Exploring 403b and 457b plans? There were a few important considerations as we dug into the different options available to us.
While many public schools across the country offer pension programs for their teachers, I think it’s fair to say that they are now regularly looking at ways to scale back benefits for new teachers, and over time many states are facing long-term fiscal challenges that will likely eventually lead to broken promises for their pensioners. We live in New Jersey, so I think about this a lot!
So, the smart thing to do would be to empower teachers with alternative programs, where they could take greater ownership of their future retirement plans and progress. My wife is a public-school teacher and among a group of professions who are fortunate to have a variety of vehicles at their disposal for retirement savings which includes both the 403b and 457b plans, which are both pre-tax investment vehicles. In 2019 such professions could fully fund these with $19,000 per account. The episode of ChooseFI where they outlined that it was possible for teachers to fully fund both of these accounts simultaneously has to have been the most life-changing tip so far, that will really help us in our journey; the next step is to make and free up enough money to achieve those full contributions.
The catch with these plans: Watch the fees and expense ratios
The kick in the pants for teachers and other professionals with these options, is that schools will often offer a limited set of investment companies to open one of these plans with, and in many cases, these plans will only have mutual fund or annuity options with relatively high fees and expense ratios attached. This is a New York Times article that nicely captured my frustrations with this:
The index funds that so many in the FI community adore for their simplicity and low cost, are often unavailable or not easily found by the teachers. Often schools will have representatives from various providers visit and run seminars to encourage and educate the teachers about the 403b and/or 457 plans that their companies offer, but I get the impression that in general they tend to focus on selling options that are most profitable for themselves. After some research into options offered at my wife’s school, I could find two programs that worked best for us:
This option is a lower cost self-directed investment tool. It currently costs $35/year for balances below $50,000, and that disappears once the account balance exceeds $50,000. You will find investment options in here that include a handful of Vanguard Index funds with Expense Ratios as low as 0.04%
2. The Lincoln Investments Participant Directed Platform (PDP)
This program is not mentioned anywhere on Lincoln Investments options, and I only found this option because of conversation threads I found online (such as Bogleheads and 403bWise ). It sounds like the state teacher’s union (NJEA) has an agreement in place with Lincoln to make this platform available, even if they don’t actively encourage or advertise its existence. We recently emailed Lincoln ( firstname.lastname@example.org ) and gained access to the documentation to establish an account. It looks like the annual custodial fee is $35 and there are also offer a variety of Vanguard Index funds with low expense ratios.
Our decision and next steps
Ultimately, we chose the Lincoln Investment PDP for simplicity, because it appears that platform will support both 403b and 457b plan contributions, while the NEA Direct program currently only offers a 403b. Our long-term goal is to simultaneously fully fund both a 403b and 457b plan. That would allow us to be saving $38,000 in pre-tax income towards retirement for my wife.
To date we have been fully funding my 401k contributions, and historically avoided contributing to 403b and 457b plans because we were always so demoralized by the available investment options and associated fees. To be honest I realize that has probably been a mistake on my part. Saving in less than ideal mutual funds, and their typically higher expense ratios (>0.5%) is still better than not saving at all, especially when you factor in the tax savings associated with these retirement savings vehicles.
Knowledge is power, and we are now on the path towards fully funding a 403b and 457b plan for my wife, and utilizing more optimal vehicles with low expense ratios to boot. We’ve only just started on this path with 403b contributions, and it will take a bit to adjust our life and budget without that $19,000 in pretax income, but I’m hoping we can stretch ourselves in 2019 to also begin funding the 457b plan, and then ultimately long-term progressing towards fully funding the 457b and really maximizing our pre-tax buckets.
Some may argue that the 457b should be the priority, because you could access those funds at an earlier age if you separate from the employer, which is a key difference to 403bs and supportive of FIRE (Financial Independence, Retire Early) aspirations; but to be honest I feel that’s splitting hairs, and I’m determined to quickly get the stage where both are being fully funded, its just going to take time, focus, and determination to get there.
I’m a geek, but I find it exciting to think about getting to a stage where we will be saving $57,000 before taxes through our combined 401k + 403b + 457b plans across both of our jobs. Steadily contributing that for a decade with compounding could really lay a solid financial bedrock to FIRE things up.
Good luck to everyone exploring their 403b and 457b plan options, and stay wary. I’d love to hear what others have done to optimize the 403b and 457b options that may be available for their professions.
Disclaimer – I am not a financial advisor, and I recommend that you consult with a financial professional before making any serious financial decisions. The content on FIandFlyFree.com is for informational and educational purposes only and should not be construed as professional financial advice. Should you need such advice, consult a licensed financial or tax advisor.
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