Higher fee index fund or lower fee actively managed fund for 403(b)

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Rincewind42
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Higher fee index fund or lower fee actively managed fund for 403(b)

Post by Rincewind42 » Thu Oct 11, 2018 11:50 am

Hi all. Would love to get some outside opinions. My main employer-sponsored retirement account is in a series of diversified low-cost index funds managed by a state provider (I work for a public college). Same with my Roth IRA. I'm now at the point where I'm able to save a bit more and I'd like to open one of the optional 403(b)/457 accounts offered by my employer. I've checked with all of our vendors and most of them are just terrible in terms of fees; we're talking 1.2-3% expense ratios and management fees. This is not unusual for 403(b)/457 accounts, and unfortunately very few people at the college take advantage of it so we don't exactly have much leverage. There are two options that are clearly superior to the others:

1) One of our vendors is a local credit union and among their options is Vanguard Index Total Stock Market. The combined expense ratio + mgmt/admin fees is 0.94%, but on the bright side it's a fund I'm already investing in through my Roth IRA and I could do some rebalancing to make it work pretty neatly.

2) The other vendor is American Century Investments. They have several funds, found here (https://www.americancentury.com/content ... rformance/) that have lower total costs, but none (that I can see at least) are index funds. I feel like I could probably choose the Government Bond Fund at a 0.47% expense ratio and just adjust my other bond holdings to have a broader exposure to corporate debt. I haven't read the 98 page custodial agreement yet, which I would do before signing up, but according to our contact there the only management fee is .0015% fee per fund with a balance under $10k.

Would love to get your thoughts.

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grabiner
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Re: Higher fee index fund or lower fee actively managed fund for 403(b)

Post by grabiner » Thu Oct 11, 2018 5:58 pm

Welcome to the forum!

In a 401(k), the main advantage of indexing is low costs; you expect an actively-managed fund with 0.5% expenses to do worse than an index fund with 0.1% expenses holding similar assets. In your case, since the lowest-cost option is actively-managed, you expect to come out ahead by using it. If you buy American Century Government Bond, and sell a bond fund somewhere else to buy a stock fund, you will pay less in total expenses than if you buy the stock index fund with all the extra fees. And assuming that the bond fund does what the bond market does (a good expectation for a government bond fund), you'll do better with the lower costs, either in higher returns or in lower risk.
Wiki David Grabiner

krow36
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Re: Higher fee index fund or lower fee actively managed fund for 403(b)

Post by krow36 » Thu Oct 11, 2018 7:44 pm

Does your college have more than 2 vendors on their 403b/457 lists? Sometimes there's a low-cost option that is not obvious. If you will list the vendors, we might know of low-cost option. What state are you in? Many states (over 20?) have state run 457 plans that teachers can use. Frequently they are not on the employer's 457 list.:(
A little pressure is sometimes all it takes to add the state 457. In fact it's very possible to get your college to add a low-cost vendor that offers index funds. :)

Rincewind42
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Re: Higher fee index fund or lower fee actively managed fund for 403(b)

Post by Rincewind42 » Fri Oct 12, 2018 9:05 am

Thanks folks. To respond to krow - we have others, such as Valic, Voya, and MetLife, but all of their offerings are significantly worse in terms of costs. The Credit Union folks told me they'll be switching to a new administrator for their offerings come next year, so maybe that 0.9 management fee will come down a bit. I work in Florida by the way - not sure if the state has a 457 or not, but I should research that. My HR department has been very open to exploring other options if I do some of the legwork. And thank you, Grabiner, for the thoughts! They make perfect sense to me.

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UpsetRaptor
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Re: Higher fee index fund or lower fee actively managed fund for 403(b)

Post by UpsetRaptor » Fri Oct 12, 2018 9:16 am

Lower fee

krow36
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Re: Higher fee index fund or lower fee actively managed fund for 403(b)

Post by krow36 » Fri Oct 12, 2018 12:34 pm

BH poster EdLaFave has succeeded in getting Fidelity and Vanguard added to the 403b vendor list for Orange County School District (FL). Take a look at his blog: https://educatorsfightingforfairness.wo ... our-story/

Rincewind42
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Re: Higher fee index fund or lower fee actively managed fund for 403(b)

Post by Rincewind42 » Fri Oct 12, 2018 1:55 pm

Awesome; thanks for the link!

EdLaFave
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Re: Higher fee index fund or lower fee actively managed fund for 403(b)

Post by EdLaFave » Fri Oct 12, 2018 2:33 pm

Rincewind42 wrote:
Thu Oct 11, 2018 11:50 am
One of our vendors is a local credit union and among their options is Vanguard Index Total Stock Market. The combined expense ratio + mgmt/admin fees is 0.94%

The other vendor is American Century Investments. I feel like I could probably choose the Government Bond Fund at a 0.47% expense ratio
1) It might be worthwhile to list all of your vendors (so far: credit union, American Century, Valic, Voya, and MetLife). Sometimes a seemingly awful vendor has a well hidden plan that is excellent. For instance Security Benefit offers NEA DirectInvest which is awesome...I documented it here. So if you're lucky, we might be able to spot something you may have missed?

2) If you don't have any great vendors, I recommend pushing to have Vanguard and/or Fidelity added to the list. This is an achievable objective and as Krow pointed out (thanks!) I was successful in my local district of OCPS (FL). I make myself fully available to help anybody who wants to work towards this goal.

3) Given the two choices you presented, I think American Century Investments is the clear winner because like you said, it has lower costs and you have the flexibility to make your other accounts more aggressive to account for holding bonds in the 403b.

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htdrag11
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Re: Higher fee index fund or lower fee actively managed fund for 403(b)

Post by htdrag11 » Fri Oct 12, 2018 2:47 pm

OP, did you try this tool to model the differences?

https://www.dinkytown.net/java/compare- ... -fees.html

Rincewind42
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Re: Higher fee index fund or lower fee actively managed fund for 403(b)

Post by Rincewind42 » Sat Oct 13, 2018 5:31 pm

Thanks for the calculator link. That'll be helpful in a report I'm putting together for HR.

To answer your questions Ed, that's the full list of our vendors. I've looked at each of their offerings and there's no sweet spots hidden, other than the ones I listed. The credit union will be switching to a new administrator, and I've put our rep there on notice that they're out of line with our current low-cost offering, so we'll see if they come in lower. I've also found some sister colleges in the region that use Fidelity, so I have some hope that once open enrollment season is done and things are a bit calmer in HR, I'll be able to get them added to the vendor list.

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