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ScottO

Best 457 Providers Available to California Employees?

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These are the options currently available to employees at our district:

  1. EBSG
  2. VALIC
  3. CalSTRS Pension2

Of the three, I use CalSTRS Pension2, but I'm looking for better options. Do you have any suggestions? Fidelity? Vanguard? Do you know the requirements for attracting those vendors? I've seen asset minimums mentioned in other threads.  I'd like to know how to approach my employer to add better choices.

 

Here's my current setup:

CalSTRS Pension 2 allocation 10% VTSMX, 90% SDBA

SDBA allocation 54% VTSAX, 36% VTIAX, 7% VBTLX, 3% VTABX

Things I don't like:

  • The .25% additional administrative fee.
  • The complexity of utilizing the self-directed brokerage account... I need to maintain a 95%/5% balance between Pension2/SDBA.
  • I had to call TD Ameritrade to set up a systematic mutual fund purchase(one time fee to set up, fee every time it is modified).
  • I pay an additional $50 annually for the SDBA, but have access to admiral class Vanguard funds and a ton of other mutual fund options.
  • I have to manually transfer funds from Pension2 to the SDBA each month prior to the systematic purchase.

It's really hard for me to advocate for a vendor with additional costs and complexity, so I'm hoping there's an easier option somewhere out there. Thanks for reading.

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Sorry but I don’t have any firsthand experience adding Vanguard or Fidelity to a vendor list. Have you talked to Vanguard or Fidelity? I know Fidelity does 457 plans but I’m not sure about Vanguard. Are either of those vendors on the district's 403b vendor list?

It’s usually a good idea to consider all your different retirement accounts as one, and not worry about having your desired asset allocation in each account. You could forget about the SDBA with its extra fees, and just use the Total Stock Market fund with a total fee of 0.27%. Assuming you are contributing to a 403b account as well, you could put your fixed income and international stock funds there.

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I've read about the "whole portfolio" approach to allocation: https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts

I see the point of it, but it's convenient to keep the same allocation in case we stop contributing to a particular account. This year we're uncertain about our income, so we may not contribute to all of the accounts we contributed to last year - 403b, 403b, 401a, 457, Rira, Rira, Taxable. I do like the idea of fixed income investments(bonds) in the Roth IRAs through, just in case they are needed as emergency funds.

This year we're going to try to maintain contributing the max to the 457 and 403b. The 457 is much more attractive due to the withdrawal rules.

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2 hours ago, ScottO said:

I do like the idea of fixed income investments(bonds) in the Roth IRAs through, just in case they are needed as emergency funds.

Because you can use your Roth IRA as an emergency fund by withdrawing your contributions without any tax consequences, that shouldn't influence whether you have equity or fixed income in the Roth IRA. You can sell either, without tax consequence. It is usually recommended that equities be used in the Roth IRA because their growth is greater than that of fixed income. That growth will never be taxed again. Your fixed income should ideally be in your 403b or 457.

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On 12/13/2019 at 3:20 PM, ScottO said:

Do you have any suggestions? Fidelity? Vanguard?

I don't believe Vanguard offers a 457b, which is why Fidelity is clearly the best 457b in the nation.

On 12/18/2019 at 12:32 PM, ScottO said:

I see the point of it, but it's convenient to keep the same allocation in case we stop contributing to a particular account.

I'm not sure how you're defining convenient in this context, but keeping the same allocation in every account is unnecessary and leads to additional complexity and fees.

If you were to stop contributing to one account and its allocation falls out of line with your overall desired allocation, then you would simply adjust new contributions to the other accounts accordingly. I have a spreadsheet that keeps track of what I have in all of my accounts and generally tells me "if I contribute an additional $A then $B of it should go to domestic stock and $C of it should go to international stock." It is really easy.

On 12/18/2019 at 12:32 PM, ScottO said:

I do like the idea of fixed income investments(bonds) in the Roth IRAs through, just in case they are needed as emergency funds.

This approach is very likely sub-optimal in terms of taxation. You want your assets with the highest expected returns to be in accounts with the lowest tax liability (i.e. your Roth account).

Ideally your Roth IRA would have at least 2x what you'd want for an emergency fund. That would allow you to hold stock in a Roth and even in a huge crash (50%) you'd still have the necessary money available in your Roth IRA. In that case you could hold your bonds in another account like a Traditional IRA and if you ever removed stock from your Roth IRA you could simultaneously exchange bonds in the Traditional IRA for stocks, so it is as if you're selling bonds.

However, the idea that you should hold bonds for your emergency fund is another game of mental accounting that gets you into trouble. Your portfolio should have an overall percentage of bonds such that you don't do something foolish and you can sleep at night. That percentage should be constant. If you only sold bonds during an emergency then you'd be making your portfolio more risky in a time of emergency. That isn't how asset allocation should be handled.

Also, I would be extremely hesitant to give up tax-advantaged space for an emergency fund. I haven't done the math, but I'd be far more inclined to diligently tax loss harvest in my taxable account and later on be able to apply those losses to selling taxable shares to cover an emergency or even sell the most recently purchased taxable shares (i.e. shares with minimal gains or potentially shares with a loss) to cover an emergency. I haven't done the math, but my intuition suggests that is optimal.

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ScottO:

Just reading this now, but if it isn't too late:  Why do you feel compelled to use the self-directed option in Calstrs Pension2?  I no longer have a Pension2 account, but as I recall they offer a substantial selection of low cost options, including many Vanguard funds.  I can't understand why the added cost and complexity of a self-directed brokerage window would be desirable in this case.   

Though Pension2 is imperfect and it would be nice to get rid of that .25% fee, it is one of the better 457 offerings available.  

PS:  I envy your access to Pension2 in a 457 account.  My district has a good selection of 403b offerings, but we are stuck with only the high-priced (most funds end up near 1.00% annually once their vig is included) Nationwide plan on the 457 side. 

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Alright, so Fidelity sounds like the best game in town for a 457 👍

 

Here's a look at all my holdings. Currently I don't feel too far from optimal in terms of asset allocation across accounts... (see attachment below)

assetallocation.jpg.d8affa468b591b11f5439ac196724091.jpg

Since all the investments are in Vanguard funds, the only fee that was really bugging me was the .25% extra I pay for Pension2's administrative cost. The taxable account is an outlier that increases our stock allocation, but we aren't always contributing to it, so other accounts will outgrow it as a result of regular contributions. The majority of the management work is automated aside from transferring to the SDBA each month. So I'm probably 91% stock/9% bonds right now. My wife also has a 403(Fidelity), 401a(Fidelity) and a Roth IRA(Vanguard)... so many accounts...

I think I did the SDBA just to have the (mostly) mirrored allocation across accounts. VTIAX wasn't available through Pension2, but it also opens up a ton more mutual funds. I've maxed the 403 for four years, the 457 for three years and Roth IRA for three years.

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I'm pretty sure you are paying an additional fee to use the self-directed option ($50 year?  I'm not sure).  It's true that Fidelity, so long as you limit yourself to index funds, would cost a bit less: they charge just $20/year custodial fee, on any amount of assets.  But the main key to success is what you are doing: consistently investing substantial amounts.  You can fuss over the details if you want, but you'll be fine with your existing set up. Fidelity, Vanguard, Pension2, index funds, maxing out... that is an excellent recipe.

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On 12/18/2019 at 9:32 AM, ScottO said:

I do like the idea of fixed income investments(bonds) in the Roth IRAs through, just in case they are needed as emergency funds.

I don't see the logic of all fixed income in the Roth IRAs. There is no advantage if you make a withdrawal of your contributions. It doesn't matter whether you withdraw fixed income or stocks. There is no tax due in either case. You are passing up having the maximum tax-free growth in your Roth IRAs. 

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3 hours ago, krow36 said:

I don't see the logic of all fixed income in the Roth IRAs. There is no advantage if you make a withdrawal of your contributions. It doesn't matter whether you withdraw fixed income or stocks. There is no tax due in either case. You are passing up having the maximum tax-free growth in your Roth IRAs. 

Roth IRA usage/allocation is a separate topic than what I originally wanted to discuss, but for some people the liquidity of a Roth IRA is important and could be what gets someone started investing. We all have different investment goals, time horizons, financial situations, etc. Yes, there are drawbacks to the idea of not maximizing the tax benefit on earnings and overall opportunity cost, but if you can make someone feel comfortable enough to get in the habit of regularly putting money into an account and watching that money grow(even at a lower rate of return) that's good. Perhaps they rebalance later if their financial situation changes and the idea of using the account as an emergency fund is no longer applicable(or proven to be incredibly disadvantageous on a forum they are a member of 😋.)

https://www.thesimpledollar.com/investing/when-and-how-to-use-your-roth-ira-as-an-emergency-fund/

https://www.investopedia.com/articles/personal-finance/040714/how-use-your-roth-ira-emergency-fund.asp

https://www.nerdwallet.com/blog/investing/use-roth-ira-emergency-fund/

https://www.bogleheads.org/wiki/Roth_IRA_as_an_emergency_fund

https://www.fool.com/news/2004/10/14/roth-ira-as-emergency-fund.aspx 

We have an emergency fund with 3-6 months expenses in the bank earning 1.65% APY, but the idea that some of that could be used toward a Roth contribution is something to think about instead of the 2020 contribution being $0. Bogleheads says if you're going to do it, don't consider the emergency fund a part of your overall asset allocation. It seems like it just becomes a matter of where your emergency fund is located/housed. I could also fund our Roths with taxable money - play a shell game to fund all available retirement accounts without having the earned income.

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17 minutes ago, ScottO said:

Roth IRA usage/allocation is a separate topic than what I originally wanted to discuss, but for some people the liquidity of a Roth IRA is important and could be what gets someone started investing. We all have different investment goals, time horizons, financial situations, etc. Yes, there are drawbacks to the idea of not maximizing the tax benefit on earnings and overall opportunity cost, but if you can make someone feel comfortable enough to get in the habit of regularly putting money into an account and watching that money grow(even at a lower rate of return) that's good. Perhaps they rebalance later if their financial situation changes and the idea of using the account as an emergency fund is no longer applicable(or proven to be incredibly disadvantageous on a forum they are a member of 😋.)

I believe you're missing the point.

Let's just assume it is a good idea to treat your Roth IRA as a savings account. It is still sub-optimal to hold your bond allocation in your Roth IRA. Your asset with the highest expected performance should be put in the Roth IRA because the (hopefully) larger growth will be tax free.

I would argue vigorously against treating certain accounts differently than others (like imagining that your bonds represent an emergency fund), but again, let's put that argument aside. If you wanted to only use bonds for your emergency withdrawals then it is easy:

1. Hold bonds in some other account (say your Traditional 401k).

2. Hold stocks in your Roth IRA.

3. Sell 10k of stocks in your Roth IRA.

4. Exchange 10k of bonds in your other account for stocks.

You've effectively sold 10k worth of bonds and your Roth IRA is enjoying the benefit of containing your highest expected performer.

17 minutes ago, ScottO said:

Bogleheads says if you're going to do it, don't consider the emergency fund a part of your overall asset allocation.

Again, this is mental accounting that just doesn't hold up to math. Your portfolio is the summation of all of your accounts and it should match your expected risk tolerance. Anything you do to get away from that is a mistake.

The only potential exception I'd make to this is if your portfolio is so small that unexpected expenses combined with a downturn really would wipe you out. But in that case your ability to take risk is so small that your portfolio should effectively be all bonds...which would mean you aren't jumping through the mental hoops that the "bucket" system demands.

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I get it finally that your want FI in your Roth IRA because if it was equity, it might not be  there in a downturn. You have a larger taxable account than a Roth IRA. I think your taxable account should probably be your emergency-emergency account, rather than the Roth IRA. If you didn't have the taxable account, I can see why you might want less volatile funds in the Roth IRA. I guess in the long run, it's not going to make a lot of difference. I suspect that in the future you will switch to at least some equity in your Roth IRA accounts as your accounts grow. 

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