457(b): Savings Plan Unicorn? 🦄
May 11, 2021
There’s a retirement plan available to teachers that sounds almost mythical. Upon separation of service it can be accessed tax-penalty free at any age. It has a provision that allows regular contributions to be doubled for three years prior to retirement (if the employer permits it). For 2021 that would be an annual contribution of $39,000! In contrast to the K-12 403(b), more employer oversight is required of this plan resulting in generally lower-cost investment choices than the 403(b). Finally, more than 40 states have state-based plans teachers and school employees are eligible to participate in. The size and scope of some of these plans allows investments to be offered for as low as 0.0084%. That is not a misprint.
Say My Name
The plan is called the 457(b). It is one of two supplemental plans available to teachers and school employees. While the 403(b) was created in 1958, the 457(b) was hatched the same year as the 401(k): 1978. Traditionally, the 457(b) has been the retirement plan of choice for state employees (government employees, municipal employees, firefighters and police). Teachers have long been eligible to contribute to this plan, but until 2001 contribution limits were coordinated with the 403(b). Meaning, if the maximum allowed to each plan was say $8,000 as it was in 2000, a teacher could only contribute a total of $8,000 to both plans. The Economic Growth and Tax Reconciliation Relief Act of 2001 (EGTRRA) repealed this coordination. Today, a teacher could contribute $19,500 to the 403(b) and $19,500 to the 457(b). Catch up provisions allow even more to be contributed.
Prior to passage of the obscurely named Miner’s Act of 2019, 457(b) money couldn’t be accessed until age 70.5 if still employed. Now money can be accessed at age 59.5 if still working, the same year as the 403(b). This change, combined with the ability to access money penalty free at any age if separated from service and the ability to double contributions for three years prior to retirement make the 457(b) a superior supplemental retirement plan for teachers. Access to low cost state based plans is the cherry on the top. That investment charging 0.0084% mentioned earlier is an S&P 500 available through The New York State Deferred Compensation 457(b) Plan. That is not a misprint. Why can New York offer such pricing? Their plan has 250,000 participants (it's not just teachers contributing) and more than $31 billion of assets under management. It also helped that this plan utilizes low-cost Collective Investment Trusts (CITs), which are permitted in a 457(b).
How Much Can Be Contributed to a 457(b)
- Participants may contribute up to $19,500 for year 2021.
- Age 50 Catch-Up: Participants age 50 and older at any time during the calendar year are permitted to contribute an additional $6,500 in 2021.
Additional Catch-Up: Employees who are three years from normal retirement age (as defined by the plan) are permitted the lesser of:
- Two times current year’s normal retirement contribution limit or
- Underutilized limits from past years. Note: not all employers make this additional catch-up option available nor are they required to do so. Check with your employer for details.
Investment Products Available in a 457(b)
- Mutual funds and annuity products (which can include fixed annuities, equity-indexed annuities and variable annuities) may be offered. See your specific plan for details.
403(b)/457(b) Side-by-Side Comparison
- Free On-Demand Learning Module: Get Wise to the 457(b)
- 403bwise 457(b) Information
- Zoom Event on May 13, 2021: Get Wise to the 403(b) and 457(b)
Dear Benefit Officials
If you are a benefits official reading this, research adding a low-cost 457(b) plan. Start by seeing if your state has one that you can utilize. As illustrated with the New York plan, economies of scale can make a state-based plan an especially attractive choice. Plus, it takes much of the management out of your hands; a real win-win. If you are a state that blocks teachers from participating in your state-based plan, the question of why has to be asked. More participants means more assets under management which means more power to lower costs which benefits everyone.
Stay wise and well (and invest in a 457(b) plan).
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