Should my partner contribute to his 403(b)?

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Fig Newtons
Posts: 2
Joined: Sat Jan 12, 2019 1:50 pm

Should my partner contribute to his 403(b)?

Post by Fig Newtons » Sat Jan 12, 2019 4:18 pm

Hi there! I'm looking for some advice on 403(b) options. My partner started a new job recently and just became eligible to contribute to his employer's plan. I handle our current investments so he asked me to look over the options they provide. Unfortunately, the fees are... quite a bit higher than I'm used to seeing, so it makes me wonder if we wouldn't be better off either increasing my own 401(k) contribution, or opening an IRA for him instead.

Emergency funds: check
Debt: One auto loan at 5.25%. We do not carry credit card balances and do not currently have a mortgage.
Tax Filing Status: MFJ, starting in TY 2019 (we's gettin' married!!)
Tax Rate: 12% (I think; somewhat hard to estimate given tax law changes but we each make about $40k annually)
State of Residence: NC
Age: 26 (him) and 29 (me)

Current Retirement Assets

401(k) (His) [was contributing 10%; company match 10%]
  • 100% Vanguard Target 2060 (no ticker) (0.08%)
  • Current value: ~30k
401(k) (Hers) [contributing 10%; company match 10%]
  • 90% Fid 500 Index (FXIAX) (0.015%)
  • 5% Fid US Bond Index (FXNAX) (0.025%)
  • 5% Vanguard Target 2055 (no ticker) (0.08%)
  • Current value: ~20k
403(b) Options

***We were provided with information from 2013. He asked about getting an updated document and was told they could only get that for him after he enrolled (???). This makes zero sense to me, but it's not my job so it's not my headache. We've decided to proceed as if this information is accurate and hasn't changed, and will make changes once we get the updated info if necessary.***

I've already narrowed down the options into the ones I would recommend for him - now it's just a question of if he should use them at all. I was planning on suggesting one stock fund and one bond fund, with a preference for index funds, and the two I've selected have the lowest expense ratios of everything they offer.

His new employer will offer a 3% match, plus an additional flat amount for him contributing anything at all (he doesn't know how much that amount is). There is a 0.65% administrative charge added to all of these expense ratios.
  • Dreyfus Bond Market Index (DBIRX) (0.41%) [1.06% total]
  • Dreyfus S&P 500 Index (PEOPX) (0.51%) [1.16% total]
IRA Options

The other option I could suggest to him would be opening a Traditional IRA through Vanguard. I'm looking at very similar options (1 index fund, 1 bond fund) but with much lower expense ratios. These funds have a minimum of $3k to open so we would probably roll over a portion of his current 401(k) balance to meet that minimum. Or possibly all of his 401(k) balance.
  • Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) (0.05%)
  • Vanguard 500 Index Fund Admiral Shares (VFIAX) (0.04%)
Questions:

1. Given the higher fees and lower employer match, what sort of contribution makes the most sense? We'd be putting away a max of about 10% of his income, whichever division we go with, so about $4k. I've come up with the following options but I'm not so good at doing the math to figure out which one is ideal.
  • He contributes 3% to his 403(b) to maximize his employer match, then contributes the rest into a Traditional IRA
  • He contributes nothing to his 403(b) and puts it all in an IRA, because the savings on fees would outweigh the value of the employer contributions
  • Either of the above, but we increase my 401(k) contributions instead of using a Traditional IRA for him
2. Does the answer to the above question change if it's considered from a perspective of "minimizing yearly tax obligations" vs. "maximizing amount in retirement accounts"? I'm not totally familiar with the interaction between the tax deductibility of 401(k)/403(b) contributions and the retirement savings credit - or if it matters that I already have 401(k) contributions, since we'll be filing MFJ (!).

3. If the expense ratios we were given are no longer correct (which, let's face it, they probably aren't), what would be the point where the best decision would change? By that I mean, if it's currently worth contributing to the 403(b), how high could the fees get before it was no longer worth it? Or, vice versa, if it's not worth contributing, how low would they have to get to make it a good choice?

4. I'm a relatively aggressive investor; he is more risk averse - and he's been feeling especially squirrelly about the market right now. Since these are his retirement funds, not mine, I'm thinking about recommending about 1/3 bonds, 2/3 stocks to him. That's probably a bit overly conservative given his age, but I think he'd be nervous with a stock-heavier portfolio. But is there a strong case to be made for a different allocation? I'm happy to recommend something else if so; I think he'll take my advice on the ratio as long as it's not too out there (e.g., I know he would veto 100% stocks... and I think he'd veto 50% bonds, too).

Thanks in advance for any advice!

Figs

autopeep
Posts: 185
Joined: Fri Jan 01, 2016 6:30 pm

Re: Should my partner contribute to his 403(b)?

Post by autopeep » Sat Jan 12, 2019 6:07 pm

The 403b plan is certainly not ideal... I would invest to the 3% match in the 403b. The remainder I would place in a Roth IRA. Roth is definitely preferable to traditional in this case given your low current tax bracket.

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Duckie
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Joined: Thu Mar 08, 2007 2:55 pm

Re: Should my partner contribute to his 403(b)?

Post by Duckie » Sat Jan 12, 2019 6:56 pm

Fig Newtons, welcome to the forum.
Fig Newtons wrote:Tax Filing Status: MFJ, starting in TY 2019 (we's gettin' married!!)
Congratulations!
401(k) (Hers) [contributing 10%; company match 10%]
  • 90% Fid 500 Index (FXIAX) (0.015%)
  • 5% Fid US Bond Index (FXNAX) (0.025%)
  • 5% Vanguard Target 2055 (no ticker) (0.08%)
  • Current value: ~20k
Mixing individual funds (500 Index, Bond Index) with target-date funds is not optimal. Pick one or the other.
  • Dreyfus Bond Market Index (DBIRX) (0.41%) [1.06% total]
  • Dreyfus S&P 500 Index (PEOPX) (0.51%) [1.16% total]
Are these the lowest cost stock and bond funds offered?
Given the higher fees and lower employer match, what sort of contribution makes the most sense? We'd be putting away a max of about 10% of his income, whichever division we go with, so about $4k. I've come up with the following options but I'm not so good at doing the math to figure out which one is ideal.
  1. He contributes 3% to his 403(b) to maximize his employer match, then contributes the rest into a Traditional IRA
  2. He contributes nothing to his 403(b) and puts it all in an IRA, because the savings on fees would outweigh the value of the employer contributions
  3. Either of the above, but we increase my 401(k) contributions instead of using a Traditional IRA for him
He needs to get the match so option #2 is out. I'd pick #1 myself -- 403b to the match and extra to an IRA. However, I wouldn't use 500 Index in the IRA; I'd use Total Stock (VTSAX). It's more diversified. (He may have to start off with a target-date fund because of fund minimums.)
If the expense ratios we were given are no longer correct (which, let's face it, they probably aren't), what would be the point where the best decision would change? By that I mean, if it's currently worth contributing to the 403(b), how high could the fees get before it was no longer worth it? Or, vice versa, if it's not worth contributing, how low would they have to get to make it a good choice?
Anything above 2% is on the edge. But he has the 3% match which negates some of that.
I'm a relatively aggressive investor; he is more risk averse - and he's been feeling especially squirrelly about the market right now. Since these are his retirement funds, not mine, I'm thinking about recommending about 1/3 bonds, 2/3 stocks to him. That's probably a bit overly conservative given his age, but I think he'd be nervous with a stock-heavier portfolio. But is there a strong case to be made for a different allocation? I'm happy to recommend something else if so; I think he'll take my advice on the ratio as long as it's not too out there (e.g., I know he would veto 100% stocks... and I think he'd veto 50% bonds, too).
I think (if the expense ratios are correct) he should use just the bond fund in the 403b. He can put stocks in his IRA. He should seriously consider rolling his old 401k into a rollover IRA. He could use VTSAX, VTIAX (if he wants international), and VBTLX.

If you jointly make ~$80K then his TIRA contributions should be completely deductible. See here. I prefer Roth IRAs myself, but some people prefer the deduction now.

lakpr
Posts: 423
Joined: Fri Mar 18, 2011 9:59 am

Re: Should my partner contribute to his 403(b)?

Post by lakpr » Sat Jan 12, 2019 9:12 pm

A few random thoughts based on original post:

1. At combined 80k salary, the Savers Credit is within reach. To get it, the AGI must be below $64k. Which means, between the two of OP and her fiance, they must contribute at least 16k to 401k plan/403b plan.

2. At 64k AGI, the savers credit is 10% of the contribution amount with a max of $1000. Assuming a retirement contribution of 16k required to get down to this level, it is essentially a match of an additional 6% from IRS. You can also look at it as having an additional $9k of untaxed income in the OP's 12% tax bracket. But you lose all this benefit if the AGI is even one dollar more than $64k

3. OP's fiance contributes $2000 in the 403b plan. Then contribute the IRS max of $6000 to a traditional IRA from Vanguard. This will ensure the match is captured as well as meet $8000 of retirement contribution which is his half of the required $16k in point 1 above.

4. May I suggest VBIAX, Vanguard Balanced Index Admiral Shares for the OP's fiance? Last year, when the stock market lost 10%, this fund lost only approx 3%. Temperamentally, I think it suits his skittishness while capturing some of the upside as well. It is a blended fund with a 60/40 split of domestic stocks and bonds. No international.

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grabiner
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Re: Should my partner contribute to his 403(b)?

Post by grabiner » Sat Jan 12, 2019 9:19 pm

lakpr wrote:
Sat Jan 12, 2019 9:12 pm
2. At 64k AGI, the savers credit is 10% of the contribution amount with a max of $1000. [/quote]

The Saver's Credit is 10% of the contribution amount, with a maximum contribution counted of $4000, so it's only $400, not $1000. To get a $1000 credit ($2000 if married), you need to get down to the 50% level, which is income of $38,500; that is out of reach.
Wiki David Grabiner

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mhadden1
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Location: North Alabama

Re: Should my partner contribute to his 403(b)?

Post by mhadden1 » Sat Jan 12, 2019 9:31 pm

grabiner wrote:
Sat Jan 12, 2019 9:19 pm
lakpr wrote:
Sat Jan 12, 2019 9:12 pm
2. At 64k AGI, the savers credit is 10% of the contribution amount with a max of $1000.
The Saver's Credit is 10% of the contribution amount, with a maximum contribution counted of $4000, so it's only $400, not $1000. To get a $1000 credit ($2000 if married), you need to get down to the 50% level, which is income of $38,500; that is out of reach.
[/quote]

The 10% SC is still worth shooting for IMO, and, I think figuring out how to get there, this far in advance, is a great exercise in financial mindfulness for two newlyweds.
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

Topic Author
Fig Newtons
Posts: 2
Joined: Sat Jan 12, 2019 1:50 pm

Re: Should my partner contribute to his 403(b)?

Post by Fig Newtons » Tue Jan 15, 2019 3:39 pm

Thank you all for your help!
autopeep wrote:
Sat Jan 12, 2019 6:07 pm
The 403b plan is certainly not ideal... I would invest to the 3% match in the 403b. The remainder I would place in a Roth IRA. Roth is definitely preferable to traditional in this case given your low current tax bracket.
Oh, good point. I hadn't considered a Roth; I'll run that by him and see what he thinks.
Duckie wrote:
Sat Jan 12, 2019 6:56 pm
Mixing individual funds (500 Index, Bond Index) with target-date funds is not optimal. Pick one or the other.
Yeah, the Target Date is a holdover from when I was first hired. Our options were previously not great and the Target Fund was the better one. Shortly after that they changed things up and I started contributing to the other two - I just haven't bothered to switch that early 5% over.
  • Dreyfus Bond Market Index (DBIRX) (0.41%) [1.06% total]
  • Dreyfus S&P 500 Index (PEOPX) (0.51%) [1.16% total]
Are these the lowest cost stock and bond funds offered?
Yes, sadly. :shock:
He needs to get the match so option #2 is out. I'd pick #1 myself -- 403b to the match and extra to an IRA. However, I wouldn't use 500 Index in the IRA; I'd use Total Stock (VTSAX). It's more diversified. (He may have to start off with a target-date fund because of fund minimums.)
Gotcha, I'll take a look at that fund. I think you're right about 403b + IRA. And I think he could reduce the actual fees he pays even more if he does an annual transfer from the 403b into the IRA - which I think is allowed, since he will be 100% vested from day 1?
Anything above 2% is on the edge. But he has the 3% match which negates some of that.
Thank you, that's info I needed!
I think (if the expense ratios are correct) he should use just the bond fund in the 403b. He can put stocks in his IRA. He should seriously consider rolling his old 401k into a rollover IRA. He could use VTSAX, VTIAX (if he wants international), and VBTLX.
Hm, now there's a thought I hadn't considered. Lower expenses on the bond fund by itself, plus if he is able to move the funds every year into a Vanguard IRA he'd only be missing out on a year of stock growth at a time.
lakpr wrote:
Sat Jan 12, 2019 9:12 pm
4. May I suggest VBIAX, Vanguard Balanced Index Admiral Shares for the OP's fiance? Last year, when the stock market lost 10%, this fund lost only approx 3%. Temperamentally, I think it suits his skittishness while capturing some of the upside as well. It is a blended fund with a 60/40 split of domestic stocks and bonds. No international.
I'll definitely check that fund out, along with VTSAX.
mhadden1 wrote:
Sat Jan 12, 2019 9:31 pm
grabiner wrote:
Sat Jan 12, 2019 9:19 pm
lakpr wrote:
Sat Jan 12, 2019 9:12 pm
2. At 64k AGI, the savers credit is 10% of the contribution amount with a max of $1000.
The Saver's Credit is 10% of the contribution amount, with a maximum contribution counted of $4000, so it's only $400, not $1000. To get a $1000 credit ($2000 if married), you need to get down to the 50% level, which is income of $38,500; that is out of reach.
The 10% SC is still worth shooting for IMO, and, I think figuring out how to get there, this far in advance, is a great exercise in financial mindfulness for two newlyweds.
Unfortunately I think that's out of reach for us for 2019, but certainly something for us to bear in mind for the future.

---

After pondering all of this, I think the best approach is likely for him to do a 3% contribution into the 403(b) to get the employer match, and sticking with just the bond fund there for the lower fees. The rest, he'll put into VTSAX (I agree he'll like the wider diversity of this one better). Hopefully he'll also be able to transfer the funds in the 403(b) out every year as well. If we need to tweak the ratio of stocks/bonds down the line, we can look at adding VBIAX into the mix at that time.

Thanks again!

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Duckie
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Re: Should my partner contribute to his 403(b)?

Post by Duckie » Tue Jan 15, 2019 6:02 pm

Fig Newtons wrote:And I think he could reduce the actual fees he pays even more if he does an annual transfer from the 403b into the IRA - which I think is allowed, since he will be 100% vested from day 1?
<snip>
Hopefully he'll also be able to transfer the funds in the 403(b) out every year as well.
It is very unlikely he would be able to take in-service distributions from his 403b at his age. There are some exceptions but they are plan dependent so even if the regulations allow it, the plan must also.

See Rules for Early Withdrawal from a Retirement Fund and In-service Distributions: Accessing Retirement Plans While Still Employed.

krow36
Posts: 2019
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: Should my partner contribute to his 403(b)?

Post by krow36 » Tue Jan 15, 2019 10:36 pm

If I were him, I would not hesitate to use the Dreyfus S&P 500 Index (PEOPX) (0.51%) [1.16% total] fund rather than the slightly lower cost bond fund. Here’s why: the bond fund will grow very slowly, mostly due to reinvestment of dividends. We expect over time that stock funds to grow faster. The difference between ERs of 1.06% and 1.16% is not significant—both too high, but both usable if that is the lowest available. Since his main purpose in contributing in his high-fee 403b is to get the 3% match, the 0.10% ER difference should not determine the fund.

If he desires a conservative (for his age) 65/35 stock/bond ratio in his 403b, I believe that would be reasonable. Beyond contributing to the 403b to get the 3% match, I agree that he should make further contributions to an IRA, either traditional or Roth, depending on your income tax bracket.

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