiplication is important is that you can roll over your 401(k)/403(b) into an IRA when you leave, getting rid of the high fees but keeping the tax benefits.
I used this to advantage recently actually as I pumped a crappy 457(b) plan at my former employer (it too had a wrap > 1%) because I knew i'd be leaving in a few years. Rolled it over to an IRA afterward.

noviceinvestor82
Posts: 14
Joined: Tue Apr 01, 2014 7:18 pm

Re: Any benefit to a 403b with a 1.25% wrap fee vs a Taxable with zero Fees

Post by noviceinvestor82 » Wed Oct 17, 2018 7:26 pm

tarmangani wrote:
Wed Oct 17, 2018 5:59 pm
How long do you plan to stay here? David Grabiner has a nice rule to help you make a decision, as identified here (among other places on this forum):

viewtopic.php?t=238466
My rule of thumb is that you should only consider taxable investing if the extra cost, multiplied by the number of years you will be in the plan, exceeds twice your tax rate on qualified dividends (15% for most taxpayers, plus state tax). Thus even 1.5% is worth paying unless you expect to spend more than 20 years with the employer.

The reason the multiplication is important is that you can roll over your 401(k)/403(b) into an IRA when you leave, getting rid of the high fees but keeping the tax benefits.
I used this to advantage recently actually as I pumped a crappy 457(b) plan at my former employer (it too had a wrap > 1%) because I knew i'd be leaving in a few years. Rolled it over to an IRA afterward.
So you can roll your 457 into a general traditional IRA? There are no limits on this?

I only plan on staying a few years but the next place I move to might be another school district or institution. Does that matter or is the 403(b) only tied to this particular employer?

krow36
Posts: 1897
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: Any benefit to a 403b with a 1.25% wrap fee vs a Taxable with zero Fees

Post by krow36 » Wed Oct 17, 2018 9:30 pm

noviceinvestor82 wrote:
Wed Oct 17, 2018 7:26 pm
So you can roll your 457 into a general traditional IRA? There are no limits on this?

I only plan on staying a few years but the next place I move to might be another school district or institution. Does that matter or is the 403(b) only tied to this particular employer?
After you leave the employer that sponsors your 457 plan, you can roll it into a traditional IRA or into your new employer's 457 plan. Similarly your current 403b plan, after separation from the plan's sponsor, can be rolled over to an IRA or to your new employer's 403b plan.

tarmangani
Posts: 106
Joined: Thu Dec 28, 2017 10:14 am

Re: Any benefit to a 403b with a 1.25% wrap fee vs a Taxable with zero Fees

Post by tarmangani » Wed Oct 17, 2018 9:56 pm

noviceinvestor82 wrote:
Wed Oct 17, 2018 7:26 pm
tarmangani wrote:
Wed Oct 17, 2018 5:59 pm
How long do you plan to stay here? David Grabiner has a nice rule to help you make a decision, as identified here (among other places on this forum):

viewtopic.php?t=238466
My rule of thumb is that you should only consider taxable investing if the extra cost, multiplied by the number of years you will be in the plan, exceeds twice your tax rate on qualified dividends (15% for most taxpayers, plus state tax). Thus even 1.5% is worth paying unless you expect to spend more than 20 years with the employer.

The reason the multiplication is important is that you can roll over your 401(k)/403(b) into an IRA when you leave, getting rid of the high fees but keeping the tax benefits.
I used this to advantage recently actually as I pumped a crappy 457(b) plan at my former employer (it too had a wrap > 1%) because I knew i'd be leaving in a few years. Rolled it over to an IRA afterward.
So you can roll your 457 into a general traditional IRA? There are no limits on this?

I only plan on staying a few years but the next place I move to might be another school district or institution. Does that matter or is the 403(b) only tied to this particular employer?
No limits provided you do a direct Trustee to Trustee transfer (what you would do almost always). I setup a traditional IRA at Vanguard that has just housed all of my former workplace retirement plans. Pensions might be an issue if you accepted a job at another school in state, but this is completely different. As Grabiner wrote, the reason this works is because you don't get dragged down by the higher fees for very long. In my case, I was able to take full advantage of tax deferment, reinvesting my savings from it, and then in short order got my preferred funds in Vanguard after rolling over. I've got to give a shoutout to forum member siamond for pointing out that I could even invest in a 457(b) as a municipal employee. My workplace had told me I couldn't, and he said, yeah...that sounds...really wrong.

And he was really right.

The only disadvantage for a 457(b) is that, once you roll it over, you lose the ability to withdraw the money penalty free. That doesn't matter to me, though.

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