This is my first post on the forum, but I have learned a lot and appreciated reading it over the past couple years. I help my mom with her investments, and I would appreciate any input/advice on the following. She is 53, works at a private school, and has roughly $50K invested in her 403(b) plan, which is run by Valic. The school currently offers no match and hasn’t for a few years. The school administrator is unsure whether they will resume matches anytime soon, but my guess is not. My mom has had the plan since she started working there, and initially she was invested in funds suggested by the plan representative. As I became more financially literate, I reviewed her plan and realized that the funds carried very high expense ratios and overlapped considerably. I then changed her funds so that now she is invested 89.4% in Vanguard Lifestrategy Moderate Fund (ER 0.16%) and 10.6% in Fixed Account Plus (let’s call it ‘FUP’.) I have no idea what the fees are in FUP, as this is a “Fixed Income” account offered through Valic. They call it “Fixed Income” because it pays a paltry fixed 2%. I would love to rebalance 100% into the Lifestrategy Moderate Fund, but Valic limits annual transfers out of FUP to 20% of the existing balance. They offer no index funds.
Her account statement from Valic says nothing about fees they charge, and the account representative is very evasive on this topic. I can only imagine how high they must be. Her annual contributions to the plan (100% to Lifestrategy Moderate) are $4,200 and she is maxing out her Roth IRA. I am trying to decide what to do. Should we stop making contributions to the 403(b), while continuing to transfer out of FUP and into Lifestrategy Moderate, and instead invest new money into a taxable account in tax-efficient TSM/TIM? I understand the tax benefit here that these would qualify for LTCG versus ordinary income tax rates upon withdrawal during retirement. Or should we continue (or perhaps even ramp up) contributions to the 403(b), as the plan’s tax deferral feature more than offsets investing in a taxable account despite the 403(b)'s likely high fees? Depending on the answer, I will rebalance her investments across the 403(b) and Roth IRA to mimic as much as possible the 3-fund portfolio suggested here. Thank you all for any advice you might have, and I apologize for the lengthy post!
She should continue to max out her Roth IRA in preference to any unmatched contributions to the 403(b).
I then changed her funds so that now she is invested 89.4% in Vanguard Lifestrategy Moderate Fund (ER 0.16%) and 10.6% in Fixed Account Plus (let’s call it ‘FUP’.) I have no idea what the fees are in FUP, as this is a “Fixed Income” account offered through Valic. They call it “Fixed Income” because it pays a paltry fixed 2%.
It appears that you made a wise choice when you changed her funds to the Life Strategy Moderate Fund. The ER of 0.16 is very low for a 403b plan. Also, the 2% guaranteed fixed income is reasonable. Unless there are other unknown exorbitant charges, this appears to be a good plan.
Should we stop making contributions to the 403(b), while continuing to transfer out of FUP and into Lifestrategy Moderate, and instead invest new money into a taxable account in tax-efficient TSM/TIM?
You have served your mother well as Grabner's reply suggests. Stay the course.
I would not be in a hurry to transfer out of the fixed account. In fact, I would endeavor to make that most of her account and save 2x that in equities outside of the VALIC account - both Roth and taxable. In other words, shoot for an endgame that looks like this:
403(b) at VALIC: $50K fixed at 2% net of fees
Roth at Vanguard: $25K in TSM admiral
Taxable at Vanuard: $30K in TISM admiral and $45K in TSM admiral
Maybe your mother does not have this kind of savings capacity. I don't know. But I would shoot for the 3 fund portfolio with the fixed in VALIC replacing TBM.
You also don't mention if she has other assets. She needs to look at her total portfolio as one.
And read the prospectus for the VALIC TSA plan, not the quarterly statements. You will be shocked by the M&E fee.
Taylor, I have read a lot of your posts and appreciate you sharing your insights gained from years of investing.
I read through the Valic TSA plan and calculated the actual ER to be 1.44% - comprised of 1) 0.16% on underlying LifeStrategy Moderate, 2) 1.25% “Mortality and Expense Risk Separate Account Charge”, 3) and 0.03% “Variable Account Option Maintenance Charge”. That 0.03% is a fixed $15 fee that I have divided by the ~$50K account balance. So much for a 0.16% ER…
dickenjb, my concern with the fixed 2% is that it will lose out to inflation over the long-term, especially when rates eventually rise. You have 100% of the Roth in TSM, and TISM in taxable. Is this because TISM is more tax-efficient?
Some additional information: $30K generated in rental income on a house with no mortgage and $60K in Roth (will rebalance depending on what you guys think).
Given this, does this change your thoughts at all? Thanks again for your help!
Dickenjb's suggestion to read the Prospectus was a good one. Now we know that the actual 403b cost of the Life Strategy Fund is 1.44%. That still makes it worthwhile for the tax savings.
Dickenjb has also suggested a very fine portfolio. I, personally, prefer using the same funds in the Life Strategy Fund for its simplicity (at some cost in tax-efficiency). There is more than one road to Dublin.
Don't worry about the 2% losing to inflation. When (not if) the stock or bond market tanks, a 2% guaranteed return will be very attractive. Anyway, it is a small part of the portfolio and getting smaller.
The first thing she needs to do is assess her risk tolerance / aversion and develop a target AA.
Say she decides to follow conventional wisdom of "age in bonds". Or about 50/50.
I would go with $50K fixed in the 403(b).
$35K VTSAX in Roth.
$15K VTIAX in Roth.
Add $5K to each account per year.
The fixed is only yielding 2% but as Taylor points out, the role of fixed income is not just to provide yield. It is also to reduce overall portfolio volatility so you can sleep at night and won't panic and sell during the next bear market for stocks. It is also to provide "dry powder" so when the next bear does appear you have funds available to buy stocks when they are "on sale".
Just my $0.02
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