Give up 403(b) contributions entirely?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
runyanorama
Posts: 22
Joined: Tue May 29, 2018 7:36 pm

Give up 403(b) contributions entirely?

Post by runyanorama »

Dear all,

Apologies for the somewhat "click-bait" title here, but I've been thinking long and hard about the expenses associated with my workplace retirement plan. I have a Roth 403(b) account invested in Vanguard's Target Date 2050 fund but our plan provider is an insurance company that charges a 0.65% "asset management fee" on top of the expenses specific to the funds we select.

The majority of my assets are already in a Vanguard Roth IRA which I max out every year. Would it make any sense at all to completely stop my workplace 403(b) contributions and re-direct my future contributions instead into a taxable brokerage account at Vanguard? If I went that route I would probably invest in some age-appropriate allocation to their tax-managed "capital appreciation" fund and a Total Bond Market index fund.

At this point I'm just wondering if the approx. 85 basis-points in combined fees weighing down my employer 403(b) plan would be any worse than just investing in a taxable account but picking investments so as to minimize the tax burden when I started drawing down the funds. I still have about 25-30 years of investing life ahead of me. Granted, I've never given much thought to the ramifications of saving for retirement in a taxable account and there are a lot of factors I'm probably not considering as much as I should (e.g. holding bonds in a taxable account?)


Thanks for reading!
User avatar
ResearchMed
Posts: 12528
Joined: Fri Dec 26, 2008 11:25 pm

Re: Give up 403(b) contributions entirely?

Post by ResearchMed »

Do you get a match from Employer?

RM
This signature is a placebo. You are in the control group.
tashnewbie
Posts: 2062
Joined: Thu Apr 23, 2020 12:44 pm

Re: Give up 403(b) contributions entirely?

Post by tashnewbie »

Probably not.

What are your tax brackets (fed, state, capital gains)?

See the 401k wiki under "Expensive or mediocre choices": https://www.bogleheads.org/wiki/401(k)# ... re_choices
A reasonable rule-of-thumb is to consider investing in a taxable account if the product of the extra costs and the number of years you will stay in the plan exceeds one and a half times your combined federal and state tax rates on qualified dividends over your working career. That is, if you pay 1.70% expenses rather than 0.20%, and you pay 15% federal tax on qualified dividends, plus 5% state tax, you should still invest in the plan unless you are reasonably certain that you will stay with the employer for more than 20 years for a net loss of 30% (actually 26% because of compounding). If you pay no state tax, you should still invest in the plan unless you are reasonably certain you will stay more than 15 years.
User avatar
ruralavalon
Posts: 22449
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Give up 403(b) contributions entirely?

Post by ruralavalon »

runyanorama wrote: Mon Oct 04, 2021 3:58 pm . . . . .
At this point I'm just wondering if the approx. 85 basis-points in combined fees weighing down my employer 403(b) plan would be any worse than just investing in a taxable account but picking investments so as to minimize the tax burden when I started drawing down the funds. I still have about 25-30 years of investing life ahead of me. Granted, I've never given much thought to the ramifications of saving for retirement in a taxable account . . .
. . . . .
If likely to stay with this employer that long, then switching the 403b contributions to a taxable brokerage account using very tax-efficient stock index funds may, or may not, be a good idea.

Does your employer's 403b plan offer an employer match?

Are there any other providers available in you employer's 403b plan?

What is your current tax bracket, both federal and state?

So the answer is "it depends".


Bogleheads Wiki wrote:A reasonable rule-of-thumb is to consider investing in a taxable account if the product of the extra costs and the number of years you will stay in the plan exceeds one and a half times your combined federal and state tax rates on qualified dividends over your working career. That is, if you pay 1.70% expenses rather than 0.20%, and you pay 15% federal tax on qualified dividends, plus 5% state tax, you should still invest in the plan unless you are reasonably certain that you will stay with the employer for more than 20 years for a net loss of 30% (actually 26% because of compounding). If you pay no state tax, you should still invest in the plan unless you are reasonably certain you will stay more than 15 years
Wiki article 401(k), "Expensive or mediocre choices".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
krow36
Posts: 2396
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: Give up 403(b) contributions entirely?

Post by krow36 »

Can I ask what state you are teaching in? And is your 403b with Lincoln Investment?
Last edited by krow36 on Tue Oct 05, 2021 9:44 pm, edited 2 times in total.
User avatar
willthrill81
Posts: 26241
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Give up 403(b) contributions entirely?

Post by willthrill81 »

Total expenses under 1% likely still justify making contributions to the 403(b) if the investment choices are reasonable. The tax-advantages created by tax-deferred accounts are substantial for most people. More details about your current tax rate and your anticipated tax rate in retirement would make for a more thorough recommendation.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
Mike83
Posts: 117
Joined: Tue Apr 01, 2014 1:37 pm

Re: Give up 403(b) contributions entirely?

Post by Mike83 »

You have free access to roll out your funds when you change jobs. If the is your forever job, that of course is not an attractive option.

Many plans allow in-service rollovers at age 55. This may be a few years down the road for you but it is an eventual escape mechanism for accrued funds held ransom to high fees.

Finally, age trajectory funds often have added fees compared their constituents, so you would likely save right now by creating your own simple portfolio. Even high fee plans usually have one broad market low(er) fee fund for stocks and on for bonds to keep the program safe from class action suits.
Admiral
Posts: 3777
Joined: Mon Oct 27, 2014 12:35 pm

Re: Give up 403(b) contributions entirely?

Post by Admiral »

If there's a match, no I would not. Nor would I hold Total Bond in a taxable account as you suggested. Whatever paltry returns you get will be eaten up by taxes.

A tax deduction of, say, 22% with a .65% ER is better than no tax deduction with a slightly smaller ER.

Beyond those two things, please provide more info for a better answer.
Topic Author
runyanorama
Posts: 22
Joined: Tue May 29, 2018 7:36 pm

Re: Give up 403(b) contributions entirely?

Post by runyanorama »

Thank you all for the responses. Here's a bit more context---

-- Current federal tax bracket = 22%

-- I do NOT receive any sort of 403(b) contribution match from my employer

-- We all know it's hard to anticipate what taxes will be in the future, but my income is on an upward trajectory-- I'm in graduate school working toward moving up into an administrative position in my career-- and I'm fairly confident that I will end up in a higher tax bracket by the time I retire in the early-mid 2050s, hence my emphasis on Roth contributions in both the IRA and 403(b). Regardless, given our national fiscal situation and macroeconomic trends, I personally anticipate a rise in taxes at some point over the next few decades. That's just my own opinion, for what it's worth.

-- The investment choices available through my 403(b) account are very reasonable. I hold Vanguard funds almost identical to what are in my Roth IRA. My only complaint is with the 'asset management fee' added by the insurance company that administers my employer's retirement plan.

-- I should also mention that, if I were to retire as a public school educator or administrator, I would also receive a *non-inflation adjusted* pension with an approximate present value of $2,400 / month. However, this will be subject to federal and state income taxes.


Thanks!
Last edited by runyanorama on Wed Oct 13, 2021 2:46 pm, edited 5 times in total.
Topic Author
runyanorama
Posts: 22
Joined: Tue May 29, 2018 7:36 pm

Re: Give up 403(b) contributions entirely?

Post by runyanorama »

krow36 wrote: Mon Oct 04, 2021 4:50 pm Can I ask what state you are teaching in? And is your 403b with Lincoln Investment?
Of course-- I'm currently teaching in Oklahoma and my employer retirement account is offered through Nationwide. I've entertained the idea of eventually moving to another state to teach or work as an administrator, with Texas or Arkansas being the most likely choices. For the near-term though, I'm based in Oklahoma.
Northern Flicker
Posts: 8558
Joined: Fri Apr 10, 2015 12:29 am

Re: Give up 403(b) contributions entirely?

Post by Northern Flicker »

runyanorama wrote: Mon Oct 04, 2021 3:58 pm Dear all,

Apologies for the somewhat "click-bait" title here, but I've been thinking long and hard about the expenses associated with my workplace retirement plan. I have a Roth 403(b) account invested in Vanguard's Target Date 2050 fund but our plan provider is an insurance company that charges a 0.65% "asset management fee" on top of the expenses specific to the funds we select.

The majority of my assets are already in a Vanguard Roth IRA which I max out every year. Would it make any sense at all to completely stop my workplace 403(b) contributions and re-direct my future contributions instead into a taxable brokerage account at Vanguard? If I went that route I would probably invest in some age-appropriate allocation to their tax-managed "capital appreciation" fund and a Total Bond Market index fund.

At this point I'm just wondering if the approx. 85 basis-points in combined fees weighing down my employer 403(b) plan would be any worse than just investing in a taxable account but picking investments so as to minimize the tax burden when I started drawing down the funds. I still have about 25-30 years of investing life ahead of me. Granted, I've never given much thought to the ramifications of saving for retirement in a taxable account and there are a lot of factors I'm probably not considering as much as I should (e.g. holding bonds in a taxable account?)


Thanks for reading!
I would do trad 403b rather than Roth 403b with high fees so that you pay the fees pre-tax.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
User avatar
willthrill81
Posts: 26241
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: Give up 403(b) contributions entirely?

Post by willthrill81 »

runyanorama wrote: Wed Oct 13, 2021 2:32 pm Thank you all for the responses. Here's a bit more context---

-- Current federal tax bracket = 22%

-- I do NOT receive any sort of 403(b) contribution match from my employer

-- We all know it's hard to anticipate what taxes will be in the future, but my income is on an upward trajectory-- I'm in graduate school working toward moving up into an administrative position in my career-- and I'm fairly confident that I will end up in a higher tax bracket by the time I retire in the early-mid 2050s, hence my emphasis on Roth contributions in both the IRA and 403(b). Regardless, given our national fiscal situation and macroeconomic trends, I personally anticipate a rise in taxes at some point over the next few decades. That's just my own opinion, for what it's worth.

-- The investment choices available through my 403(b) account are very reasonable. I hold Vanguard funds almost identical to what are in my Roth IRA. My only complaint is with the 'asset management fee' added by the insurance company that administers my employer's retirement plan.

-- I should also mention that, if I were to retire as a public school educator or administrator, I would also receive a *non-inflation adjusted* pension with an approximate present value of $2,400 / month. However, this will be subject to federal and state income taxes.

Thanks!
If you're expecting both a pension and significant income growth, a strong argument can be made for using a combination of traditional and Roth 403(b) contributions and maybe even just the latter. If you retire before taking your pension and/or starting SS benefits (if applicable; I'm not sure if you will receive both in your situation), traditional contributions will probably be better. Otherwise, a pension paying you around $30k and SS benefits of that same amount would likely put you paying at least 22% in federal taxes alone due to the taxation of SS benefits.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
tomsense76
Posts: 1066
Joined: Wed Oct 14, 2020 1:52 am

Re: Give up 403(b) contributions entirely?

Post by tomsense76 »

How long do you plan to be at this job? Understand that may be unknown now, but even a rough estimate can be useful.

Also where does the 85 bps come from? Saw the 65 bps fee? Is there another 20 bps coming from somewhere?
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
Admiral
Posts: 3777
Joined: Mon Oct 27, 2014 12:35 pm

Re: Give up 403(b) contributions entirely?

Post by Admiral »

Thanks for adding that info.

It's important to understand that you're speculating about tax rates 30 years from now. All we know, today, is that in four years there will be no 22% bracket as the brackets will revert to pre-TCJA rates. So, I would say if you're going to make decisions based on tax bracket speculation, you might as well speculate about what the law currently says.

Second, it's not just brackets that change, it's the amounts that fall within them that change. If we're talking thirty years' time, a 25% bracket (MFJ) could include income up to $300,000. Or more. We have no idea. It's based on inflation, which is 100% impossible to predict that far out. Will your income double in that time? Absolutely it will. I didn't see where you reported what you make now, but for some perspective I've been working for 30 years and my first job (as a professional) paid $20,000. It has doubled many times since then. Thus, the lower brackets you need to fill to get up higher than 22% marginal will hold much more income than they do now.

Thus, my advice is the same: save in traditional now, while you know exactly what the tax savings is, and then convert later if you need to. Or, with a pension, save mostly in traditional, and a little in Roth. I would not save in taxable until those two options are maxed out, unless you need the money for spending in the near future.
krow36
Posts: 2396
Joined: Fri Jan 30, 2015 6:05 pm
Location: WA

Re: Give up 403(b) contributions entirely?

Post by krow36 »

runyanorama wrote: Wed Oct 13, 2021 2:35 pm I'm currently teaching in Oklahoma and my employer retirement account is offered through Nationwide. I've entertained the idea of eventually moving to another state to teach or work as an administrator, with Texas or Arkansas being the most likely choices. For the near-term though, I'm based in Oklahoma.
Most school districts offer more than 1 403b vendor, and I wonder if your district has a non-annuity provider that has lower fees than Nationwide? Several 403b vendors have lower-cost options that they don't publicize. If you post the 403b vendor list, we might recognize a lower-cost vendor than Nationwide.

As for moving to another state, you are probably aware that teacher pensions usually penalize those that don't stay in the state pension system until "full retirement". I'd work out the penalty to your OK pension if you moved and started over in TX or AR.
Topic Author
runyanorama
Posts: 22
Joined: Tue May 29, 2018 7:36 pm

Re: Give up 403(b) contributions entirely?

Post by runyanorama »

tomsense76 wrote: Wed Oct 13, 2021 4:20 pm How long do you plan to be at this job? Understand that may be unknown now, but even a rough estimate can be useful.

Also where does the 85 bps come from? Saw the 65 bps fee? Is there another 20 bps coming from somewhere?
The combination of Vanguard funds I hold in the 403(b) account come out to an expense ratio of approximately 0.2%, and then I added the 0.65% "asset management fee" on top of that.....
Topic Author
runyanorama
Posts: 22
Joined: Tue May 29, 2018 7:36 pm

Re: Give up 403(b) contributions entirely?

Post by runyanorama »

krow36 wrote: Thu Oct 14, 2021 12:15 pm
runyanorama wrote: Wed Oct 13, 2021 2:35 pm I'm currently teaching in Oklahoma and my employer retirement account is offered through Nationwide. I've entertained the idea of eventually moving to another state to teach or work as an administrator, with Texas or Arkansas being the most likely choices. For the near-term though, I'm based in Oklahoma.
Most school districts offer more than 1 403b vendor, and I wonder if your district has a non-annuity provider that has lower fees than Nationwide? Several 403b vendors have lower-cost options that they don't publicize. If you post the 403b vendor list, we might recognize a lower-cost vendor than Nationwide.

As for moving to another state, you are probably aware that teacher pensions usually penalize those that don't stay in the state pension system until "full retirement". I'd work out the penalty to your OK pension if you moved and started over in TX or AR.

Thanks for the response! My school distract only has one provider for our 403(b) plan, and it is Nationwide. We apparently had several providers some years ago but those options are only available now as "grandfathered" accounts for employees who had already begun making contributions prior to consolidation.

We also offer a 457(b) account, which seems to also have only one provider-- Voya Investments / ING. I was able to locate their 'supplemental fee disclosure' document for my school district's plan and found the following passage to be especially revealing--

"Many fund companies pay Voya in connection with their funds being offered by Voya in its retirement products .... The funds selected for inclusion in retirement products are based on several factors, including the revenue paid to Voya and Voya's assessment of the funds' quality and cost. Both Voya and the mutual fund companies seek to make a profit from the product.... As of 10/14/2021, the total fees charged for investing in this product averaged 1.84% of a hypothetical investor's account balance every year."


So, this is even higher than the Edward Jones account that I begged my parents not to use. Maybe I'm already pursuing the least-bad course of action?
placeholder
Posts: 5065
Joined: Tue Aug 06, 2013 12:43 pm

Re: Give up 403(b) contributions entirely?

Post by placeholder »

Mike83 wrote: Wed Oct 06, 2021 10:04 pm Many plans allow in-service rollovers at age 55.
Age 59 1/2 for in service while 55 for penalty free distributions after leaving service.
tomsense76
Posts: 1066
Joined: Wed Oct 14, 2020 1:52 am

Re: Give up 403(b) contributions entirely?

Post by tomsense76 »

runyanorama wrote: Thu Oct 14, 2021 5:02 pm
tomsense76 wrote: Wed Oct 13, 2021 4:20 pm How long do you plan to be at this job? Understand that may be unknown now, but even a rough estimate can be useful.

Also where does the 85 bps come from? Saw the 65 bps fee? Is there another 20 bps coming from somewhere?
The combination of Vanguard funds I hold in the 403(b) account come out to an expense ratio of approximately 0.2%, and then I added the 0.65% "asset management fee" on top of that.....
Thanks for the context.

Any thoughts on the other question of how long you plan to stay there?
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
Post Reply