Higher Ed Story: 403(b) or 457(b)?
by Inga Chira, Professor and CFP®
One of the questions I get asked all the time is: “What should I choose for my workplace retirement savings, the 403(b) or the 457 plan? ” My answer to this question will depend on the two plans you have at your particular job. Everyone’s situation is different. However, to help you with the decision, here are a few things to consider and my take on them. At the very least, I suggest that you know the global differences between the two options and how each of them works. Here are 3 differences I find important. This least is not exhaustive; it is a just a start as you consider your options. Note: It is possible that as a college employee, you also have the option of a 401(k) plan. If this is the case, you will also need to incorporate that option into the decision making process.
1. There is no coordination (no overlap) between the 403(b) and the 457
In other words, if you really wanted to, you could max out both accounts. For someone who is still below the catch-up age limit (under 50), this means $18,000 into each account or $36,000 total per year. With that being said, should you max out both accounts? Well, that is up you to. Retirement savings is important but at the end of the day, you also have to live your life at least somehow enjoyably, pay your mortgage, and put your kids through school. Although I am a big proponent of retirement savings, I am even a bigger fan of taking a balanced approach to your life and see how much you can comfortably afford to save for retirement without feeling like your life is pretty sad. Given that I am a college professor, I always get asked what I personally chose. I decided to max out my 401(k) rather than the 403(b) and bypass the 457 for now. I fully intend to start contributing to my 457 in about 2 years and max it out by the time I am 40. However, for now, I have other goals that to me are more important than the 457.
2. Getting access to the money differs
In a 403(b), you pretty much need to be 59 ½ (exceptions do exist like death or disability) to access the funds without paying the 10% penalty. For the 457, there is no penalty for early distributions as long as you no longer hold the same job but if you are still working past 60, you may have a tougher time accessing the funds. What does that mean to you? If you are going to change jobs when you are 47 and want the flexibility of having access to your retirement money, then choosing the 457 might make more sense. If you are planning to continue working past 60 but would like to use the retirement money for that trip around the world when you are still young enough, the 403(b) option may be a better choice. Obviously, it is quite hard to know what will happen in 20-30 years so some people choose to split their retirement contributions between the 2 options in order to increase flexibility in the future.
3. Look at the investment options as you are considering which plan to choose
The investment funds you settle on is a separate decision from which plan to choose but unfortunately, you cannot keep it 100% separate and decide later on. It is very important to look at the actuals funds as you are deciding between the 401(k)/403(b) or the 457. The providers and the options you have available under a specific plan might are so much better or worse than the other plans that splitting your money or going with the one you are most familiar with might cost you thousands of dollars in the long run. You (or at least I) would expect employers to coordinate these plans to where there is no big difference in investment choices between them (in other words, where they are pretty much the same) and although some employers are very good at this, others are really bad. This means that the decision is left in your hands and it’s a big one because it might turn into an expensive one. This is primarily what drove me to decide to go with the 401(k) rather than the 403(b) in my current job with Cal State. Although the recent changes they implemented in April make this decision much less important, when I first started a year ago, I calculated the difference in expense ratios between the options available in the 401(k) plan with Savings Plus and the options available with the five 403(b) providers to be so large, that it tipped the scale towards the 401(k) plan.
There are many other things to consider as you are deciding on which plan to enroll into, how much to contribute, and how to invest your money. I put together a series of 5 emails that goes into more detail on how to make this choice. Feel free to leave your email in the box on my website at: inga(at)attainablewealthfp.com and I hope they can help you with making your choice.
Inga talks college teaching and saving for retirement as a higher ed employee in episode #31 of the Teach and Retire Rich podcast.
Inga Chira, Ph.D., CFP®, teaches finance and financial planning at California State University, in Southern California. She has previously worked at Oregon State University, Florida Atlantic University, and Jacksonville University. When not teaching, Inga helps academics (and others) plan their financial lives through her financial planning firm Attainable Wealth. You can contact her at: inga(at)attainablewealthfp.com