I’m hard on myself. I get frustrated when I make a decision that I learn later could have been a better one. As I’ve gotten older I have grown a lot as a person and I’m better about evaluating the situation, taking what I can learn from it, and moving forward. A recent situation has played out in my investing in my pre-tax accounts. I’ve been using a 403 (b) and have discovered I could have been investing in my state’s 457 (b) deferred compensation program. This eliminates a third party, commission based individual/ institution, and comes with considerably lower fees and gives me the options of funds I’ve been searching for.
My financial journey has been full of decisions and research. After fully funding my ROTH IRA for years I finally had more discretionary income to invest so I turned my focus on 403 (b)’s in 2016, the public sector’s pre-tax version of the 401 (k). I say version with caution because do not be mistaken the 401 (k) and the 403 (b) are not the same.
Here is only a short list of numerous resources that exist that you may want to look at to expand your own knowledge of this investment vehicle.
Does the 457(b) Beat the 403(b)?
401 (k) and 403 (b) Plans: Knowing the Difference from Investopia
New York Times Article: Think Your Retirement is Bad? Talk to a Teacher
I went to my school’s payroll and requested more information on my investment options. The employees in payroll stated they were not financial experts and handed me a list of eight companies I could contact with my questions. Some of those companies on that list were insurance companies and some of them were clear cut financial institutions. I had been doing the bulk of my ROTH IRA investments with Vanguard and Fidelity, but their names were no where on the list.
I set up an appointment with whom I thought was the best of the individuals and companies on the list that payroll had given me. The financial professional presented several options and we decided upon a broad based fund that tracks domestic or US large businesses. (This fund had large successful companies which had names I was familiar with and had good track records.) The caveat was the fund came with a handful of fees I was unfamiliar with and my ROTH IRA did not have. Load fees and administration fees were two of those costs that I had never paid before. A load fee is a percentage of money that is taken out and given to the investment institution to pay costs of investing money. My father had advised me never to get into funds that have a load fee. This particular fund had a 5.5% Front End Sales Load fee. Every $100 I put in $5.50 would be deducted. It may not sound like a lot but fees add up very quickly when you’re looking over a career or a lifetime of investment. An administration fee is a yearly fee that is taken out directly from my account once a year. When I asked about a fund that didn’t have a load fee the investment professional said the other funds had higher expense ratios and other fees that wouldn’t be advantageous. Hence, I did the best I could with the knowledge I had at the time.
Fast forward five years later, I had an online professional development session on a Saturday afternoon. The topic was 403 (b)’s for teacher retirement and Dan Otter from 403bwise was speaking. He is an educator and financial literacy advocate and shared that there is growing momentum to change, not only awareness and education for teachers on their investment options, but within the 403 (b) options as well. Within this one hour seminar he also shared about a different type of pre-tax vehicle public employees could choose. The 457 (b) can be set up by financial institutions and some individual states have been offering low cost investment options through deferred compensation programs. A 457 (b) has similar elements to a 403 (b), but yet has it’s own unique principals. (I’ll tackle the differences and similarities in a follow up post soon.) He happened to mention my state as one with decent offerings. As soon as the professional development was over I took to the internet to discover that a program I had once thought was limited to fire fighters and police was open to all public employees in my state. This deferred compensation program did indeed have the check list of items I’d been looking for all along. A big shout out to Dan Otter for all his advocacy and sharing of his knowledge. Thank you, Dan!
The following week after several hours of research I stopped my 403 (b) contributions and enrolled in my state’s 457 (b) deferred compensation program. I believe I this personal move could save me potentially and conservatively $5,000-$7,000, but could also be substantially more depending on numerous variables including fund performance, the amount I invest, and how long I have the account open. Below is the email I sent to my initial 403 (b) financial planner.
Subject: Stopping my 403 (b) Contributions
Hi XXXXX,
This is XXXXX, I work with XXXXX at XXXXXXXXX. You helped me open a 403 (b) a handful of years ago now. In my endless research and learning of investing and investing vehicles, I recently discovered that public school teachers can contribute to the supplemental 457 (b) Ohio Deferred Compensation program. You and I had initially spoken about a Roth 403 (b) which XXXXXXXX still does not allow. We also talked about low fee investments and Vanguard or Fidelity funds. I don’t remember us discussing this option of the Ohio Deferred Compensation program and I’m not sure how this slipped through my initial research years ago, but am happy to have found it now.
Here’s the link with Investment Choices and Fund Performance if you’re curious what they have to offer. https://www.ohio457.org/investments
I will be contacting payroll at XXXXXXX to stop my contributions to XXXX here in the next few days. I wasn’t sure if there was anything else I needed to do on your end to stop my contributions. The reasons I am switching to the 457 (b) Ohio Deferred Compensation Plan is the following:
1) I can finally invest directly in funds operated by Vanguard and/ or Fidelity. (I have most of my individual Roth IRA invested in these companies and feel very comfortable with their products.)
2) The expense ratio is .50% lower or more than XXXX .85% . If I decide to go with Vanguard’s Institutional Index Fund Institutional Shares (VINIX) actually has a .02% expense ratio.
3) There is no load fee. Only a .0014 or .14% admin fee (which will fluctuate with my rising balance, but is capped) but seems extremely reasonable.
4) If I manage to retire before I’m 59 1/2 I’ll have access to this account penalty free only paying the obvious taxes on the money at the time of withdrawal.
I’m assuming if I no longer put any additional funds into XXXX it will continue to grow with returns and I’ll still have the $30 maintenance fee coming out every year and then when I retire I can flip the money into an individual traditional IRA or I may choose to keep it in this 403 (b).
Please let me know if my previous paragraph above is correct about the XXXX and current 403 (b) fund. I appreciate the knowledge and help you’ve been over the last few years. I believe the Ohio Deferred Compensation program will allow me more opportunities.
Thanks again. Please respond with letting me know if there is anything I need to do with stopping my contributions to XXXX.
Have a great rest of the week. Should be good golfing weather.
XXXXXXXXXXXX
XXXXXXXXXXXXX
I did get a very short reply from my financial planner that simply said…
“You are correct.”
~Quiet Turtle
*Disclaimer: The information provided in this blog and in this website does not and is not intended to constitute financial advice; instead all information, content, and materials presented are for general informational and educational purposes only.
Quest for Fi 