At what point to NOT contribute to a retirement account due to high fees-403(b)

[wp746911]

My wife has a 403(b) with work (among other state retirement accounts). She is saving ~100k/year towards retirement (just her savings). In digging through the paperwork for the 403(b)- while it appears to have reasonable funds (vanguard wellington, vanguard lifestrategy) in addition to the mutual fund expenses they are tacking on another ~1% in fees (Valic is the company). This isn't a huge account but she is putting 18k in it each year. It annoys me so much to pay the fees but our options appear to either be to 1) not contribute to the 403(b) and just pay 40% tax on that amount of her income then invest it post-tax myself or 2)pay the 1% fee (plus the mutual fund fee) and deal with it.

 

Thoughts?

[Craigy]

There is a lot of value to having post tax dollars in your pocket, or in your account, without restrictions or subject to future tax or penalties.  If you ever need that money, it's there for you.  With tax-deferred accounts, eventually somebody has to pay the tax on that money, whether it's you in retirement or your heirs when they receive it.  It's a lot nicer to inherit cash than to inherit taxable income.

However a 40% marginal rate would be pretty motivating.  Then again, it's only $18k.

Are you happy with the investment options in the account?  If they're quality funds like you mention with low-expense ratios it might lessen the blow, but yeah that 1% fee would really irritate me on principle.  Plus over time that's guaranteed tens or even hundreds of thousands out of your pocket.

Lot of factors to weigh but the right choice is whatever makes you and your wife happiest.

[TheGipper]

I think you keep using it. 1% fees stink, but we all switch jobs more than we realize and companys/groups switch retirement plans. Odds are strong you'll have better options in the future and you tax-deferral will be locked-in.

Have her lobby for lower fees. Can't hurt.

[litovskyassetmanagement]

wp746911 wrote:

My wife has a 403(b) with work (among other state retirement accounts). She is saving ~100k/year towards retirement (just her savings). In digging through the paperwork for the 403(b)- while it appears to have reasonable funds (vanguard wellington, vanguard lifestrategy) in addition to the mutual fund expenses they are tacking on another ~1% in fees (Valic is the company). This isn’t a huge account but she is putting 18k in it each year. It annoys me so much to pay the fees but our options appear to either be to 1) not contribute to the 403(b) and just pay 40% tax on that amount of her income then invest it post-tax myself or 2)pay the 1% fee (plus the mutual fund fee) and deal with it.

 

Thoughts?

Click to expand...

I always recommend getting together with the plan administrators and discussing how they can lower the fees.  You can show them all of the 403b and 401k excessive fee lawsuits and have them review the plan to see if they can decrease those fees.  If this is a larger group or a hospital, there is no reason to pay such high fees!  Being complacent is absolutely the worst thing to do.  I would never put up with fees like that given that there are so many other alternatives which cost significantly less and would make both the plan sponsor and the participants much happier.  I bet nobody ever looked at that plan in a long time, so this would be a perfect opportunity.

[jz]

My former boss ( ER doc ) single-handedly lobbied to lower the hospital retirement cost structure.  The options were changed to Vanguard funds. It only took one motivated employee.

[Zaphod]

jz wrote:

My former boss ( ER doc ) single-handedly lobbied to lower the hospital retirement cost structure.  The options were changed to Vanguard funds. It only took one motivated employee.

Click to expand...

Wow, thats awesome.

[The White Coat Investor]

wp746911 wrote:

My wife has a 403(b) with work (among other state retirement accounts). She is saving ~100k/year towards retirement (just her savings). In digging through the paperwork for the 403(b)- while it appears to have reasonable funds (vanguard wellington, vanguard lifestrategy) in addition to the mutual fund expenses they are tacking on another ~1% in fees (Valic is the company). This isn’t a huge account but she is putting 18k in it each year. It annoys me so much to pay the fees but our options appear to either be to 1) not contribute to the 403(b) and just pay 40% tax on that amount of her income then invest it post-tax myself or 2)pay the 1% fee (plus the mutual fund fee) and deal with it.

 

Thoughts?

Click to expand...

It depends. How long will the money be in the account? How much do you value the asset protection benefits? What are the odds of being able to lower the fees in the account at some point in the future.

Etc

 

But if you're stuck with it for a very long time (like most of your career) I think it's still probably worth using the 403(b) if total fees are < 2%. Once you hit that, I think you're better off in taxable.

[cscholz]

I have to agree with the WCI post above re:  asset protection.  Also, keep in mind that there comes a point (investment time horizon) when an after-tax account provides less growth potential than a qualified (pre-tax) account -- even when including taxes and when those taxes are incurred.

[Craigy]

Kon Litovsky wrote:

wp746911 wrote:

My wife has a 403(b) with work (among other state retirement accounts). She is saving ~100k/year towards retirement (just her savings). In digging through the paperwork for the 403(b)- while it appears to have reasonable funds (vanguard wellington, vanguard lifestrategy) in addition to the mutual fund expenses they are tacking on another ~1% in fees (Valic is the company). This isn’t a huge account but she is putting 18k in it each year. It annoys me so much to pay the fees but our options appear to either be to 1) not contribute to the 403(b) and just pay 40% tax on that amount of her income then invest it post-tax myself or 2)pay the 1% fee (plus the mutual fund fee) and deal with it.

 

Thoughts?

Click to expand…

I always recommend getting together with the plan administrators and discussing how they can lower the fees.  You can show them all of the 403b and 401k excessive fee lawsuits and have them review the plan to see if they can decrease those fees.  If this is a larger group or a hospital, there is no reason to pay such high fees!  Being complacent is absolutely the worst thing to do.  I would never put up with fees like that given that there are so many other alternatives which cost significantly less and would make both the plan sponsor and the participants much happier.  I bet nobody ever looked at that plan in a long time, so this would be a perfect opportunity.

Click to expand...

This.

[Craigy]

jz wrote:

My former boss ( ER doc ) single-handedly lobbied to lower the hospital retirement cost structure.  The options were changed to Vanguard funds. It only took one motivated employee.

Click to expand...

That is impressive.

Really all it takes is just one person being a squeaky wheel.  Like Kon said above, the CEO can take one look at this and figure out it's in the company's best interests.

I was the single squeaky wheel at my firm.  At first I basically asked our plan administrator in front of all the employees at our annual meeting about fees, comparison to Vanguard's fees, and then when stonewalled, what we could do to switch plan administrators to lower our fees.  That riled some feathers, might have opened the door but nothing really got moving.  Second approach was to show the most senior guy behind the bossman, with the second biggest account balance behind the bossman, how these high admin fees and shitty plan options were going to cost him hundreds of thousands over the rest of his career.  I called Vanguard and got their literature on small firm plans and costs and gave it to him.  That really got it home, and he did all my heavy lifting for me.  Next thing you knew we had a new administrator with a much lower fee, and access through Vanguard with admiral shares.  I was a newbie, only had like $10k in my account when it started, but in the end it happened by just making a little fuss and being persistent with someone with leverage.

[litovskyassetmanagement]

Craigy wrote:

jz wrote:

My former boss ( ER doc ) single-handedly lobbied to lower the hospital retirement cost structure.  The options were changed to Vanguard funds. It only took one motivated employee.

Click to expand…

That is impressive.

Really all it takes is just one person being a squeaky wheel.  Like Kon said above, the CEO can take one look at this and figure out it’s in the company’s best interests.

I was the single squeaky wheel at my firm.  At first I basically asked our plan administrator in front of all the employees at our annual meeting about fees, comparison to Vanguard’s fees, and then when stonewalled, what we could do to switch plan administrators to lower our fees.  That riled some feathers, might have opened the door but nothing really got moving.  Second approach was to show the most senior guy behind the bossman, with the second biggest account balance behind the bossman, how these high admin fees and shitty plan options were going to cost him hundreds of thousands over the rest of his career.  I called Vanguard and got their literature on small firm plans and costs and gave it to him.  That really got it home, and he did all my heavy lifting for me.  Next thing you knew we had a new administrator with a much lower fee, and access through Vanguard with admiral shares.  I was a newbie, only had like $10k in my account when it started, but in the end it happened by just making a little fuss and being persistent with someone with leverage.

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If you have a group plan, there are simpler ways to go about it.  A group can simply request a proposal from a number of firms and compare those, and pick the best one (or simply start with the best one that fits their specific needs). With a hierarchical structure it is much more difficult. In most cases, record-keepers call the shots (which shouldn't be the case).  An ERISA 3(38) fiduciary should call the shots, and this would bypass the entire management structure to deliver the best investments at the lowest cost.  An ERISA 3(38) can also work with the plan sponsor do determine whether a record-keeper should be replaced (especially if it is a record-keeper that thrives on high cost funds, revenue sharing and not doing a good job for the participants, which by law they are not required to do since they are not a fiduciary).  There has to be someone at the top who is in constant contact with the plan sponsor/plan participants and who can manage the plan for the best interest of plan participants (that's a key phrase that DOL uses to describe the fiduciary responsibility of the plan sponsor).  Few plan sponsors actually go far enough to get the best plan for the plan participants, but if a flat-fee ERISA 3(38) fiduciary who believes in low cost index funds takes control of the investment decisions and advocates for removing of all administrative/advisory asset-based fees from the plan in favor of fixed fees paid by the plan sponsor directly (rather than taken out of plan assets), this can go a long way to help all plan participants save significant amount of money.

For some reason I rarely see 3(38) fiduciaries in charge for larger plans because plan sponsors don't want to relinquish control, yet they are not doing all that can be done to lower plan fees.  Smaller plans pay some of the highest AUM fees vs. larger plans, but that does not mean you can't get a plan just as good as large companies can, but this requires participants to agitate for changes, and use all means at their disposal, especially if they have a lot of money invested.  Somewhere out there there is an investment committee, or someone who is responsible for making investment decisions.  If a record-keeper is in charge, this is a clear fiduciary violation by the plan sponsor, who should have an official investment policy regarding plan investments.  If there is no committee, there has to be a person who can direct the record-keeper to make investment changes.  Ideally, there should be an investment committee comprised of plan participants because if nobody is in charge, that's a big liability for the plan sponsor, and that's why it is a lot more cost-effective to hire an ERISA 3(38) whose philosophy aligns well with that of the committee.

[WallStreetPhysician]

wp746911 wrote:

My wife has a 403(b) with work (among other state retirement accounts). She is saving ~100k/year towards retirement (just her savings). In digging through the paperwork for the 403(b)- while it appears to have reasonable funds (vanguard wellington, vanguard lifestrategy) in addition to the mutual fund expenses they are tacking on another ~1% in fees (Valic is the company). This isn’t a huge account but she is putting 18k in it each year. It annoys me so much to pay the fees but our options appear to either be to 1) not contribute to the 403(b) and just pay 40% tax on that amount of her income then invest it post-tax myself or 2)pay the 1% fee (plus the mutual fund fee) and deal with it.

 

Thoughts?

Click to expand...

The fees suck, but it's still beneficial to invest in the 403(b) even with the higher fees. I ran the numbers in a spreadsheet I made (I've been thinking about related questions as well), and the benefit is less than if you could invest in index funds, but it's still better than taxable.

Of course, if she can lobby for lower-fee options, then you get the best of both worlds.

-WSP

Edit: I thought fees were currently 1% per year. If they are 2% a year, it actually becomes detrimental to invest in the 401(k) versus keeping it in taxable. Keep on lobbying.

[wp746911]

Thanks for all your feedback! I met with the advisor from VALIC yesterday. We discussed fees- in her current mutual fund (some Valic mutual fund) she is paying around 0.8% fees plus VALIC has some overall management fee of 1% on top of that- so she is around 1.8% total. Getting pretty high and I told him that. He said they are switching to a 'mutual fund platform' in the next few months so that should reduce our fees. I think by changing to a more efficient fund and with the change in platforms we will get closer to 1% in total fees which is more palatable (although still annoys me why in this day and age we pay such high fees). Of course, then he proceeded to tell me about how he doesn't really like my vanguard target 2040 fund that I have in another retirement account with the state and about high yield MLP bonds I should be buying and how they have some great actively managed funds and how I should invest in sector specific funds... Ugh.

[litovskyassetmanagement]

wp746911 wrote:

Thanks for all your feedback! I met with the advisor from VALIC yesterday. We discussed fees- in her current mutual fund (some Valic mutual fund) she is paying around 0.8% fees plus VALIC has some overall management fee of 1% on top of that- so she is around 1.8% total. Getting pretty high and I told him that. He said they are switching to a ‘mutual fund platform’ in the next few months so that should reduce our fees. I think by changing to a more efficient fund and with the change in platforms we will get closer to 1% in total fees which is more palatable (although still annoys me why in this day and age we pay such high fees). Of course, then he proceeded to tell me about how he doesn’t really like my vanguard target 2040 fund that I have in another retirement account with the state and about high yield MLP bonds I should be buying and how they have some great actively managed funds and how I should invest in sector specific funds… Ugh.

Click to expand...

Therein lies the problem.  A practice hires a broker, and broker's 'advisers' (who are not fiduciaries in any sense) are selling broker's funds to participants, and are otherwise not acting in the best interest of plan participants. This is a pretty significant breach of fiduciary duty by the plan sponsor, and if a participant wants to sue, they will find plenty attorneys willing to do that because everything that can be done wrong is done wrong in this case.  Plan sponsor is wide open for lawsuits here because they are not only NOT supervising brokers' employees (aka 'advisers') selling products to participants (a fiduciary breach), but they are not supervising the entire arrangement where such practices are occurring (using a broker, not an ERISA fiduciary).  So plan sponsor is ultimately responsible for bad advice offered by non-fiduciaries/brokers to plan participants, and if participants follow such advice, plan sponsor is ultimately responsible. So going from 1.8% to 1% is still not going to help if other fiduciary breaches (described above) are occurring. That's why even for a tiny plan it makes sense to follow a prudent fiduciary process, so that the buck stops with the named fiduciary responsible for investment selection and management, and so that the plan sponsor can protect themselves from any potential legal liability (which is easy to do if you offer the best plan possible, yet even in that case having a solid process in place to shield plan sponsor from fiduciary liability related to investments is a good idea).