403b Frustration - Help!!

[Hopeful]

Yesterday I introduced myself to the board, and today I wanted to start a new thread to get some guidance regarding asset allocation with mine and DW's employer sponsored 403b plan. I started yesterday by looking into having our bond allocation more within the tax deferred 403b. The only 2 bond options were PIMCO total return and Pioneer Strategic income. Both charge around 0.7%, and we currently have our bond allocation split between the two. I have become very frustrated looking at the fees being charged by my plan. I got really upset this morning when I started reading the fine print. ING charges an extra 0.32% annually on balances held in Vanguard funds. WOW, here I thought I was investing in low cost funds!!


One option was mentioned that I could set up a self directed brokerage account with TDAmeritrade through ING. Well after multiple phone calls to understand this option, it turns out I can only trade mutual funds. The only mutual funds available with no fees are high cost ones. All Vanguards funds it seems that there would be a $25 fee on each transaction. Suddenly this is not looking to be such a great option.


Another option for the bond portion is ING has a fixed account paying 3% this year. This may be an option since the bond market is expected to see falling prices with rising interest rates. There may be some restrictions on transferring in and out of this option, so it would require another call to ING to sort that out.


Another option would be to use Vanguard Target Income within my plan for the Fixed income. This fund has a 70% bond allocation. The drawback is that it would make rebalancing cumbersome. Also this is less attractive considering the additional 0.32% ING will charge on Vanguard balances.

The more I am writing this the more I am thinking that the SDBA with TD Ameritrade might be better. Currently with more than 400K in Vanguard funds in ING that 0.32% in fees is $1280 a year. Even if I rebalance once or twice a year the $25/fund/transaction fee might not be so bad in comparison.


Any advice would be appreciated. Any thoughts on using the 3% fixed (if there are not too many restrictions) vs Intermediate Term Bond Index fund?

 

[hlfo718]

I would pick the $25 option since you have a sizable amount and not looking to do a lot of transactions.

 

[pb4uski]

I would love to have a 3% stable value option available to me - if I had one I think my whole fixed income allocation would be in it. Interest rate risk today scares me. I would not give up that option and would consider the $25 option once interest rates normalize.

 

[Hopeful]

I would love to have a 3% stable value option available to me - if I had one I think my whole fixed income allocation would be in it. Interest rate risk today scares me. I would not give up that option and would consider the $25 option once interest rates normalize.

New to this so bear with me....My understanding was that Bond Funds tend to react inversely with the stock market, thus the reason they tend to buffer volatility. Would a stability fund negate that? Or is it a matter of interest rates being so low there is little room for a rise in the bond market even in the case of a falling stock market? Sorry, but bonds still confuse me.

 

[steelyman]

I echo pb4uski on the stable value option. I have one in a 457 (deferred compensation) plan and it is the reason I did not and won't roll over to my IRA or 403. I view it as a money market on steroids and money I know is there should I need it.

I'm no longer working, so I can't contribute any more, but I set a "threshold value" on a good stock fund also in the 457 and when it goes above that, I sell down and transfer the proceeds to the stable value. Lather, rinse, and (you know the rest).

Brewer has offered good info on this stuff (hope he doesn't mind me mentioning). Do a search for the eatlier threads.

 

[Hopeful]

Thanks for the input so far. I will do a search for Brewer's posts, and welcome any more feedback on the 3% stability fund vs a Bond fund.

The more I am looking in to it I may open the SDBA and pay the $25 per transaction fee with Ameritrade. I could leave the bond allocation in the 3% stability fund with ING, and use Ameritrade for the other allocations. If I rebalanced and sweep the ING contributions to Ameritrade twice a year I will still be ahead even with the $25 per transaction fee. Could even do it quarterly and be ahead, though I am not sure there is too much benefit in that.

 

[pb4uski]

New to this so bear with me....My understanding was that Bond Funds tend to react inversely with the stock market, thus the reason they tend to buffer volatility. Would a stability fund negate that? Or is it a matter of interest rates being so low there is little room for a rise in the bond market even in the case of a falling stock market? Sorry, but bonds still confuse me.

Bond values do move inversely to interest rates but a stable value fund would not - that is why they call it stable value. Check to make sure that is what you have bu hat is what it sounds like from what you described.

 

[Hopeful]

Bond values do move inversely to interest rates but a stable value fund would not - that is why they call it stable value. Check to make sure that is what you have bu hat is what it sounds like from what you described.

Yes, It is a stable value fund that is set at 3% through the end of the year. I am doing some reading on bogleheads about using a Stability fund for my bond allocation. There are some who seem to advise against it because they say it is not possible to pay more than a bond fund, and they only work in declining rate markets. I suppose there is risk in anything.

 

[yakers]

Another site to check: 403bwise.com Its remarkable how bad most 403bs ae, DW had no good options, she was in afund that was to be 'like' Fidelity Contrafund, she had a return of over 9% for the period she held it, the retail Contrafund returned 13+% during the same period, the rest went to fees visable and hidden. Rolled it over when she retired and she has done well with Wellesley.
That you have PIMCO option is a good thing and a good stable value fund is a valuable asset. You are asking the right questions.

 

[pb4uski]

Yes, It is a stable value fund that is set at 3% through the end of the year. I am doing some reading on bogleheads about using a Stability fund for my bond allocation. There are some who seem to advise against it because they say it is not possible to pay more than a bond fund, and they only work in declining rate markets. I suppose there is risk in anything.

To me that is as good as a 3% CD and I think a lot of us would jump for a 3% CD with no early withdrawal penalty.

I don't view stable value as a permanent solution, but rather a good alternative to other fixed income assuming that interest rates will rise soon.

I would compare it to a bond fund like the Vanguard Total Bond - better yield and no interest rate risk.

 

[Hopeful]

Yakers: Thanks for the link to 403bwise.com. I will check it out. Sad part is, I might have been happy with the PIMCO choice if the were not charging .71% instead of the .46% PIMCO charges retail investors.

To me that is as good as a 3% CD and I think a lot of us would jump for a 3% CD with no early withdrawal penalty.

I don't view stable value as a permanent solution, but rather a good alternative to other fixed income assuming that interest rates will rise soon.

I would compare it to a bond fund like the Vanguard Total Bond - better yield and no interest rate risk.

Thanks for the input. I think I will use the stable value for my fixed income portion, and reassess on a yearly basis as the interest rate and bond market changes.

 

[Badger]

We had the same problem with wife's 403b. Other than insurance companies she only had Merrill Lynch as an (pretty lousy) option. They wanted way too much in fees both in purchasing and maintaing their MF. They also wanted her to give them authority to make changes in her investments as they felt needed. Sounded too much like the potential for churning to me. Our way around it was to have her money placed in a ML money market account so the fees were low. Then TRPrice worked with me to set up a 403b with them so I could transfer the money every few months to a decent MF of her choosing. Other than ML screwing up the transfers a few times (I constantly had to keep a close eye on them) this worked well to her advantage for a number of years until retirement. Now she has it in Wellesley.

Cheers!