Roth IRA or 403b?

[Guest calluke]

Hello -

I'm 26 years old and married with 1 newborn. I am a teacher while my wife is a stay at home mom. We have very little to save for retirement but we still want to get started with something. My school district offers a 403b, but tied to a variable annuity or a loaded mutual fund with high fees. I've also looked into a Roth IRA but unsure of how much those usually cost to run. Is one better than the other?

Thanks!!!!!!!

[John G]

First, congratulations on thinking ahead. Time is an investors friend and starting early will produce a bigger nest egg.

403B - shame on school districts for aiming folks towards high expense products, commissions and stodgy anuities. My wife used to work at a District in Colorado where 10 out of 11 offerings were insurance based annuities with meager performance and high cost. You might want to ask your district to offer something better. BUT, you still may want to do this if your school district offers a match to your contribution. For example, a 50% match overcomes the typical commissions.

ROTH - if there is no match, or you don't like your investment choice, then start with a Roth. Two important first decisions: (1) who will be your custodian and (2) your investment choice. The overall costs of a Roth can be zero to a very small amount if you choose wisely.

Custodian: banks, brokerages, and mutual funds are the main choices. Bank offerings are often loaded with fees and weak performers - but you should at least see what your bank offers beyond CDs. Brokerages include full service, discount and internet based. If you are comfortable with using computers then I would suggest the internet approach as firms like Etrade, Scottrade, Ameritrade, Schwab, etc. have zero or low annual fees and many mutual funds to choose. Maybe the best option for you would be to open an account directly with a mutual fund - there are over 8,000 to choose from an you need just one. You can find lots of names in MONEY, Kiplinger Financial and the March issue of Consumer Reports. See comments bleow on NO LOAD.

Investment Choice: You are going to invest this money for decades and need a reasonable performance that stays ahead of inflation. As someone just getting started, a stock based mutual fund is what you probably want. First, only choose from NO LOAD funds as these have no commisions. Second, look for low annual expense (try to stay below 1% in actively managed) and take a good look at ultra low index funds (Vanguard invented these, but Fidelity and others have reasonable clones). Third, if you decide against something like a total market index fund, then consider a fund with a broadly based portfolio with a slight bias towards growth companies.

Mutual Fund Annual Fees: We all hate them, and often they can be minimized or eliminated. For example, if you do a monthly auto deposit, some custodians waive the annual fees. Others waive the fee if you use electronic statements. Often these fees are waived when your account balance grows beyond 5k or 10k. And, you can just ask them to waive the fee. Avoid anything more than $20/year as just too much.

Even if you only can start your investment plan with a modest amount, go for it.

Post again if you have any other questions.

[Guest calluke]

Wow! Thank you John G!!!! I really didn't know what to expect in terms of an answer, and I was shocked to see how detailed your message was. Thank you so much for your advice! It seems like the Roth is the way to go, so I will be taking your advice and looking into them asap. Thanks again!

[Guest calluke]

John -

1 more thing to add, to comment on your comment...

Our employer doesn't offer a match and when I asked the agent (who had said he was the ONLY one approved by our district to give a 403b plan) if he had any no-load mutual funds, he said "they didn't exist"! Seems like my only option right now is the roth. thanks again for your help!

[John G]

You can find a lot here by searching keywords, like "no load", "index", "mutual fund", "novice", etc.

Sounds like your school district is about 3 decades behind the times. I know of a few places where there are "rebates" or "special services" in return for steering high cost business towards an agent. Only one agent? Did they ever consider a competitive market place for retirement money? Like put it out for bid? Having a plan devoted to anuities and loaded funds is completely out of touch with today's marketplace - a throw back to the paternalistic approach to employees... they can't be trusted to understand their options so mgmt will choose ultra conservative options. I would not be surprised if the annual returns that this group of choices has provided is 1 or 2 percent below average.