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Mooney_Lupin

Considering move from AXA

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I currently have a 403b account with AXA via my school district.  Your site has helped me realize that I am paying for one of the more expensive annuities out there!  Yikes!  I've had the 403b account for about 15 years and I've seen very little growth beyond my own contributions (I feel like it's nothing more than a money market account!).  Now that I'm almost 40, I am really beginning to look more closely at my retirement account options.

I was wondering, given my choices, which company would offer me the cheapest option with "best" returns (i.e. mutual funds).  Here's a link to the providers my district offers - https://www.tsacg.com/individual/plan-sponsor/south-carolina/greenville-county-school-district/  Any advice would be appreciated.

If none of these companies are any better, do you recommend stopping payments to the 403b and opening a Roth IRA with Vanguard or another reputable company?

Thanks for your help and guidance!  I'm grateful for your site and resources.  They have been very eye opening!

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19 hours ago, Mooney_Lupin said:

I was wondering, given my choices, which company would offer me the cheapest option with "best" returns

I don't have a detailed breakdown of every vendor on that list, but I'm pretty confident that none of them are good.

On the blog portion of my site, I wrote about adding Vanguard and Fidelity to the OCPS (FL) list of approved vendors. I'd encourage you to follow in my footsteps.

In the meantime, does your district not allow you to contribute to a 457b plan? If not, you should push them to allow that.

19 hours ago, Mooney_Lupin said:

do you recommend stopping payments to the 403b and opening a Roth IRA with Vanguard

I'll never understand why so many people seem to think a Roth IRA is the fallback to a Traditional 403b.

The decision to invest in a Traditional or a Roth should be made independently of whether it is in a 403b or an IRA.

It is almost always the best decision to max out an IRA before contributing to an employer sponsored plan like a 403b. The reason for this is that IRAs are essentially guaranteed to be lower cost, have more options, and give you total control (i.e. the employer can't wake up one morning and prevent you from using you preferred financial institution). A couple rare cases where you might give preference to the employer sponsored account:

  1. Suppose you're saving enough to max out an IRA and still contribute to an employer sponsored plan. Further suppose the employer sponsored plan reduces/waives fees if you exceed a specific balance (like the $35/year admin fee NEA DirectInvest waives when you get 50k). In that case you're already guaranteed to pay the "fixed" fees (like the $20/year fee Fidelity charges) associated with the employer sponsored plan (since even if you maxed an IRA, you'd still be putting money in the plan). Therefore, it may be in your best interest to contribute everything to the employer sponsored plan to get the fee reduction and then go back to maxing out the IRA.
  2. If you expect to do backdoor Roth IRAs some day then putting money in a Traditional IRA account can reduce the effectiveness of a backdoor Roth IRA.
  3. Maybe other corner cases exist?

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Thanks for your response, Ed.  It's unclear if I have access to a 457.  The webpage linked above mentions the 457, but then the list of companies specifically says "403b."  I'll reach out to my district office and see what I can find out.  The 457 sounds like the better option for sure.  If that fails I will look into the Traditional Roth route.

Of course it's ultimately my fault for being so uneducated on these things, but you would think a district would work harder to provide its employees with education on these topics and access to better financial options.  I didn't even know there was such a thing as a 457 until you mentioned it.

Thanks for your help and guidance!

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Please ask questions.

A 457b is virtually identical to a 403b. They have slightly different rules, for instance it is easier to pull money out a 457b. However, it is generally wise look at fees when choosing between a 457b and a 403b and use the slight differences between account types as a tie breaker.

In 2020 you can contribute $19,500 to each account, more if you're old enough and therefore qualify for "catch up" contributions.

29 minutes ago, Mooney_Lupin said:

The 457 sounds like the better option for sure.

Well, you might have better approved vendors in your 457b, but your district may not allow you to have a 457b.

29 minutes ago, Mooney_Lupin said:

I will look into the Traditional Roth route.

I'm not sure what you mean by that, but here is some info to get you started.

Tax advantaged accounts (IRAs, 401ks, 403bs, 457bs, etc) are allowed to grow tax free (i.e. distributions/dividends aren't taxed and you can exchange funds with profit without paying tax). However, when and how tax is paid is determined by whether it is Roth or Traditional. Taxable accounts on the other hand do not receive this tax benefit at all.

If you put $1 into a Roth account, it is tax right away and then grows tax free. After 30 years it looks like this:

$1 * (1 - Highest Marginal Tax Rate When You Earned The Dollar) * (1 + Average Yearly Return) ^ 30 years

If you put $1 into a Traditional account, it grows tax free and isn't taxed until you withdraw it. After 30 years it looks like this:

$1 * (1 + Average Yearly Return) ^ 30 years * (1 - Marginal Tax Bracket The Withdrawn Dollar Falls Into During Retirement)

As you can see these equations can be reduced to:

Roth = (1- Highest Marginal Tax Rate When You Earned The Dollar)

Traditional = (1 - Marginal Tax Bracket The Withdrawn Dollar Falls Into During Retirement)

So the end goal is to have enough money in traditional such that every dollar you withdraw falls into a tax bracket that is less than or equal to your highest marginal tax rate when you were working. As long as you can do that, and most people easily can, then you'll get a larger tax benefit from traditional than roth.

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On 1/31/2020 at 11:02 AM, Mooney_Lupin said:

  If that fails I will look into the Traditional Roth route.

Not to nitpick, because you probably just mistyped, but there is no Traditional Roth.

Traditional account means deferring taxes until later, such as: traditional IRA, 403(b), 401(k).

Roth refers to accounts where you pay the taxes before the money even hits your direct deposit, such as:  Roth IRA, Roth 401(k), Roth 403(b).

Which is better for you means comparing your current marginal tax bracket (known) vs. future tax bracket in retirement (unknown).  So the exact right answer is impossible to know for sure.  I agree with Ed, that for most people in their peak earning years, the traditional route will work out best in most cases.  The case where Roth is likely better is if you are in the 12% tax bracket in the year you are contributing (mostly new teachers, low on the salary scale).

 

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Thanks for all the help with finding the best way to move from the 403b.

It does look like I qualify for a 457b.  Here's the main page from my state (employer) and what they offer.  https://southcarolinadcp.empower-retirement.com/participant/#/login

Here's a breakdown of the plans being offered - https://southcarolinadcp.empower-retirement.com/participant/#/articles/SouthCarolina/investmentInformation

Finally, here's a performance chart for the various plans - https://docs.retirementpartner.com/ioag/98955-02_IOAG.pdf

 

It's a lot to choose from, but I'm glad to see some of the companies recommended here.  Given the choices, I'm leaning toward the Large Cap Vanguard account (fees look low with pretty good returns).

 

I'm kind of lost, so I would appreciate thoughts on what's offered above.  Hopefully you guys know something or will see something in the various plans that I'm missing.

 

Thanks again for your help and guidance!

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The SC state 457 offers some excellent fund choices. The Vanguard Institutional Index is an excellent, super low-cost S&P 500 index fund (ER = 0.02%). If you can put your bond fund allocation in another account, using only VIIIX would work. The target retirement funds with an ER of only 0.10% are also a great choice. These would be totally diversified and automatically rebalanced. You can pick one that suits your desired asset allocation (stock to bond ratio), rather than using the funds date (which reflects a retirement date).

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You are not allowed to transfer your AXA 403b account balance to your SC state 457 account (to-be) unless the 403b account was sponsored by a previous school district (not your current district). You CAN transfer your balance to another vendor that is on your district’s 403b vendor list. I see mostly vendors that sell high cost (mostly annuity) plans on your district's list. So the best solution is for you and your colleagues to get a low-cost vendor (Vanguard, Fidelity or Aspire) added to the district’s 403b vendor list. This can be done but will take some time and effort.

Is your AXA 403b account a variable annuity using sub accounts, or a fixed annuity with a low interest rate, say 2%? Is it the Equi-vest Series 201? If so, there is no surrender fee because you have had the account for more than 12 years.

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Thanks for the info and assurance regarding these new investment opportunities.

I was curious about the 403b rolling into the 457b. I am with the same school district that I began my 403b with. The IRS rollover chart indicates that a rollover is possible, but with the caveat that they "must have separate accounts." Does that refer to what you mention above about previous employer?

Please understand that I'm not challenging your expertise, just looking for some clarification on what you said vs the IRS chart.

It will be a bummer if I can't roll over, but in the long run it's better to switch.

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No problem about asking questions about anything anybody says on the forum! We love questions, and we don't always agree. I think I am correct about moving a 403b from your current employer into a 457 also with your current employer. And yes that chart indicates it's possible. But I think the details were omitted from the chart.

The reference to a separate account is a requirement of the receiving plan. The 403b balance is not turned into a 457 balance, but is still considered a 403b account within your 457 account.

This discussion has come up before in the forum. The best way to find out for sure is to call the 457 plan and ask. That settled it for the NY state 457 plan.

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I'm back with a couple more questions.

Looking at the enrollment form, it appears that I can mix and match things.  Is this correct?  If so, how would that work if one percentage is with Fidelity and another is with TIAA, etc.?  Are these lumped together in one big fund not directly controlled by TIAA, Fidelity, etc?  Would I end up paying more in fees this way?

I'm not opposed to a timed/target fund, but I do like the idea of choosing and piecing together my own investments.  Since I'm pretty new to all of this and considering I'm almost 40, what would be the ideal build if you pieced together these various funds?  I do realize that I would need to adjust these percentages over time as I get closer to retirement.

Hopefully I'm understanding this enough and my questions make sense.

Thanks again for all of your help!

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I'm waiting to hear back, but my school district's website has a link to the State's 457 plans linked above and indicates it's an option for us as employees.  All signs point to the fact that I am eligible.

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The ideal we recommend on this forum and on the Boglehead forum is a 3 or 4 fund portfolio, using Total Market Index funds. I will assume an asset allocation that you can change, to illustrate what the weighted expense ratio could be.

Vanguard Institutional Index Instl Plus, VIIIX, ER 0.02%

TIAA CREF Small Cap Blend Index Institutional, TISBX, ER 0.06%

American Funds Europacific Growth R6, RERGX, ER 0.49%

Baird Aggregate Bond Inst, BAGIX, ER 0.30%

VIIIX is an S&P 500 Index fund that covers large cap stocks and some mid cap stocks and covers about 80% of what a Total Stock Market Index fund covers. VIIIX is super low-cost and should be the largest percentage fund in the portfolio. Int’l stocks TISBX could about be about 20% of total stocks.

To compare the cost of using separate funds with that of the target retirement fund, I calculated the weighted expense ratio of such a portfolio.

Total stocks 80%

Of total stocks, US stocks =60%

Of total stocks,  International stocks = 20%  (.2*.0049 = .001)

Of US stocks, 80% large cap (VIIIX) = 48% (.48*.0002 = .0001)

Of US stocks, 20% small cap (TISBX) = 12% (.12*.0006 = .0001)

Bonds = 20% (.2*.003 = .0006)

Adding up the products gives a weighted ER of .0016 = 0.16%

The ER of the target retirement funds is 0.10%. So you could go with individual funds, or choose a target retirement fund of your choosing, and there would be a very modest difference in expense ratio. If it was my choice, I think I would choose one of the target retirement funds that matched my desired stock/bond ratio.

No matter which choice you make, there is an administration fee:

The link below is out of date (2009). Ed's link in post following this, has current the

fees.

https://www.chacity.org/images/FCKUploads/file/Careers/Employee Forms/401k-457 Getting Started.pdf 

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