Author Topic: UPDATE: 403b vs. 457b: Help me decide!  (Read 2765 times)

mustachianteacher

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UPDATE: 403b vs. 457b: Help me decide!
« on: October 24, 2016, 10:16:35 AM »
UPDATE: Please see updated information about crazy-high fees down below.

For the longest time, my employer only offered a 403b, so I dutifully plowed money into it, all invested in USAA funds because that was the best option available. The USAA funds are pretty good, but their fees, while not terrible, are certainly higher than Vanguard. My portfolio average is around 0.65%. Current balances total up to about $250K, and we have 15 working years ahead of us.

Now, they've recently added a 457b administered by TIAA-CREF that offers Vanguard funds, and all of the funds' fees are 0.10% or lower.

Is there any mathematical advantage to sticking with the 403b? The money I have in the 403b would stay there, of course, because I don't think I can roll money over anyway if I haven't retired or terminated employment. It just feel weird to "start over" with a new account at zero, and -- bear with me because I'm not a mathematician -- it makes me wonder if there's a compound interest advantage to adding to an existing balance vs. starting fresh with new investments. I also wonder whether I'm unnecessarily complicating things by adding yet another account to my investment mix. As it is, husband and I each have 403b accounts and Roth IRAs. Is it worth it to add 457 accounts? I know the 457 has the advantage of allowing withdrawals before age 60, but neither of us will retire before age 55 anyway, and the 403b allows withdrawals at 55 if you've separated from service, so that's fine either way.

I tend to lean toward keeping things simple, but I don't want to be stupid about fees either.
« Last Edit: October 29, 2016, 01:07:05 PM by msjd123 »

seattlecyclone

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Re: 403b vs. 457b: Help me decide!
« Reply #1 on: October 24, 2016, 10:23:03 AM »
There is no compound interest advantage to having all your money in one account vs. spread across several.

The lack of early withdrawal tax is a nice point in the 457(b)'s favor. Even if you don't plan on retiring prior to 55 right now, maybe you'll end up saving faster than you expect and want to get out sooner.

Also important to note is that the two accounts have separate $18k maximum contributions. You would do well to switch your future contributions to the 457(b) for the lower fees and the lack of early withdrawal tax. If you get to the point where you're able to max that out, you can then start contributing to the 403(b) again.

DecD

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Re: 403b vs. 457b: Help me decide!
« Reply #2 on: October 24, 2016, 10:42:58 AM »
My spouse has both options as well, and we max out both.  If you are able to contribute to both, it's a great opportunity.

Petuniajo

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Re: 403b vs. 457b: Help me decide!
« Reply #3 on: October 24, 2016, 10:48:29 AM »
I agree that the greater flexibility of the 457 is a pretty good--you might not plan to retire before 55, but what if you change your mind? Or what if your circumstances change and you no longer can (or want to) work?

Also to keep in mind, however, is whether you have any matched contributions on either. For example, we have access to both, and contributions to our 403b are matched dollar for dollar up to 5% of salary, whereas there is no match to 457 contributions. So, we contribute up to the match for our 403b, and then fund our 457 with remaining funds.

mustachianteacher

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Re: 403b vs. 457b: Help me decide!
« Reply #4 on: October 25, 2016, 10:04:46 PM »
Thanks for the feedback. Yesterday, I called TIAA to double check that 0.04% expense ratio, and found out that my employer actually tacks on another 0.37%. WTF?!? That's not disclosed anywhere on the website, and when I said that that seemed deceptive, the rep got testy.

So now, as much as I agree about the value of having the 457, I'm not sure I trust the fee disclosure, or lack thereof. If I'm going to be paying 0.41% for a Vanguard index fund when the USAA fund in my 404b is 0.25%, well, that seems dumb, right?

mustachianteacher

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Re: 403b vs. 457b: Help me decide!
« Reply #5 on: October 25, 2016, 10:19:41 PM »
There is no compound interest advantage to having all your money in one account vs. spread across several.

Thanks for this. I've actually wondered this for a while. Kids be of embarrassing, but I specialize in words, not numbers.

seattlecyclone

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Re: 403b vs. 457b: Help me decide!
« Reply #6 on: October 26, 2016, 01:30:00 PM »
There is no compound interest advantage to having all your money in one account vs. spread across several.

Thanks for this. I've actually wondered this for a while. Kids be of embarrassing, but I specialize in words, not numbers.

Fair enough. Just in case some simple numbers would help:

If you have $1,000 in a fund that returns 10%, you'll earn $100 in a year (10% of $1,000).

What if it's split between two accounts? You'll have $500 in one account and $500 in another account. You'll earn $50 in each (10% of $500). $50 + $50 = $100, same as if it was just in one account.

GrOW

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Re: 403b vs. 457b: Help me decide!
« Reply #7 on: October 26, 2016, 01:48:22 PM »
457 should allow withdrawal upon a break in service so full retirement is not a requirement. No better example than forum contributor millionaireeducator who details how moving to teach in another county unlocked his 457. This is a huge benefit even if the chance of use seems low today.

Barring employer match or special catch-up contribution options for the 403b, I think the 457 is the winner here for just a structure perspective.

Now to fees, I would strongly recommend really digging in on your research. It can be so darn frustrating to determine true total fees with these types of plans. I would even go so far to find a coworker that has a 457 and ask them to share their total fees. Seeing a real world example always makes me feel better than talking to customer service rep.

Or...max out both 457 and 403! Cmon we have to at least recommend that. Don't we?
« Last Edit: October 26, 2016, 01:54:36 PM by GrOW »

Gin1984

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Re: 403b vs. 457b: Help me decide!
« Reply #8 on: October 26, 2016, 01:52:28 PM »
Try to hit both

mustachianteacher

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Re: 403b vs. 457b: Help me decide!
« Reply #9 on: October 26, 2016, 07:23:47 PM »
There is no compound interest advantage to having all your money in one account vs. spread across several.

Thanks for this. I've actually wondered this for a while. Kids be of embarrassing, but I specialize in words, not numbers.


Fair enough. Just in case some simple numbers would help:

If you have $1,000 in a fund that returns 10%, you'll earn $100 in a year (10% of $1,000).

What if it's split between two accounts? You'll have $500 in one account and $500 in another account. You'll earn $50 in each (10% of $500). $50 + $50 = $100, same as if it was just in one account.

And thank you for not pointing out that someone who specializes in words clearly forgot to proofread. *facepunch*

mustachianteacher

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Re: 403b vs. 457b: Help me decide!
« Reply #10 on: October 26, 2016, 07:30:17 PM »
GrOw, good idea about asking a coworker. I think I might also call my employer's benefits department to see if they can provide me with something in print about fees assessed.

Good point too about not being able to predict the future. It's been a bad workweek already -- the king ndvthat has me looking at my numbers -- so even a 2-3 year acceleration would make the 457 beneficial.


mustachianteacher

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Re: 403b vs. 457b: Help me decide!
« Reply #11 on: October 29, 2016, 01:05:38 PM »
UPDATE: After much research and reading of fine print, it's even worse than I thought: That 0.37% that my employer tacks on is assessed quarterly, which adds up to 1.48% annually. This makes me want to kick my employer in the shins.

I'm trying to make a logical decision, not an emotional one, but even though I'm investing in Vanguard index funds with expense ratios of 0.04% and 0.06%, I will be paying fees I would normally never accept from any mutual fund. I'm trying to reframe it in my mind as paying for the privilege of easy early withdrawals -- all the perks that a 457 has that a 403b does not -- but it's still bothering me.

What do you think? Would you still invest in the 457?

And yes, I agree we should invest in both the 457 and the 403b, but unfortunately, we don't have that much cash available. Then I thought about splitting our money -- half to the 403b and half to the 457 -- but in order for the 457 money to be enough to be helpful in early retirement, I think it would make more sense to start building up the 457 account balance, and right now, we're starting with zero.

Another Reader

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Re: UPDATE: 403b vs. 457b: Help me decide!
« Reply #12 on: October 29, 2016, 02:23:55 PM »
It's important to distinguish between 457 plans offered by government agencies and 457 plans offered by private, non-profit employers, such as private hospitals.  457 plans offered by private employers offer no protection for you should your employer go bankrupt, lose a lawsuit or get into some other financial trouble.  Private 457 plan assets belong to the employer, and claims against the employer can be made against the 457 plan.  Government 457 plan assets are held in trust for the employee, are not assets of the employer, and are not subject to claims against the employer.

I would not invest in a 457 plan offered by a private employer for that reason.

mustachianteacher

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Re: UPDATE: 403b vs. 457b: Help me decide!
« Reply #13 on: October 29, 2016, 03:57:58 PM »
I'm a public school district employee.

MDM

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Re: 403b vs. 457b: Help me decide!
« Reply #14 on: October 29, 2016, 06:04:55 PM »
What do you think? Would you still invest in the 457?
See http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/ for some thoughts on making the best of a bad situation.

mustachianteacher

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Re: UPDATE: 403b vs. 457b: Help me decide!
« Reply #15 on: October 31, 2016, 03:12:08 PM »
That's helpful. Thank you!

slugsworth

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Re: UPDATE: 403b vs. 457b: Help me decide!
« Reply #16 on: October 31, 2016, 03:41:30 PM »
Random - If your employer also offers a pension, some 457's can be used to purchase additional years of service once vested. . . an additional benefit of some 457's. You would need to see if it made sense for you, if it is offered, but something that may be worth checking out.

I've seen the additional expense on the 457 before, typically it is in the employers info, not the providers.

mustachianteacher

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Re: UPDATE: 403b vs. 457b: Help me decide!
« Reply #17 on: November 01, 2016, 05:33:42 PM »
Slugsworth, that's intriguing. I'll have to look into that. We won't tap our pensions until several years after we both stop working. I mention that because we can't take out 457 money until after we "separate from service," but since there will be a lag between that event and when we declare retirement to the pension system, I suspect we could probably still buy a year or two. We used to be allowed to buy as many as five years, but they put a stop to that a few years ago. Still, every little bit helps! Thanks for the idea!

Tjat

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Re: UPDATE: 403b vs. 457b: Help me decide!
« Reply #18 on: November 02, 2016, 07:06:44 AM »
Not sure why no one has provided a simple answer, but with those fees there is no way in hell I would invest in that scammy 457 plan. Max the 403b and put any remainder in a Roth, taxable, or emergency fund.

Gin1984

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Re: 403b vs. 457b: Help me decide!
« Reply #19 on: November 02, 2016, 07:18:12 AM »
UPDATE: After much research and reading of fine print, it's even worse than I thought: That 0.37% that my employer tacks on is assessed quarterly, which adds up to 1.48% annually. This makes me want to kick my employer in the shins.

I'm trying to make a logical decision, not an emotional one, but even though I'm investing in Vanguard index funds with expense ratios of 0.04% and 0.06%, I will be paying fees I would normally never accept from any mutual fund. I'm trying to reframe it in my mind as paying for the privilege of easy early withdrawals -- all the perks that a 457 has that a 403b does not -- but it's still bothering me.

What do you think? Would you still invest in the 457?

And yes, I agree we should invest in both the 457 and the 403b, but unfortunately, we don't have that much cash available. Then I thought about splitting our money -- half to the 403b and half to the 457 -- but in order for the 457 money to be enough to be helpful in early retirement, I think it would make more sense to start building up the 457 account balance, and right now, we're starting with zero.
Do those fees also hit the cash portion of your money?  You could put your cash portion of your investments in there and be more risky with the rest.

KCM5

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Re: UPDATE: 403b vs. 457b: Help me decide!
« Reply #20 on: November 02, 2016, 07:18:56 AM »
0.37% per quarter?! That's obscene.

Contact your HR. Explain to them that that is obscene. Try to get it changed. It's possible that they don't know how ridiculous it is.

I was pretty annoyed when our 457 added a 0.2% annual fee. And the HR told me, don't worry, most of the other fees were reduce. Yeah, well, not MY fees. Whatever.

RWD

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Re: UPDATE: 403b vs. 457b: Help me decide!
« Reply #21 on: November 02, 2016, 08:10:44 AM »
Not sure why no one has provided a simple answer, but with those fees there is no way in hell I would invest in that scammy 457 plan.
0.37% per quarter?! That's obscene.

Agreed. Assuming an (optimistic?) average of 10% returns their fees would equate to ~15% of your gains every year!

mustachianteacher

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Re: UPDATE: 403b vs. 457b: Help me decide!
« Reply #22 on: November 02, 2016, 09:22:57 PM »
I appreciate the outrage because that's how I feel too. Working for a large underfunded school district already requires me to make many concessions, and I just can't shake the feeling by that MY savings will be enriching the district. This is one of many reasons I want to retire early. I would never, ever invest in a mutual fund with fees like that, yet that's exactly what I'd be doing by enrolling in the 457. It doesn't fit well with me at all, and that nagging feeling has stayed with me ever since I posted this.

I have thought about calling HR; I just haven't had the time. What blows me away is that, when I spoke with the rep (not an employee of the district), he mentioned that listing the fees as a line item on statements is a new thing. They have only been doing that since January, "so we've been getting a lot of calls about these fees that we didn't get before." Good grief.

MDM

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Re: 403b vs. 457b: Help me decide!
« Reply #23 on: November 02, 2016, 10:07:27 PM »
UPDATE: After much research and reading of fine print, it's even worse than I thought: That 0.37% that my employer tacks on is assessed quarterly, which adds up to 1.48% annually. This makes me want to kick my employer in the shins.
The language can be ambiguous.  E.g., "X%/yr assessed quarterly" should mean X/4% would be charged each quarter.  But if you have confirmed that it's really 1.48% annually....

 

Wow, a phone plan for fifteen bucks!