Author Topic: Value of 457b plans  (Read 6812 times)

MustardTiger

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Value of 457b plans
« on: August 02, 2014, 09:02:11 AM »
I am a public school teacher, and am eligible to use a 457b retirement plan.  For those not familiar, it is simlar to a 401k, but I can withdraw money without penalty as soon as I leave the job, instead of a set age.  This of course seems like a huge advantage, but the fee's are substantial.  It seems like for a stock index fund you would be paying around 1%, which is significantly higher than you would pay in a vanguard ira.

Are the extra fee's at all worth considering for someone who would be wanting to retire early? 

zataks

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Re: Value of 457b plans
« Reply #1 on: August 02, 2014, 09:31:14 AM »
Double check but I am almost certain that if you draw your funds prior to retirement age (59.5yrs) you pay a 10 or 20% penalty unless you setup/tae the substantially equal payments plan option just as you would have to do with a 401k.  The biggest different I know of for the 457 vs the 401 is that the 457 is specifically for government employees.  Beyond that and for most practical purposes, they are the same. 

The difference between your 457 and a Vanguard IRA is that the 457 has the same annual contribution limits as a 401k (17.5k) whereas the IRA is 5,500$.  The other benefit of the 457 is that the employer, in addition to paying into your pension, often gives some sort of match for the 457 and often fees are very low as it's a large organization negotiating the fund contract.

Psychstache

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Re: Value of 457b plans
« Reply #2 on: August 02, 2014, 10:03:44 AM »
Double check but I am almost certain that if you draw your funds prior to retirement age (59.5yrs) you pay a 10 or 20% penalty unless you setup/tae the substantially equal payments plan option just as you would have to do with a 401k.  The biggest different I know of for the 457 vs the 401 is that the 457 is specifically for government employees.  Beyond that and for most practical purposes, they are the same. 

The difference between your 457 and a Vanguard IRA is that the 457 has the same annual contribution limits as a 401k (17.5k) whereas the IRA is 5,500$.  The other benefit of the 457 is that the employer, in addition to paying into your pension, often gives some sort of match for the 457 and often fees are very low as it's a large organization negotiating the fund contract.

What you are describing is a 403b, which is the government version of a 401k. 457s are deferred compensation plans that are not subject to the 10% penalty and can be access any time after leaving employment. They are also tax deferred until withdrawal, like a 401k or 403b. If your plan is to retire early, the 457 is a worthwhile option typically, even with the fees.

milesdividendmd

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Re: Value of 457b plans
« Reply #3 on: August 02, 2014, 12:16:46 PM »
Ksaleh is correct. You can withdraw from a 457 without 10% penalty after leaving your employer.

Advantages of contributing to a 457 in addition to a 403B are

1.  More tax savings now.
2.  Early withdrawal without penalty.

The disadvantages are

1. High fees
2. The risk of losing principle if the organization you work for goes bankrupt and the creditors seize assets.

In balance it's usually well worth it.

zataks

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Re: Value of 457b plans
« Reply #4 on: August 02, 2014, 12:40:48 PM »
Crazy, always thought there were penalties on my 457.  But just did some reading and you guys are right.  Also, it looks like I could get into a 403 or 401 in addition to my 457 and significantly increase the amount I can invest with tax advantages.  Definitely will require some more research but this is fantastic news!  Thanks guys!

Rural

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Re: Value of 457b plans
« Reply #5 on: August 02, 2014, 12:41:20 PM »
Ksaleh is correct. You can withdraw from a 457 without 10% penalty after leaving your employer.

Advantages of contributing to a 457 in addition to a 403B are

1.  More tax savings now.
2.  Early withdrawal without penalty.

The disadvantages are

1. High fees
2. The risk of losing principle if the organization you work for goes bankrupt and the creditors seize assets.

In balance it's usually well worth it.


Disadvantage #2 is a risk only with private entities. Governmental 457 accounts are protected.

Psychstache

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Re: Value of 457b plans
« Reply #6 on: August 02, 2014, 01:18:38 PM »
Crazy, always thought there were penalties on my 457.  But just did some reading and you guys are right.  Also, it looks like I could get into a 403 or 401 in addition to my 457 and significantly increase the amount I can invest with tax advantages.  Definitely will require some more research but this is fantastic news!  Thanks guys!

Yeah, my employer doesn't always do things right, but offering a 403b and 457 through Vanguard is def one thing they do perfectly :)

Another Reader

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Re: Value of 457b plans
« Reply #7 on: August 02, 2014, 01:34:50 PM »
School districts are prone to offering annuity products in their 403b and 457b plans.  Do you have a choice of providers?  Is the provider an insurance company?  If it's an insurance company, the mutual funds may be tied to an annuity product for which you pay fees.  Review the plan information carefully to see what you are being offered.

457b's are deferred compensation plans, not qualified retirement plans.  That's why they are not subject to early withdrawal penalties.  However, if you roll the 457b plan into an IRA upon separation of employment, you lose the penalty-free withdrawal benefit.  It's a good idea to find out what your withdrawal options are when you quit or retire.  Government agencies are required to hold 457b assets in trust for the benefit of the employees, so they are not subject to creditor claims in a bankruptcy.

If you post the funds and the details of the plan, you will get some more useful feedback.

MustardTiger

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Re: Value of 457b plans
« Reply #8 on: August 02, 2014, 02:51:33 PM »
I looked at the expenses and I can invest in Vanguard total stock market but I have to pay .65% fees on top of vanguard fee. 

Another Reader

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Re: Value of 457b plans
« Reply #9 on: August 02, 2014, 03:18:14 PM »
What is that fee?  Is there an annuity "wrapper" on the account, or is that a simple account service fee?  Who is administering the plan?  Can you post a link to the plan if the information is available without a password?

MrsPotts

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Re: Value of 457b plans
« Reply #10 on: August 02, 2014, 03:48:24 PM »
I looked at the expenses and I can invest in Vanguard total stock market but I have to pay .65% fees on top of vanguard fee.

Wow.  I though my 3% 457 fee was high!

MustardTiger

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Re: Value of 457b plans
« Reply #11 on: August 02, 2014, 05:49:53 PM »
http://region10rams.org/school-government/

This is the website with the information.  I have to go in next week to make elections.  With the .65 in addition to the .17 fee from the vanguard fund that is still under 1%, the 3% comment is confusing me.

milesdividendmd

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Re: Value of 457b plans
« Reply #12 on: August 02, 2014, 06:30:28 PM »
http://region10rams.org/school-government/

This is the website with the information.  I have to go in next week to make elections.  With the .65 in addition to the .17 fee from the vanguard fund that is still under 1%, the 3% comment is confusing me.

Wow!

I've got some great news for you. Your 457 plan options are not bad at all. In fact they're very close to ideal.

I would gladly trade my options (basically the all of Fidelity's low-cost index funds at my disposal ) for yours. Why?  Dimensional fund advisors are the gold standard for Factor tilting.  The problem is that to access them you usually have to employ an advisor which adds another one percent per annum to your investment costs.

If I were in your shoes I would fill up my 401(k) or 403B plan with plain-vanilla index funds like Vanguard total market and Vanguard total bond market funds.

Then I would load up my 457 plan with big time factor tilts. Like the DFA small-cap value fund, the DFA microcap fund, the DFA emerging markets value fund, etc. Vanguard is great at Capital weighted indexes but they are not so good at factor weighted indexes (so their small-cap value is neither very small or very value-ey. )

You should write your plan administrators a love letter. They nailed it!

Here's a nice reference reviewing which funds are best from DFA versus Vanguard:

http://www.altruistfa.com/dfavanguard.htm

Congratulations and enjoy!

« Last Edit: August 02, 2014, 06:38:07 PM by milesdividendmd »

Another Reader

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Re: Value of 457b plans
« Reply #13 on: August 02, 2014, 06:37:38 PM »
Different 457b plans have different fees.  Looks like in your case (Region 10) you pay the investment advisor 0.40 percent and the plan administrator 0.25 percent.  Boo! Hiss! Total ripoff!  You are stuck with that, so move on.  The funds offered are really good.  Oddly, you have the higher fee investor share class Vanguard total market index fund and short term bond index fund.  That seems unfair, as with all that pooled money you should be getting the lowest cost institutional class shares.  You also have access to DFA funds.  DFA funds are highly regarded managed funds.  You can read about DFA here.

 http://us.dimensional.com/philosophy.aspx

In your shoes, I would decide on my asset allocation and take advantage of these funds and the opportunity to shelter the money and invest it for the future.   If you have not already done so, read up on asset allocation and investment policy statements over at the Bogleheads website.  If you prefer Vanguard, go with the two index funds and pick funds in your other accounts to conform to your asset allocation.  I would have no problem with using the DFA funds if you want to diversify outside the US or put a little more emphasis on small caps.

It also looks like you can leave your money in until age 70 1/2, when required minimum distributions kick in.  The distribution process is not well described, so if you are planning on ER, you should ask about how you take distributions if you retire early.




MrsPotts

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Re: Value of 457b plans
« Reply #14 on: August 02, 2014, 10:21:12 PM »
http://region10rams.org/school-government/

This is the website with the information.  I have to go in next week to make elections.  With the .65 in addition to the .17 fee from the vanguard fund that is still under 1%, the 3% comment is confusing me.

My bad.    Point three percent

TomTX

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Re: Value of 457b plans
« Reply #15 on: August 04, 2014, 08:24:01 PM »
Different 457b plans have different fees.  Looks like in your case (Region 10) you pay the investment advisor 0.40 percent and the plan administrator 0.25 percent.  Boo! Hiss! Total ripoff!  You are stuck with that, so move on.  The funds offered are really good.  Oddly, you have the higher fee investor share class Vanguard total market index fund and short term bond index fund.  That seems unfair, as with all that pooled money you should be getting the lowest cost institutional class shares.  You also have access to DFA funds.  DFA funds are highly regarded managed funds.  You can read about DFA here.

 http://us.dimensional.com/philosophy.aspx

Can you opt out of the investment advisor? In my 457, I have to pay plan administrator costs, but the investment advisor service is an option, not mandatory.

MustardTiger

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Re: Value of 457b plans
« Reply #16 on: August 05, 2014, 11:07:10 AM »
Ok a bit more information and another questions about which buckets I should be using.

First some background info.  We have insignificant savings and are just beginning investing.  We have probably a slightly over 0 net worth when you consider debts (~30k) and home equity.  I am a teacher but also have a side job, and my wife is an independent contractor.  I am in the process of setting up individual 401k's for both of our businesses.

Now my question is about which buckets I should start throwing my $$ into.  At first I thought to put everything into the individual 401k's because of the increased tax liabilty for self employed income.  I also have the ability to contribute to both a 403b and a 457b plan through work.

It looks like through my 403b I can invest in VTSMX for a similar fee as if I went through vanguard.  The 457b plan obviously has benefits for possible early retirement, and the ability to invest in what could be some higher quality managed funds as the poster above mentioned.  The 457 has a sliding scale fee from .6%-.8% in addition to the fees from the fund, which will end up being close to 1%.

Should I ignore my job retirement plans entirely with no % match and just contribute to the i401k's (which even if we put everything there we will not max them for the foreseeable future).  Or do some combination of the above?

I realize this is a convoluted question and greatly appreciate anyone taking the time to give me some insight.

arebelspy

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Re: Value of 457b plans
« Reply #17 on: August 29, 2014, 11:43:21 AM »
Do you have a choice of providers?

This.  My school district offers a half dozen different companies to choose from.  Start with researching what providers are available, rather than what funds are available with a particular provider.
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