@notrichenough Old company had the Roth 403(b) option (which was utilized). New company doesn’t. Agree with you about the savings aspect but in this case, they are doing pretty well on a modest income so I don’t necessarily want to force them to squeeze the budget too hard. When it was matching, it was a very easy decision to make. Now it is a lot tougher.
If there’s a Roth 403(b) option then I would consider it even without a match (assuming its possible to save more than just the personal Roth IRA limit), especially if there’s no intention to stay with the employer for a decade or more (so the money can then be rolled over to a lower cost fund). The cost of investment should be outweighed by the tax savings (especially if they pay higher tax rates later on), whereas that is less likely to be the case for a pre-tax 403(b).
Thanks@BunsenBurner.
I’ve been a longtime lurker, Infrequent poster since 2004 when DS was applying undergrad.
You specifically and several others here have posted many things that have proved useful to our family. So that’s my excuse for not leaving this site. Too many intelligent and generous folks willing to help.
Somehow, i never studied the whole Roth conversion thing so we have only traditional 403b and IRA accounts. Think at 63, it’s too late to pursue.
I did suggest Roth to DS at first job after grad school and think he listened.
He is marrying GF in 3 weeks. Wonder if she enjoys personal finance stuff more than our DS.
That would be great!
“no matching, no index funds, just actively managed funds with expense ratios of 1.5-2%.”
@doschicos
that is way, way ,WAY too much to pay these days!
they can do just as well, if not better over the long run, with putting any extra $$ into low cost ETF’s.
just my 2 cents…
@doschicos
Without matching, they can start their own Self Directed IRA(roth) LLC, but the administrative cost might be too much for a small fund. Competitons are fierce in this field, so compare.
Benefit of the self directed fund is that it can invest in any thing that is allowed vs. company supported 401k, 403b will be limited to mutual funds. At a young age, you can invest aggressively, in such as IPOs, pre-IPOs, commodities, gold and silver etc. Not that I suggest to invest in those.
@IxnayBob - wow. Massachusetts is clearly an expensive place to live AND die! $1 million is a pretty low threshold for estate taxes to kick in.
Your comment about gifting money to your kids now made me wonder; How many gift money to their adult children each year? Do you max out gift amounts or give a lower amount? What is your motivation for gifting to them? Tax strategy (as is the case for IxnayBob)? Do they need support? Helping them to fund a nest egg? I’m curious as to everyone’s philosophies on this.
I am hoping ds will pursue an MBA in the next couple of years. While it would be employer sponsored, he will obviously lose earnings for 18 mos (two 9-month academic years) and will incur income tax on the tuition benefit and stipend (I don’t think this is a huge amount - definitely not enough to cover all living expenses) his company pays for him. I’d like to make those aspects less painful for him by helping out a bit. That would be my motivation for gifting monies - that might support might make his pursing the MBA a bit more enticing.
We gift to our kids each year. We gift to S to have him to max Roth IRA backdoor contributions (have been doing so for several years). We gift D about $20K or so every year for all her living expenses as she has never been able to hold a full-time job due to chronic health issues. We also gifted him money to start a solo 401k for his business.
Our state has same inheritance laws as fed govt, so no incentive to gift much more at this time.
Was just reading through the comments to see if anyone else has picked up on the outrageous expense ratios and @menloparkmom beat me to it. I would put what they would have contributed into a Roth and if they could afford to throw what the former company’s match would have been, I’d do that, too. Use Vanguard or Fidelity where expense ratios are low. Throw it into an age-targeted fund if they don’t want to worry about managing the money. Good for them for getting an early start! If they can
@Hoggirl In some sates, you don’t get any break and inheritance tax kicks in right away.
@Hoggirl , my motivation varies. I have two kids from my first marriage in addition to younger two from my marriage now. .
My very oldest, I almost had to twist her arm to accept a gift from me; she enjoys being self sufficient. I finally “won” by telling her that
- I’d enjoy seeing her get it while I’m alive
- how much better to gift her now, when she could use it, rather than after it’s just another bunch of money
"What is your motivation for gifting to them? "
One benefit I can think of is helping your adult children now as opposed to waiting until they are in their 60s/70s at your death.
@HImom and @IxnayBob, we have confronted a sibling who is not as financially responsible once directly and once indirectly. Directly, I have three siblings. Two are very responsible financially. My brother has an unerring capacity to make bad financial choices and often not obviously good life choices. He has no spouse and retired as a teacher after 20 years, I think. I had suggested two things. My mother’s inheritance will likely not be that big, but I suggested putting his share in trust. I also thought because a) he has been the most help to my mother in recent years; and b) will need the money more (though one sibling should be fine but might object given that she has been frugal whereas he has not), she could leave him with a disproportionate share if the other siblings agreed. My mother wanted to make it equal. Reluctantly she agreed to the trust and the lawyer suggested in effect a trust for each with another sibling being the trustee to disguise a bit, but with different rules for him (he and my sister will be co-trustees). My mother and he somehow concluded that I don’t like my brother as a result of this, but both agreed to the structure. My concern is that this inheritance, combined with his pension and SS if doled out regularly as opposed to in a lump sum would enable him to not run out of money during his retirement (he is now 63). My fear has always been that without the trust, he would blow the money and then come to me and my sibs (but mostly me) to live and/or bail him out if he runs out of money (my parents regularly would pay his credit cards off after he’d max them out). The issue is less likely to be the money and more my having to be parent to a 60+ year old whose emotional age is considerably lower.
The good news is that this is behind us. She and he accepted the trust. She decided to move from one of the most expensive parts of NJ to live in a senior facility next to my sister in Memphis. I suggested he work on a financial plan with my mother’s financial advisor. He did at least some of this after putting it off for several years. I also suggested that he consider moving as well, as he had moved in with my mother and couldn’t figure out how to find a place nearby the tennis club that he has played at since we were kids because the rents were so high. In Memphis, it appears he has chosen a very nice but less expensive apartment with a gym and a pool and found a good tennis club to join. I’m sure the move, which takes place this month, will be tough for both my mother and brother, but I’m hoping it will help him get out of a rut and start a new chapter of his life.
Both of my kids had/have learning disabilities (ShawSon is sufficiently dyslexic that is his maternal grandmother thought he would not be able to go to college) and it looked for a few years in elementary/middle school like ShawD would go partially blind from a degenerative retinal disease (which turned out to be a plausible but incorrect diagnosis). Fortunately, my mother has set up a dynasty trust with a minimal gift. The trustee is instructed to help our kids, and our progeny generally (as well as my wife and me) with health, welfare, housing, education, etc. So, if one kid needed help more, the trustee could do that. I’m hoping that the trust will help both kids with downpayments on houses, for example. But, they key point is that the trustee could very easily decide to help a kid with issues more but only do so in little bits so that money would not be wasted. Fortunately, ShawSon is exceedingly bright and even more driven and graduated from some of the best schools in the country and his second startup (which he started in grad school) is doing very well and ShawD has good vision and is three years into a very good career. Both are good with money. So the trustee will likely not have to worry about disabilities, though ShawSon could easily not need any money after perhaps the downpayment.
My biggest reflection is that it might look like one kid is doing great now, but things might turn out differently than you think. So, even without a disability or problems with a spendthrift, we realized we can’t predict how things will turn out and we thought we would leave it up to a trustee to help as she sees fit.
I don’t know if this is helpful.
@Hoggirl we max gift both kids every year for a couple of reasons. 1) We want them to max out retirement savings while they’re young. The expectation is that the gift will go toward that. 2) For our tax/estate benefit as @IxnayBob mentioned. 3) We want them to have the money when they could use extra $$$ for downpayments, etc. And when we can enjoy seeing them benefit from our gifts.
DH’s nonagenarian mom’s sitting on several million, that her children really don’t need at this time of their lives. (She’s of The Great Depression era and never felt comfortable giving away much of her estate because she could see it all going south with an economic downturn.)
Also important to note that both our kids are financially responsible and in career jobs.
My guess is that this is an all-in plan with no extra expenses to the employer. Thus, any annual maintenance and reporting fees that they might charge to the employer are rolled into the fund fees. When I started at a nonprofit, that is the type of plan that we had. Literally, the first thing I did as CFO was to recommend that we change out the plan (with Principal) to a 401k with Fidelity. (Yes, nonprofits are eligible for 401k’) Most of the Board members were business peeps, and once I showed them the ER’s, they said immediately agreed. My recommendation was also that the company would pay for the annual maintenance fees separately so 100% of the employee’s withholding would go to work. So there was a small expense hit to the company, but to me, that is the cost of doing business. At first, we could not afford a match, but we did add it later.
My parents gifted my 2 sibs and me money over many years, starting in our 30s. Inlaws gifted some randomly, but it came with strings so I just told them it went to the kids college accts and they stopped telling us (really me, since I manage our money) how to spend it. And I did put all of it into their 529s.
In the last 4 years we inherited money from both sets of parents, about $1mil total, after all four passed away. We have been giving money to our kids, but there are 12 years between S1 and D2, so the amounts they actually see has not been evenly distributed. Also S2 has autism and will never be independent or employed. I keep track of who gets how much, and will try to keep it even over the years. S2 has a funded trust and will not inherit what remains when H and I die. He will live with either S1 or D1 (though most likely D1).
"Was just reading through the comments to see if anyone else has picked up on the outrageous expense ratios and @menloparkmom beat me to it. I would put what they would have contributed into a Roth and if they could afford to throw what the former company’s match would have been, I’d do that, too. Use Vanguard or Fidelity where expense ratios are low. Throw it into an age-targeted fund if they don’t want to worry about managing the money. Good for them for getting an early start! "
That’s one of the main reasons I raised the question for input to start with. Although expense ratios of that nature aren’t rare, they aren’t unknown either but it’s not something I’d choose to invest in. At the age of the family member, I’d plow it all into equities but a nice, minimal index fund is all that is needed.
They are already maxing out the Roth every year. I did talk with them today and after we mulled it over, they are going to pass on contributing to the 403(b) for now and will aim to make a monthly deposit to after tax savings. The option to contribute to the 403(b) won’t disappear so they can always change their mind down the road.
My guess is this employer is picking and choosing what to offer and since the other benefits are very generous for a company this size (cheap healthcare with ZERO deductible and free dental, free LT and ST disability), it’s hard to fault them too much as I know how expensive healthcare is and the employer is covering the lion’s share.
@aMacMom and others
I am sure this has been brought up before, but the risk of gifting children money to exlude from your estate have several drawbacks, even if your kids are responsible adults and are making money.
- If they use the gift to buy investment as oppose if you buy intvestment for them in your account, they will lose the stepup basis when you die.
- If the child die before you, now it will be a mess for you to get it back or have a control over their estate, especially if spouse or children are present.
- While your child maybe responsive, but their spouse might not.
- In a devoice of your child, you have no control over the gifted money.
- If you give the maximum each year, most of the money can not be part of their retirement fund, ie, max amount is around $19,000 with a roth solo 401k trust., $6000 if it is a roth IRA. In addition, it will have a separate fee structure for the account management.
To me, I would open several living trust accounts in my name and ear mark the funds in each account to one of the child.
High expense ratios in 401ks really irritate me.
My current employer uses Voya. They offer low-cost Vanguard Index Funds; SP 500 index with 0.06% fees.
BUT… they repackage it as a Trust and add 0.60% fees! 10x for running a web site. They do this for each fund that they offer.
So irritating.
Step up basis could be toast… there is some talk about getting rid of it.
We just spent a small portion of our future heirs’ (a living person has no heirs 
) inheritance on a nice vacation for just the two of us. Back to work on Monday.
@BunsenBurner
That is the way to go! Enjoy the fruit of labor while you can!