B-Fund Question

[ifonlyIknew]

I started a new job last July and signed up for their 403b plan. I wasn't very knowledgeable about funds, so I just chose the automatic investment 2040 plan.

So lately I've been reading a lot of Dave Ramsey and Suze Orman and decided to see what funds are in my portfolio. Unfortunately it looks like all of the funds are B-Funds, which I know isn't good. I'm not sure I understand all the fees, but here they are:

General Annual charge 0.65%. I'm assuming this is like the 12b fee.
Then each fund within the 2040 plan has an Expense ratio of 0.41% to 0.45% There are a total of five funds, so I'm looking at about another 2% annual fee.

I realize this is one of the worst types of mutual funds that I can have. I'm not even sure if no-load funds are offered, but I'll call to verify.

Question: Should I immediately change funds to no-load if possible? I've read that b-fund 12b expenses usually start a 5% then decrease by 1%, then they're gone, although the only administrative fee I see listed in the prospectus is the 0.69% that I listed above. But even if that's correct, wouldn't I still have 2% in expense ratios per year?

I can't even think of another option at this point. Any suggestions?

BTW, the mutual fund broker is AIG VALIC Retirement and the funds were created for my organization, so they have tickers that are unique to my organization, but if anyone's familiar. they are SDAL(Large Cap Index B)), SDAS (Small-mid cap index B), SDAI (International equity index B), SDAT(Total Market Bond Index B), and SDAB(short bond index B).


Thanks in advance!

[noppenbd]

A few things:

The expense ratios of the individual funds do not add. To find the total load you would average the individual funds' expense ratios and then add the overall annual charge. So if the individual funds range from 0.41 to 0.45%, then maybe the average is 0.43%. Adding on the annual charge gives you 1.08%, which is not that bad for a 403b.

You should also take a look at the track records of the funds offered. The prospectuses should give you comparisons between the funds and the benchmarks they are supposed to track. The 3, 5 and 10 year returns should be close to or hopefully above the benchmarks.

If the "2040" plan you refer to is a target type fund, then your asset allocation should be set automatically by the plan. If so, what is the current mix?

One other item to clear up is the term "no load". A load refers to the sales charge when you initially purchase the fund and has nothing to do with the expense ratio of the fund. A no-load fund could have sky-high ongoing expenses. But typically (at least in my wife's 403b) there are no loads charged when purchasing within a 403b/401k plan. So load/no-load is not really applicable in this case.

[ifonlyIknew]

Thanks for the information. Knowing that the expense ratios aren't added up is a relief.

My current asset allocation is :
45.48- Large Cap (not sure if it's growth/value or blend if that matters)
23.42- Small-Mid cap
20.22- International equity
3.2 -short bond
4.9- total market bond
3.0 fixed interest

The funds appeared to have matched the various benchmarks (S&P 500; S&P 1000; MSCI EAFE (not sure what this is); and Lehman Brothers Aggregate Bond, respectively, but has not exceeded it.

Just looking at this, I think I have too many bonds, would you agree?

[disneysteve]

I believe the bond portion matches that of other similar funds form Vanguard or T.Rowe. 10% bonds seems to be typical.

[ifonlyIknew]

Thanks for the input.

I've read that the fees associated with B-share funds are so high,, which is why they should be avoided, but my fees seem about average, if I'm correct in assuming that the administrative fees(12b) are only 0.65%, then the average expense ratio for the mutual funds are 0.43%. Total annual- approx. 1.03%

What am I missing? My funds are all index funds, could this be why the fees aren't as high as the typical B-share funds?

[noppenbd]

My funds are all index funds, could this be why the fees aren't as high as the typical B-share funds?

If they are truly class B index funds (which I had never heard of until now) then that is probably why the fees are not oppressive. If you could buy class A shares the fees would probably be 0.5% total or less for an all-index fund portfolio.

[kv968]

Ah, the old "alphabet soup" (Class A, B, C) classes of funds...seemingly my favorite topic. You're right in that Class B shares aren't necessarily the best expense ratio(ER)-wise class of shares to hold but they aren't the worst either. Granted, a fund with no class association at all is most likely better ER-wise than one that has one, however, "B"'s at least has no front-end load and typically a lower ER than "C"'s.

With that out of the way, the ER (0.41-0.45%) you're paying on those funds isn't bad for Class B shares. It isn't good for index funds which you say the funds are comprised of, but for a Class B share of a fund, it's not bad.

I have a feeling that the "General Annual Charge" of 0.65% isn't a 12b fee associated with the funds themselves but an overall administrative expense of the 403b instead. That won't diminish with time like you were saying. What you're thinking of is the "deferred sales charge" (fancy way of saying back-end load) that most, if not all, "B" shares carry. The way that usually works is that if you were to redeem shares within a year of purchase, they would charge a 5% fee just say. If you redeem in 2 years, it would 4%, and so on and so on, until after 5-7 years (whatever the step-down ratio works out to be), there would be no fee.

IMO, it would be best if you could invest in funds that have no "class" association at all but the operative word there is "IF". There probably aren't any funds available to you in your 403b that aren't "B" class shares. The only way you would be able to get them for your retirement would be to open an IRA with a company of your choosing outside of the 403b and invest in that.