What to do with a lousy 403b plan?

A great number of employer-provided retirement plans are expensive, offer poor fund selections and have clunky websites to boot. Given that low-cost, high-diversified index funds are generally considered the best, easiest investments for most of us, your 403b plan (or other employer-provided retirement fund) may be seriously hindering the growth of your Mercy Mound.

Here are four things you can do about it:

1. How bad is it?

Go find that seldom used link to your 403b account, reset the password (because you’ve forgotten it), and gather any of this information you can find:

⇒ How much does this plan charge me monthly, quarterly or annually for the privilege of doing business with them? (This can be from $0 to hundreds.)

⇒ How much do I pay every time I sell, buy or exchange a mutual fund or exchange-traded fund (ETF)? Pay special attention to accounts that charge you a percentage fee on each transaction. They can be brutal!

⇒ What are the “expenses” of each, individual fund? This may be listed on your retirement website, but it will not show up in your statements or transactions, so a lot of people miss this! It is a so-called “hidden fee.” If you just type your exact fund code into your URL bar of your browser or into a Google Search box, you should see the name of your fund, some of its recent trading values (ignore them!), and then a list that includes any “loads” and the “expense ratio.” If you are paying any loads (I hope not!), it is usually a one time fee paid at the purchase of your fund. These can be expensive! They are waived in some accounts, so check with your specific 403b plan to see if those funds are paid by you or not.

The “expense ratio” is very important as you are paying that each and every year without really knowing it. If you love that fund and it is in a particularly difficult sector (like microscopically small companies in inland China, you might we willing to spend over a 1% expense ratio for their research costs, but most of the time 1% would be considered quite high).

Here’s a practical example. Most of us will want to be invested in the S&P500. The cheapest way to do that is almost always an index mutual fund or ETF that just automatically buys a small bit of all 500 large companies in the Standard & Poors listing. That should be cheap, easy and comparably priced between companies, right? Well, as of this writing State Farm’s SNPBX is charging 1.39% while Vanguard’s VFIAX (or VOO, the equivalent ETF) is charging 0.04%. Because they are investing in the same companies, their performance would be expected to be identical except one company is subtracting over 1% in fees and the other is subtracting almost nothing.

If you’ve just invested your first $100 into your 403b, that cost is insignificant, but if you’ve got $10,000 in the S&P500, State Farm will be gladly charging you $139 per year while Vanguard will be happy with…yep…$4. That amount quickly becomes huge when you multiply by the number of years they’ll be holding your $10,000 and with you adding to that fund every year (which you are doing, right?).

We need to learn to hate fees! Fees are a killer for a person on a limited income (as most of us are). If you can’t increase your income, you’d better be careful about your outflow. Such fee differentials are too costly for the nonprofit worker!

It would also be good to know how much your employer is contributing (it may very well be “$0”) and how much you are contributing each month (hey, while you are on that 403b page, go ahead and add $100 or $200 to what you’ve been putting aside every month. Your future self will thank you.)

EASY TRICK: If this all seems a little time consuming, you might want to just sign up for a FREE account with Personal Capital and link it to your 403b account. If you contact me, I can probably get you a $20 cashback reward or just use my affiliate link for Personal Capital, and they’ll give all of the money just to me. Anyhow, Personal Capital will analyze the fees in your 403b for you! You should probably check it for accuracy, but it was accurate and amazingly easy for me!

So the first step is finding out how bad your 403b is. You may find that you have no fees, great fund choices that include low-cost, well-diversified index mutual funds or ETFs (such as Schwab or Vanguard). However, most 403bs are weak in choices, weak in fund expenses or weak in brokerage expenses. The first step is knowing how bad the problem is.

2. Start your financial planning with your 403b

I hope that you have some money in a 403b, maybe in an IRA from some time when you were allowed to fund one (which is seldom the case if you are claiming the FEIE or Foreign Earned Income Exclusion), perhaps in a 529 for your kiddo’s education, in a taxable brokerage account because you’re hoping to one day buy a house, or elsewhere.

If you have investments – large or small – in lots of accounts, one smart move is to decide what percentage of your money (assets) you want to dedicate (allocate) to specific types of investments. As you probably know, personal financial advisors like to call this your “asset allocation.” If you know that you want to have roughly 1/3 of your money in the S&P500, 1/3 in smaller companies, and 1/3 in foreign companies, you could try to do that 1/3 split in each one of your accounts, but that’s not always practical with the smallish dollar amounts we’re probably talking about.

Instead, I try to look at my collection of investment funds (403b, IRA, 529, etc.) as a collective whole. If I know I want a third of that whole dollar amount in those three categories above, I start with my worst account option. Yep, if my 403b only has a handful of expensive mutual funds, I would start there. I would select the very best mutual fund or ETF available to me in that 403b (cheapest, most widely invested, that comes close to fitting one of my three categories), and I would invest funds in that “best” of the “worst” options.

For example, let’s say my 403b plan has State Farm’s S&P500 but Vanguard’s Small Cap fund. I’d buy just the Vanguard fund in the 403b and move on. Then, when I get to my other accounts, which probably have some better options, I can fill in the rest of my investing.

3. Consider an in-service roll-over (or move it when you leave the organization)

If you began your overseas service on your 25th birthday, you may be saddled with a bad 403b for two or three decades. In fact, you will likely be saddled with it for exactly 34 1/2 years. Why? Because when you turn 59 1/2 years old, many organizations will allow you to make an “in-service rollover.” What that means is that you will be allowed, while still in the service of your charitable organization, to move some of your 403b funds to another account.

For example, if you had a high-cost Roth 403b with your missions agency, on the day you turn 59 1/2 years old, you can move most of that to a Roth IRA at any brokerage in the USA. When you choose a brokerage for your Roth 403b, you control the annual fees (should be $0) and the low-cost mutual funds and ETFs you want to invest in. Please get the advice of a US tax preparer before making any such changes. And, please notice the Expat Warning below.

Similarly, if you have a 401k or 403b from another company or organization in your past, you should be free to rollover those to an IRA as well.

4. Request other options

If we are not pleased with the options in our 403b retirement plan, we have every right to state our case to our organization and/or to the plan administrator. We should be prepared to explain that we feel we are being hampered by the high costs and low number of choices. I think I’d go to the meeting with short list of low-cost, well-diversified funds that I’d like them to consider. (Some people have even sued their companies for not providing an adequate investing platform. I am not recommending that.)

That meeting would also be the perfect time for us to ask if the plan’s rules allow us to take an in-service rollover now or in the future. We’re going to want to know that anyhow, and it doesn’t hurt to communicate to our agency that we are serious about being frustrated by our costs and options.

I’ve had this talk with my organization. While offering better funds does not seem to be on the horizon, an in-service rollover will be allowed. Now, I’m almost looking forward to turning 59 1/2 because I plan to take full advantage of it…if…

What’s the expat warning?

Well, as is often the case, missionaries and nonprofit workers have one final hurdle to jump over and, as usual, that hurdle is a tax problem. The question seems simple: Will the foreign country where I live and presumably pay taxes, consider any of these moves taxable?

It is very unlikely that buying or selling funds within our existing non-taxed accounts, like a 403b, will be taxable abroad. Such transactions shouldn’t even cause our financial institutions to emit an IRS form 1099.

However, when we rollover a 403b to an IRA or a Roth 403b to a Roth IRA, an IRS 1099 will be created by the 403b plan because this is technically a distribution or payment. If you follow the rules and put those monies into your new account within the allotted time, Uncle Sam will give you a free pass on that 1099. It is not taxable. Will your foreign government see it in the same light?

Given the relatively free exchange of financial information from one government to another, my guess is that your foreign government will be aware of that 1099, will expect you to report it, and will – possibly – tax it as income. That, of course, would be tragic.

Please consult with your foreign tax professional, before taking any distributions of any kind from a retirement account, 529 account, HSA, etc. Those may be “qualified” (i.e., non-taxed) transactions in the USA, but they may not be “qualified” in your country of residence.