Warm Yucatan greetings to all my trillionaire readers! This week I was poking around on my Personal Capital account and found something that I have to share with the world. As most of you know, I’m usually a pretty easy-going guy, but there is one thing that really spikes my blood pressure. Any guesses? Yeap, you nailed it–investment fees. I especially hate the fees found in the 403b and 457 plans offered to most educators. If your district provides you with solid cost-effective options, consider yourself fortunate. If you have fee-bloated plans (or have no idea what kind of plans you have), keep reading to learn how fees are hazardous to your wealth.
Here are the referral links for the credit cards we currently use:
Our Fees
Let’s start with what I found on my Personal Capital account. While looking under the “Planning” tab, I found an awesome option, “Retirement Fee Analyzer.” How could I resist? It’s not hard find; look for a red arrow in the picture below:
Did you find it? If not, turn in your driver’s license immediately and get someone to take you to the ophthalmologist. Okay, so here’s what I discovered about the total fees on our portfolio:
Boy oh boy, was I ever happy to see that our total fees were a puny six bips (basis points). Put another way, we pay a fee of .06% on our portfolio of $1.1 million. The total bite was $649 lost to fees. That’s like putting your hand into a tank of piranhas and expecting to lose a few fingers or possibly the whole hand. Instead, you pull your hand out and notice that your overgrown fingernails have been nibbled on. There’s no blood, bites, or cuts, and, most importantly, you still have all of your fingers.
by Quitting My Job
by Taking "Crappy" Jobs
I know what you’re thinking: “Ed, how did you get your investment fees so low?” My regular readers know that on three previous occasions (LaGrange, Statenville, and Douglas) my wife and I quit our jobs in order to move our 403b and 457 savings to our Vanguard IRAs. I realize that seems like a radical step to most people, but if you want control of your investments (and their fees), you have to take a mercenary approach. The main reason our fees are so low is that the majority of our portfolio is invested in Vanguard’s Total Stock Market Index Fund (VTSAX). The VTSAX fund has an expense ratio of, brace yourself, 4 bips (.04%)!
Now that you know how we keep our investment fees so low, I’d now like to show you just how bad your typical 403b or 457 plan can be.
Average 403b and 457 Investment Fees
Unlike the mutual funds that we use for our Vanguard IRAs, most 403b and 457 plans use variable annuity products as the plan’s platform. Let me be very direct here, I hate variable annuities for one simple fact–they are insanely expensive. How expensive? A quick Google search of “average variable annuity fees” leads to posts claiming that the average fee is 2.25%. Yikes, that is high, but I’ve seen variable annuity plans with fees well over 3% a year. Nonetheless, I’m going to give these variable annuity providers (i.e., insurance companies) the benefit of the doubt and use that 2.25% figure to make a a simple calculation. How much would we pay in fees if we used an average variable annuity for our 403b and 457 investments? To illustrate this lower math, behold this magnificent table:
For the sake of the example, I even rounded our investment fees up to $660. Isn’t it amazing that an average 403b or 457 plan would generate almost $25k a year in fees on our $1.1 million portfolio? To me that’s like putting your hand in that piranha tank and instantly watching it get devoured up to your wrist. I’m sorry, but I refuse to feed the piranhas. To make matters worse, those annual fees would apply in a down market as well. How do you think I’d feel watching a falling portfolio lose an additional 2.25% a year due to fees? I think you already know the answer to that question.
Would you like to read how teachers lose $10 billion a year due to excessive fees? If so, check out this PDF file. Let me finish by saying that keeping your investment fees in check is vital to your long-term wealth. If you ignore investment fees, you are essentially allowing your plan provider to plunder your retirement savings. Know what you are paying in fees and refuse to be abused! I look forward to your comments and questions.
Yours at .06%,
Ed
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Is this along the lines of how you’ve advocated quitting your jobs in order to use money from your 457 plan? What if you get attached to a city or school district? Are you screwing yourself over for not quitting your job?
Jonathan,
That’s correct. Quitting allows us to do two things: First, we can access our 457 money from our “old” 457 accounts. Boom, instant cash flow. Second, quitting lets us move our money to a better investment platform. We take our money to Vanguard, but there other low-cost investment firms out there (namely, Fidelity, Schwab, and TD Ameritrade).
Falling in love with a place could be problematic because 1.) the 403b and 457 savings would be “trapped” in a variable annuity platform, and 2.) the funds would be stuck in a fixed account losing to inflation. In our case, we did love Echols County, but we had take care of our finances first. (We also needed a break from work.) Are we screwing ourselves? I don’t think so. As long as you don’t burn your bridges on the way out the door, you can always go back to your “sweet spots.” Stay tuned…
Ed
Thanks so much Ed for the reply. I certainly foresee myself being here for at least 5 years. After that who knows what will come and where I’ll go.
It hurts to think of all the educators who are paying high fees, so this article is soooo important.
(If links are not allowed just delete this next part, no hard feelings) I went through the TIAA site to show low cost alternatives from a 403b and discussed the differences in cost here: https://inthewheat.com/2017/08/19/starting-fi/
Mr. Wheat, thanks for the link! I’m all about helping teachers understand how investment fees devour their retirement savings. Ed
Thanks so much for sharing your knowledge and strategies for the path towards FI — it’s awesome to find these resources. My wife and I keep a solid budget and save as much as possible towards retirement accounts, but I can’t figure out how you could live off of $30k/year like you describe in your posts on taking new jobs in South Georgia to max your savings. Can you post an example monthly budget of how you were able to live off $30k/year? That would be helpful to understand how that is possible.
Even excluding the moderate mortgage and childcare costs for two kids under 4, we are still quite a bit over that yearly amount, and we don’t spend much for buying stuff or eating out. But somehow it adds up. I’d love to see how you manage that month to month.
And thanks again for sharing the FIRE knowledge!
SN,
I won’t run from the fact that I’m not big on budgeting. Instead, I try to focus on big wins like maxing out my retirement accounts as soon as possible. Then I focus on living on whatever amount of money we have left. Our success in small-town Georgia was primarily due to our reasonable rents of $500 to $750. We also had no car payments or big medical expenses during that time. No cable TV, only Republic Wireless phones, and very little driving (so low gas costs). Few meals out and most meals in. You get the picture.
I’ve been planning on writing a post about the cost of living in various parts of Mexico. I can also look a my spreadsheets on Douglas, Georgia to give people an idea of what our budget looks like. Let me see what I can come up with. It might make a good FAQ post. Thanks for you question. Ed
Thanks Ed, that all makes sense and is helpful info. It would be interesting hearing how costs of living compare in Mexico and also how the family is adjusting to a new country in general. Enjoy the adventure!
Great article. Fees do matter! Now that TD Ameritrade is doing away with free Vanguard ETF trading what do you plan on investing in with your HSA? I heed your advice and I need advice!! Thanks!
Hey Jeff,
Thanks for the heads-up. I didn’t receive any info about the change…then again I’m in Mexico. As soon as I know I’ll let you know of my plans. Ed
Looks like SPTM might be a decent choice. State Street just announced they’re dropping the expense ratio to 0.03%.
Holy crap! That’s a big difference between 2.25% and .06%. I could practically live on $24K a year. And for the life of me, I don’t know why this is happening. Why are teachers and their unions putting up with this nonsense? Is there some law that says 403(b)s and 457s have to be managed by firms that love annuities and loathe low-cost index funds?
Hello Mr. Groovy,
I don’t remember the ins and outs of why 403b and 457 plans generally use variable annuities. It doesn’t matter. These plans will never be reformed. Teachers need to realize just how bad and how expensive such plans are. The 403b cannot be reformed. Ed
Would there be more benefit in contributing more to a Vanguard Target Date Fund based on the S & P 500 instead of investing in a bad 403/457 plan or am I off base in this wild thought?
I would encourage all to take a careful look at your 403b and 457 choices. My TIAA 403b has excellent choices, ERs for index funds as low as 0.05%. My 457 has OK choices, ERs (after accounting for fees) of about 0.26%. Of course they also have horrible choices, and if you pick the defaults…. Maybe I am just lucky. Caveat emptor.
Hello Mr. Groovy,
You are right – it is mindboggling and you posed a great question – why are the unions and teachers putting up with this nonsense?
It is because 1) they trust the system, 2) they trust their school district to offer them solid plans 3) they underestimate the effect of fees 4) unions receive contributions from such insurance companies 5) they don’t have any education on the topic and no resources to turn to. (Well, they do, thanks to Ed and http://www.403bwise.com and http://www.fixmy403b.com but they don’t heed them or read them.)
Ed’s answer is honest and truthful, and frustrating. He knows that it is nearly impossible to fight for reforms of the 457 and 403b.
The history is this: They’re called 403(b) plans because they’re described in section 403(b) of the Internal Revenue Code (the tax code). They’re also called tax-sheltered annuities (TSA’s) because when the plans were first invented, participants could only invest in annuities. Since 1974, participants have also had the choice of investing in mutual funds but generally not directly, hence a middleman and fees.
I advocate for reform and I write about it. Ed used to blog about the fee structure too. I can’t remember what his early blog was called, but he was as spot on then as he is now and not much has changed despite New York Times and CNBC articles.
I am part of a consortium that is advocating for change.
I logged in to personal capital fees also and it’s telling me I’ve lost 10% of earnings lost to fees. How do I avoid this? What am I supposed to do? I’m on a traditional IRA and a 403b thru my employer with franklin templeton.
Please help
Retirement Fee Analyzer
All Accounts
0.57%
Your Annual
Fees
0.50%
Benchmark Tip
1 YEAR
of retirement lost to fees
10%
Of Earnings
Lost to Fees
$160K$140K$120K$100K$80K$60K$40K$20K
AGE 41 AGE 50
Contributions $93,766 Earnings $51,258 Total Fees $5,412
Date of Birth
Retirement Age
5080
Your Company Size Tip
Select Your Company Size 1-499 Employees 500-999 Employees 1000-4999 Employees 5000-9999 Employees More than 10,000 Employees
Risk Tolerance
Select a Risk Tolerance Very Aggressive Aggressive Moderate Conservative Very Conservative
My spouse also contributes to a 401k Tip
Edit Assumptions
Annual Contributions Tip
$0$18,000
Annual Employer Match
$0$18,000
Annual Growth
4.0%9.0%
Additional Investment Fees Tip
0.00%1.00%
Funds
Type
Value
Expense Ratio
Fees/YR
AGTHX
American Funds The Growth Fund of America® Class A Fund $4,333 0.66% $28
FCISX
Franklin Income Series Class C Fund $7,156 1.11% $79
FKACX
Franklin Growth Opportunities Fund Class C Fund $7,743 1.79% $138
Miriam,
It’s a little difficult to determine the annual cost of your fees from the info above. Is your annual fee .57%? If so, not great but not the worst I’ve seen. I hope the “total fees” figure of $5,412 is over a multi-year period because that’s a ton of money in fees. The bottom line is that the fees you pay are a result of your investments’ underlying expense ratios. You could switch your IRA money to a lower-cost investment at Vanguard or Schwab. (That assumes there is not penalty from F.Temp. to move your money.) For your 403b investments, do you have any other investment options?