403b
While working at Cedars-Sinai Medical Center, I learned how to invest in the 403b to maximize my portfolio. We went through various financial companies throughout the years and currently have Voya Financial managing the retirement account. I invested aggressively and retired early. I wrote this blog to share with my colleagues how I did it. I am not a financial advisor so I can’t tell you how to invest; I can only tell you how I invested.
How to Review the Funds
Stability of Principal
In the Voya retirement plan, there are 33 funds. See below for a snapshot. First, look at the asset class, which tells you what type of fund it is. Stability of principal is a money market fund. Second, review the 10 year average. Although past performance does not guarantee future results, you can see that the return has been a little more than 0.5%. Finally, look at the Net Fund Exp %, which is the fee you pay for investing in the fund. For the BlackRock Liquidity, your annual return would have been 0.34% (0.51 (return-expense 0f 0.17). Therefore, due to a low return and high fees, putting money in this asset class is not part of how to invest in 403b strategy.
Bonds
The second class of assets are bonds. You can look at the prospectus to see what type of bonds (government, treasury, or corporate) each fund holds.
Bonds return an average of 5% annually while stocks return an average 10%. See figures below how $100,000 would grow if you invested in bonds at 5% versus stocks at 10%. Due to the effects of compounding interest, the rate of annual return can be your best friend. Similar to a stability of principal, bonds are also not a strong strategy in how to invest in 403b plan strategy. I don’t like bonds and had 5% or less invested in them.
| bonds vs. stocks | year 1 | year 10 | year 20 | year 30 | year 40 |
bonds | 100,000 | 162,889 | 265,329 | 432,194 | 703,998 |
stocks | 100,000 | 259,374 | 672,750 | 1,744,940 | 4,525,926 |
Asset Allocation
The third class is Asset Allocation which are target dated funds. If you want to retire in 2035, you would simply pick that fund and put all your money in it. For this reason, investing in Asset Allocation fund is the easiest way to grow your portfolio.
How to Invest in Asset Allocation
Notice the 5 year average returns are higher with later maturity dates. The reason for this is due to the fact that later date funds have more stocks and less bonds. These funds also include foreign companies.
Simple Way to Invest in 403b
As I mentioned earlier, the simplest way to invest is to pick one Asset Allocation fund and put all your money in it. It provides a diversified portfolio that automatically rebalances stocks to bond ratio. Additionally, they have low fees. If you want to multiply your savings faster and have higher risk tolerance, pick a fund with a date later than your anticipated retirement date.
Large Caps
The fourth set of asset class is the large cap stocks. You get more money for your buck with the Large Cap Value funds but may also get lower returns. Large Cap Growth funds has holdings in companies that are focused on growth. In general, you get better annual returns. It’s ideal to have both value and growth large cap funds. Large Caps are my favorite investment vehicle under how to invest in 403b plan.
Let’s again look at the 10 year return and fees. You want to pick the funds with a balance of good return (10 year average) and low fees. I created a chart below so you can see what your net return could be if you had invested $10,000. I invested in all the funds except the Dodge $ Cox Fund and did well.
funds | 10 year average | fees | net return |
Vanguard Institutional 1228 | 14.19 | 0.02 | 11,417 |
Dodge & Cox 466 | 12.35 | 0.52 | 11,177 |
Harbor Capital 7520 | 18.26 | 0.59 | 11,756 |
T. Rowe 2467 | 18.25 | 0.56 | 11,759 |
Vanguard Growth 7593 | 16.83 | 0.04 | 11,678 |
Small and Mid Caps
How to Invest in 403b: Fees Do Matter
The fifth set of asset class is small/mid/specialty. Vanguard fund has expense ratio of 0.03% while the Wells Fargo has 0.88%. This means that for every 10,000 you invest, you pay $3 for the Vanguard and you pay $88 for the Wells Fargo Discovery Fund.
The figures below represent a hypothetical return of $10,000. I like all the funds except AB Discovery fund. The low return combined with high fee makes this fund a loser. The Vanguard funds have the best value for the return.
| Funds | 10 year return | fee | net (return-fees) |
Vanguard Mid Cap 9799 | 12.71 | 0.03% | $1268 |
Wells Fargo Discovery 9388 | 17.03 | 0.88% | $1600 |
AB Discovery 8446 | 8.79 | 0.88% | $783 |
Vanguard Small Cap1198 | 12.05 | 0.04% | $1201 |
Investing in mid and small cap companies are excellent strategy to investing in 403b and growing your money. They have more volatility but also can have higher returns. After all, Apple and Tesla were once small and mid cap companies.
Global/ International Funds
Finally, the asset class is the international funds. Similar to small caps, the global funds may have more highs and lows but also have potential to yield higher returns. They are excellent asset class for investing in the 403b strategy.
See figures below with a net return after deducting the fees. Once again, the one with the highest fee, Wells Fargo Fund, lags behind all other funds. Check out bankrate.com under mutual fund fee calculator. I invested in the American Funds Euro, MFS International and the Northern Fund.
funds | 10 year return | fees | net return |
Wells Fargo 3166 | 4.43 | 1.18 | 10,320 |
Vanguard Total 9772 | 5.4 | 0.08 | 10,532 |
American Funds Euro 1723 | 8.14 | 0.46 | 10,764 |
MFS International 1118 | 7.78 | 0.7 | 10,703 |
Northern Funds 3601 | 10.13 | 0.3 | 10,990 |
If you click on the fund name you can see the prospectus, which contains information such as volatility as well as what companies the mutual funds have holdings in.
How to Invest in 403b: Putting It All Together
The final step is putting together my portfolio with the information I gathered.
Most people do not have a lot of time to spend managing their retirement funds. However, the time you spend is directly proportional to how much money you will have to retire. As an aggressive investor, here’s how I invested.
Aggressive Investors
asset class | funds | percent allocation |
large cap | Vanguard Institutional #1228 | 10% |
Harbor Capital #7520 | 10% | |
T. Rowe 2467 | 10% | |
Vanguard Growth #7593 | 10% | |
mid cap | Vanguard Midcap #9799 | 10% |
Wells Fargo Discovery #9388 | 10% | |
small cap | Vanguard Small Cap #1197 | 15% |
international fund | American Funds Euro #1723 | 5% |
MFS International #1118 | 5% | |
Northern Fund 3601 | 5% | |
bonds | T. Row International #3364 | 10% |
total | 100% |
Conservative Investors
Asset Allocation funds or target dated funds are excellent vehicles to invest in the 403b plan. It’s the ultimate “set it and forget it” strategy.
If you don’t know how to do this, call your Voya specialist.
After working hard for other people, I hope your money will grow to give you a comfortable, financially free retirement. Happy investing!