Looking for Advice on Asset Allocation in 457(b) Plan

[AlmostElton]

I’d like some advice on my asset allocation for my 457(b). I’m 38, in law enforcement so will have 90% pension with COLA. I don’t currently have a taxable investment account. My objective for this post is to ask if there is a better AA for my situation and time frame, without being concerned for the present with expense ratios.

My current AA is as follows:
Mission Square 500 Stock Index R5 - 30%
Mission Square MFS Value R5 - %16
MSQ AMG Times Square Mid Cap Growth R5 - 11%
MSQ Mid-Small Co Index R5 - 5%
Mission Square International R5 - 14 %
MSQ Emerging Markets R5 - 8%
Mission Square Plus Fund R5 - 17%

My available funds are as follows. I have put asterisks by the 7 funds I currently have:

MissionSquare Equity Income Fund
**MSQ MFS Value Fund
MSQ BlackRock Equity Dividend Fund
**MissionSquare 500 Stock Index Fund
MissionSquare Broad Market Index Fund
MissionSquare Growth & Income Fund
MSQ Parnassus Core Equity Fund
MSQ Invesco Main Street Fund
MissionSquare Growth Fund
MSQ Contrafund®
MSQ T. Rowe Price® Growth Stock Fund
MissionSquare Select Value Fund
MSQ Victory Sycamore Established Value Fund
**MissionSquare Mid/Small Company Index Fund
MissionSquare Aggressive Opportunities Fund
**MSQ AMG TimesSquare Mid Cap Growth Fund
MSQ Carillon Eagle Mid Cap Growth Fund
MSQ JPMorgan Small Cap Value Fund
MissionSquare Small Cap Discovery Fund
MSQ Invesco Discovery Fund
**MissionSquare International Fund
MissionSquare Overseas Equity Index Fund
MSQ Diversified International Fund
**MissionSquare Emerging Markets Fund
MSQ Cohen & Steers Realty Shares Fund
**MissionSquare PLUS Fund
MissionSquare Core Bond Index Fund
MSQ Western Asset Core Plus Bond Fund
MissionSquare Inflation Focused Fund
MSQ PIMCO High Yield Fund
MissionSquare Retirement IncomeAdvantage Fund
MissionSquare Retirement Target Income Fund
MissionSquare Retirement Target 2015 Fund
MissionSquare Retirement Target 2020 Fund
MissionSquare Retirement Target 2025 Fund
MissionSquare Retirement Target 2030 Fund
MissionSquare Retirement Target 2035 Fund
MissionSquare Retirement Target 2040 Fund
MissionSquare Retirement Target 2045 Fund
MissionSquare Retirement Target 2050 Fund
MissionSquare Retirement Target 2055 Fund
MissionSquare Retirement Target 2060 Fund
MissionSquare Model Portfolio Conservative Growth Fund
MissionSquare Model Portfolio Traditional Growth Fund
MissionSquare Model Portfolio Long-Term Growth Fund
MissionSquare Model Portfolio Global Equity Growth Fund
MSQ Puritan® Fund

[mamster]

You definitely need to be concerned with expense ratios.

I would pick one low-cost broad stock fund here. The "Broad Market Index Fund" seems like a good choice if the expense ratio is low.

What other investment accounts do you have?

[ruralavalon]

Is the 457b your only account? How much do you contribute annually?

Will you be eligible for Social Security benefits in addition to the pension?

I’d like some advice on my asset allocation for my 457(b). I’m 38, in law enforcement so will have 90% pension with COLA. I don’t currently have a taxable investment account. My objective for this post is to ask if there is a better AA for my situation and time frame, without being concerned for the present with expense ratios.

My current AA is as follows:
Mission Square 500 Stock Index R5 - 30%
Mission Square MFS Value R5 - %16
MSQ AMG Times Square Mid Cap Growth R5 - 11%
MSQ Mid-Small Co Index R5 - 5%
Mission Square International R5 - 14 %
MSQ Emerging Markets R5 - 8%
Mission Square Plus Fund R5 - 17%

My available funds are as follows. I have put asterisks by the 7 funds I currently have:

MissionSquare Equity Income Fund
**MSQ MFS Value Fund
MSQ BlackRock Equity Dividend Fund
**MissionSquare 500 Stock Index Fund
MissionSquare Broad Market Index Fund
MissionSquare Growth & Income Fund
MSQ Parnassus Core Equity Fund
MSQ Invesco Main Street Fund
MissionSquare Growth Fund
MSQ Contrafund®
MSQ T. Rowe Price® Growth Stock Fund
MissionSquare Select Value Fund
MSQ Victory Sycamore Established Value Fund
**MissionSquare Mid/Small Company Index Fund
MissionSquare Aggressive Opportunities Fund
**MSQ AMG TimesSquare Mid Cap Growth Fund
MSQ Carillon Eagle Mid Cap Growth Fund
MSQ JPMorgan Small Cap Value Fund
MissionSquare Small Cap Discovery Fund
MSQ Invesco Discovery Fund
**MissionSquare International Fund
MissionSquare Overseas Equity Index Fund
MSQ Diversified International Fund
**MissionSquare Emerging Markets Fund
MSQ Cohen & Steers Realty Shares Fund
**MissionSquare PLUS Fund
MissionSquare Core Bond Index Fund
MSQ Western Asset Core Plus Bond Fund
MissionSquare Inflation Focused Fund
MSQ PIMCO High Yield Fund
MissionSquare Retirement IncomeAdvantage Fund
MissionSquare Retirement Target Income Fund
MissionSquare Retirement Target 2015 Fund
MissionSquare Retirement Target 2020 Fund
MissionSquare Retirement Target 2025 Fund
MissionSquare Retirement Target 2030 Fund
MissionSquare Retirement Target 2035 Fund
MissionSquare Retirement Target 2040 Fund
MissionSquare Retirement Target 2045 Fund
MissionSquare Retirement Target 2050 Fund
MissionSquare Retirement Target 2055 Fund
MissionSquare Retirement Target 2060 Fund
MissionSquare Model Portfolio Conservative Growth Fund
MissionSquare Model Portfolio Traditional Growth Fund
MissionSquare Model Portfolio Long-Term Growth Fund
MissionSquare Model Portfolio Global Equity Growth Fund
MSQ Puritan® Fund

Do be concerned about the expense ratios. Expenses (along with diversification) are a primary concern in selecting funds to use.

In my opinion MissionSquare Broad Market Index Fund (uses the Russell 3000 index) ER 0.19%??? would probably be a better choice than the U.S. stock funds you are currently using for investing in U.S. stocks.

In my opinion MissionSquare Overseas Equity Index Fund (uses the MSCI EAFE index, developed markets only) ER 0.28%??? would probably a better choice than the funds you are using for investing in ex-US stocks.

What interest rate is currently being paid on the "Mission Square Plus Fund R5", and what rate if any is guaranteed? This might be a good choice for a bond/fixed income investment.

In my opinion MissionSquare Core Bond Index Fund (uses the Bloomberg U.S. Aggregate Bond Index) ER 0.20%?? will probably be a good choice for a bond/fixed income fund to use.

[slicendice]

Some additional info is needed to make recommendations:

Time horizon-- how long until you get to tap the pension?
As mentioned above, expense ratios for all funds.
Your desired stock/bond split?
Will you get social security?

Given the 90% pension (which I am assuming will be treated as 100% taxable income by Fed and States-- but you should check this) you may want to consider doing annual Roth IRA contributions first before 457 contributions (unless you get some sort of match) for future tax diversification.

[retiredjg]

My objective for this post is to ask if there is a better AA for my situation and time frame, without being concerned for the present with expense ratios.

Nobody here is going to suggest that you not be concerned with the ERs. And in this plan, it will matter a great deal.

I didn't look them all up. The 500 index is about .2%. That is usable. Mid cap is 1.18% and international was about .9% which are both outrageous.

In other words, it is possible that the 500 index fund is the only fund you want to use here other than a bond fund or a stable value fund.

Ok, I looked one more up - the MissionSquare Core Bond Index Fund is .2% which again, not great but definitely usable.

If you are willing to look the others up, there might be something better. But i f nothing better is found, I would use only the 500 index and the Core Bond Index and put your international into a Roth IRA. You can easily get by without midcap and small cap and especially do not want to pay those prices for them.

With a 90% pension, you want to put more in Roth than into traditional.

[HipCoyote]

My DW and I both retired from law enforcement after 30 plus years each. Here is advice that may fit your situation:

The pension is great. We (and you) are lucky beyond measure to have it. We are opposite of most folks in that in retirement our pensions completely cover our living expenses. We really don’t NEED the savings! But, if all your investments are tied up in pre taxable 457 account(s) you are facing a tax time bomb when RMDs hit. Your income will go up dramatically. Most likely you’ll just live off of pension so the money in your 457 will just sit there growing.

You will not get much, if any social security.

So, if there is a ROTH program in your 457 I’d strongly suggest you start putting $$ into that. Yes, you bite the tax bullet now but avoid massive tax problems down the road. It also helps for legacy planning. Imagine having a large yearly pension and then you have an RMD of $100k that year? Tax bomb, IRMAA bomb.

With regard to your asset allocation. I can’t wrap my head around all your positions. As others mentioned pay attention to ER costs of those funds. Personally I’d simplify the whole thing into a two fund or three account and rebalance on your birthday. I see that some of the ERs are crazy high. Avoid those. And if possible lobby to get your plan administrator changed or get funds in there that are reasonably cheap. (I’d argue that the agency/ city has a fiduciaries responsibility and they are not upholding that.

If your agency is anything like mine was, so called financial advisors circle the block trying to lure cops and firefighters in to manage their money once they’re retired. You’re here so you get the drill. But avoid them like crazy.

Secure 2 had a few provisions for cops and retired cops so take a look at that.

Your 457 plan may have positions for cops to sit on the board overseeing the plan. If it interests you maybe get involved? It will protect your interests and you’ll learn a lot! And maybe get lower cost funds?

Cop to cop…avoid the boats and expensive trucks. Consider the savings plans for kids college. Stick with it, seek promotions and you’ll have a great life.

Oh, and wear your vest

Be safe.

[AlmostElton]

Trying to respond to as many raised points as possible:

• I'll keep the ERs in mind. Reading all responses so far it looks like 0.20% is about the line at which most consider a fund to be palatable in that regard.
• Any social security I'll collect will come from contributions made during "normal" employment prior to age 22 when I was hired as a cop.
• I plan to retire at 50 or 55 (12 to 17 years, expressed as a sentence non-accidentally) depending on the state of the Law Enforcement at that time. Should I go at 50, I'll lose some percentage of my max (which will vest at 52 after 30 years), but it might keep me sane to do so.
• Given the last point, I don't really plan to stop working entirely at retirement, and therefore wouldn't really need to touch my 457 til considerably later. 60....65, etc, though I realize that RMD may require me to.
• While I have a brokerage account, it's in the 3 digits as (clearly) I'm relatively novice with all this and don't want to do anything stupid at scale.
• No kids, and no plans for any, so that's not a factor.
• I have nowhere to park a boat or a fancy truck, and tend toward the 250,000 mile road life of a decent Toyota Rav4, so no worries about extravagant money pit vehicles.
• I always wear my vest.

It's also worthwhile noting that a couple of years ago, I flipped entirely from pre-tax contributions to Roth contributions when the government imagined up $10T during covid. I'd rather pay income tax now instead later on those dollars as I expect the rate to increase over time. Thank you all for the advice thus far. Hopefully this helps refine things.

[CyclingDuo]

Trying to respond to as many raised points as possible:

• I'll keep the ERs in mind. Reading all responses so far it looks like 0.20% is about the line at which most consider a fund to be palatable in that regard.
• Any social security I'll collect will come from contributions made during "normal" employment prior to age 22 when I was hired as a cop.
• I plan to retire at 50 or 55 (12 to 17 years, expressed as a sentence non-accidentally) depending on the state of the Law Enforcement at that time. Should I go at 50, I'll lose some percentage of my max (which will vest at 52 after 30 years), but it might keep me sane to do so.
• Given the last point, I don't really plan to stop working entirely at retirement, and therefore wouldn't really need to touch my 457 til considerably later. 60....65, etc, though I realize that RMD may require me to.
• While I have a brokerage account, it's in the 3 digits as (clearly) I'm relatively novice with all this and don't want to do anything stupid at scale.
• No kids, and no plans for any, so that's not a factor.
• I have nowhere to park a boat or a fancy truck, and tend toward the 250,000 mile road life of a decent Toyota Rav4, so no worries about extravagant money pit vehicles.
• I always wear my vest.

It's also worthwhile noting that a couple of years ago, I flipped entirely from pre-tax contributions to Roth contributions when the government imagined up $10T during covid. I'd rather pay income tax now instead later on those dollars as I expect the rate to increase over time. Thank you all for the advice thus far. Hopefully this helps refine things.

Thanks for your service!

Your RMDs for the 457b won’t be required to start until you are age 75 based on your current age and current tax law. That means another 37 years of compounding and growth!

CyclingDuo

[ruralavalon]

Trying to respond to as many raised points as possible:

• I'll keep the ERs in mind. Reading all responses so far it looks like 0.20% is about the line at which most consider a fund to be palatable in that regard.
• Any social security I'll collect will come from contributions made during "normal" employment prior to age 22 when I was hired as a cop.
• I plan to retire at 50 or 55 (12 to 17 years, expressed as a sentence non-accidentally) depending on the state of the Law Enforcement at that time. Should I go at 50, I'll lose some percentage of my max (which will vest at 52 after 30 years), but it might keep me sane to do so.
• Given the last point, I don't really plan to stop working entirely at retirement, and therefore wouldn't really need to touch my 457 til considerably later. 60....65, etc, though I realize that RMD may require me to.
• While I have a brokerage account, it's in the 3 digits as (clearly) I'm relatively novice with all this and don't want to do anything stupid at scale.
• No kids, and no plans for any, so that's not a factor.
• I have nowhere to park a boat or a fancy truck, and tend toward the 250,000 mile road life of a decent Toyota Rav4, so no worries about extravagant money pit vehicles.
• I always wear my vest.

It's also worthwhile noting that a couple of years ago, I flipped entirely from pre-tax contributions to Roth contributions when the government imagined up $10T during covid. I'd rather pay income tax now instead later on those dollars as I expect the rate to increase over time. Thank you all for the advice thus far. Hopefully this helps refine things.

With little or nothing in Social Security benefits, even with pension benefits expected, traditional 457b contributions will probably be better in my opinion.

Most people will likely be in a lower tax bracket during retirement.

You could consider Roth IRA conversions during the years after retirement but before Required Minimum Distributions (RMDs) begin, when you will be in a low tax bracket.

In your 457b plan (assuming I have the expense ratios right) I suggest simply using these three funds:
1) MissionSquare Broad Market Index Fund (uses the Russell 3000 index) ER 0.19%??? ;
2) MissionSquare Overseas Equity Index Fund (uses the MSCI EAFE index, developed markets only) ER 0.28%??? ; and
3) MissionSquare Core Bond Index Fund (uses the Bloomberg U.S. Aggregate Bond Index) ER 0.20%??

For international stocks you should consider a more diversified international stock fund like Vanguard Total International Stock Index Fund (VTIAX) ER 0.11% in your Roth IRAs, instead of the MSCI EAFE index fund in your 457b plan.

I suggest both maximum annual employee deferrals to the 457b account and maximum annual contributions to Roth IRAs for each of you as a priority over contributions to a taxable brokerage account.

My objective for this post is to ask if there is a better AA for my situation and time frame, without being concerned for the present with expense ratios.

Your current asset allocation (in the 457b) is 83% stocks/17% bonds, with around 27% of stocks in international stocks. In my opinion your current asset allocation is within the range of what is reasonable at age 38 with a 90% pension with COLA expected.

What percentage of your overall portfolio is currently in each of your accounts (457b, his Roth IRA, her Roth IRA, HSA)? What funds do you use in your other accounts (Roth IRAs, HSA)?

It's probably better to treat all accounts together as a single unified portfolio, rather than view each account separately.