When I was younger, I thought there might be a possibility I was a superhero with latent powers. I figured my powers would awaken if I was put in peril and very frightened. Luckily(unluckily?) I have never been in a life or death situation to test this*. The ability to stop time like Evie on “Out of This World” would be useful for someone as chronically late as myself, though it brings up many questions, would I grow older since my time doesn’t stop, does the earth stop spinning, am I half alien? Now a grown-up, I’ve (mostly) concluded I am normal. Setting aside childish thoughts for more adult thoughts, I spend my free time thinking how I can use financial tools to make my future self live just as great a life as my current self lives. The first time I heard of a 403b, was from an older colleague who mentioned he and his wife, who are both educator’s, sock money away in a 403b every year. I didn’t look into it further at that point, but several years later in December of 2018, I learned about the Superpower of 403b’s and 457b’s listening to episode 13 of the Choose FI podcast interview with the Millionaire Educator, called “The Unfair(FI) Advantage of Teachers”. What are these 403b’s and 457b’s, how are they different, why should someone with access utilize them, how did I choose which to use and which company to go through, and do I feel super powerful?
Teachers and many other employees in the public sector do not have access to the 401k plans that have become the retirement plan du jour, as pensions have been ushered out. 403b and 457b’s are named after the tax code whence they came. They are both pretax vehicles that must be funded directly from a paycheck. This picture nicely shows the differences between the two plans and in my school district we can fund both. You can get a pdf copy of the picture below here. At a $19, 500 limit for each, that means I could reduce my taxable income by $39, 000. If those top dollars were in the 24% tax bracket, I would avoid $9,360 in taxes this year. Now, I (probably) can’t avoid taxes forever, so I pay today or I pay when I take it out, or like me I do both pretax investment vehicles and after tax vehicles (Roth IRA’s).
Some of the noticeable differences between the plans are that you can access the 457b funds after severing ties with your employer at any age without penalty, the 403b has more reasons for qualifying under financial need distributions, and if you are planning on continuing working with this employer and are older you won’t be able to pull out funds from the 457b until 70 1/2, but you will from the 403b at age 59 1/2 while still working for the same employer.
In my state of Alaska, if you joined the teaching or many public sector jobs after mid 2006, you are under a retirement plan called TRS III or PERS IV or SBS. I will speak to the TRS III program, as that is the one I have the most knowledge of. Here is a website that can give you the rundown on these retirement plans. All three of these current plans are considered defined contribution plans, not defined benefits plans, which means we put a certain % into the plan and depending on our allocations and how the markets do our money grows over time. We are not guaranteed a certain amount of money each month when we leave. (Now, when you do take your money out, you are given the option of rolling the funds into an annuity, but that is a conversation for another day and for most people – don’t do it!) The defined contribution in TRS III is 8% of the employee’s yearly salary and 7% of salary is put in by your employer. This comes out to 15% of your salary being saved every year. Not bad for the average American, but we will need to do more. According to Mr. Money Mustache(MMM) in his famous post “The Shockingly Simple Math Behind Early Retirement”, if you saved 15% a year, you would ONLY need to work 43 years. I am shooting for 30 years to get 85% retirement help on paying for my secondary health insurance premium (primary being medicare), so according to MMM this would take saving/investing between 25-30% a year. I have not kept track of my savings rate beyond the last two years, both years came in around 35%, but our family is on the right track.
The tools I have used in the past to save money were Roth, see “My Dance with Roth” and money market accounts. I only discovered after tax brokerage accounts and pre-tax accounts in late 2018. I spent March 2019 through September 2019 trying to choose and open a 403b and 457b pre-tax advantaged account. I was given the run around and false information by multiple companies, both the third party and the brokerage accounts, but I persevered. Our district goes through a third party called Omni to process the paperwork and make sure we aren’t over contributing. I opened a 403b and 457b and in 2020 I am funding the 457b. I chose the 457b for it’s flexibility when you sever ties with your employer. I figured if life happens and I decide to switch careers or take a year or five off, that it would be great to have an option of using these funds. If I’m able to save $19,500 and have room for more, I’ll fund the 403b also.
I called my HR department in early 2019, and they sent me newsletters for the 3rd party OMNI that were more than a year old and this had a list of the 403b and 457b companies allowed in my district. I was later directed to look at their website, which is where the two images below are from. Now, had you heard of a 403b program, you may be surprised that there are more than one provider we are allowed to choose from. The colleague who first told me about 403b’s and my own impression was that American Fidelity was the only provider in our district. I have heard salesman for the providers were “kicked out” of the schools after staff feeling harassed by them hanging out in the staff lounges. American Fidelity is primarily an insurance company and has an agreement with our district to provide Daycare FSA accounts and Health FSA accounts, among other things, so they schedule appointments with staff at each school and while you are there they also share the other products they carry, different types of insurance, as well as 403b accounts.
Now there seem to be many providers on this list, a financial advisor in Anchorage, AK told me our district had the most he had seen in the Alaska school districts he worked with. The providers with “ROTH” in front offer the ROTH versions of the 403b and 457b, essentially you put money from your paycheck that has been taxed into these accounts. The advantage to these accounts is the higher $19, 500 limit vs. the Roth IRA’s $6, 000 yearly limit. For my search, I was concentrating on the pre-tax 403b and 457b. I called each of the companies listed, some were quite difficult to get a person on the phone. I was trying to figure out what fees were involved, how many and what types of funds were available to invest in. On this list the first three colored dots refer to annuities. What I found in my experience with American Fidelity and my calls to other insurance companies, is that I didn’t want to invest my money in a company that is primarily insurance and selling annuities. In addition to the yearly fee and the expense ratios of the funds you choose, these companies often charge a yearly 1.25-1.5% mortality & expense(ME) charge. This ME charge is an insurance in case you die, your beneficiary is guaranteed to at least get the amount you put in. If your funds earned 10% in a year, it would be closer to 8.5%, the ME charge comes right off the top in good years and bad. 1.5% may not seem like much, however over the lifetime of your account, that will add up to many thousands of dollars! It is also important to look at penalties charged for rolling your money to a different company, some companies charge up to 8% fees! The prospectus’ of the funds show what the fees and penalties are, but you should ask the company when you are deciding who to go with.
From my research, the companies that stood out as low cost with many available index funds were Fidelity Mgmt Trust Co., Vanguard, and Aspire Financial Services. Some of the other companies would require going through a financial advisor, which is not necessarily a bad thing. A financial advisor is much more than just a mutual fund picker, they help you plan for your life goals. Make sure they are a fiduciary in every regard and decide between fee only advisors or assets under management advisors. I had opened up Vanguard taxable, Roth IRA, and 529 accounts in January 2019, so I could have gone with them for a 403b, but as I was more interested in the 457b, I decided to go with Fidelity for my new account. 403b’s are more common and a good resource to find out more is this website. I had a lot of difficulty setting up my 457b account, I was sent back and forth between OMNI and Fidelity. There was an error when I tried to sign up on Fidelity’s website and both companies claimed the error was from the other company, possibly paper work or designation errors. In a digital age, and when I was able to sign up for Fidelity’s 403b account online in about two minutes, I was sent paper copies for the 457b account. I had a hard time believing I was the only person from my district to ever have signed up on-line with Fidelity 457b, but the errors seem to be fixed, so hopefully the folks in the future will be able to create an account, lickety-split. I had asked what kind of funds were available in the 457b and at one point was told there was only a money market account, but after finally signing up and getting access to my account on-line I saw there were almost 200 funds you could choose to purchase with your funds. There should be mutual funds for every flavor. Choosing what funds you want to allocate your money to will be highlighted in another post for another night. Choosing what company to go through and what funds to choose and what allocations are important factors to think about. If your employer does not have good options, you may be able to add to the options, here is a podcast on this subject, where Nancy Bachety discusses how she was able to get better options added to her district’s plans, her life mission now is to help others at her website, find it here.
After all the headaches I went through, the many calls and learning conversations, what makes me feel super powerful is that I took action. It didn’t happen over night, I sometimes suffer from analysis paralysis, but I have opened my account and I have a goal in 2020 of maxing my 457b contribution. I have chosen the Fidelity total stock market index to dollar cost average into on a bi-monthly basis, and am still working through my investor’s statement to decide my allocations. I won’t be relying on an other worldly superhero to save my retirement, but to be my future self’s hero, I must take action now, and you can too.
Don’t be like Wimpy.
As Ever, SOS
*There was that two month period of time I didn’t have health insurance when I was hit by a 5th wheel being towed by a truck on the last day of my epic bicycling trip “26 days, 2100 miles, 5 flat tires, and 1 collision”. Or the time I almost drowned in a hot tub as a child when my hair was caught on an underwater piece.
**Top Image from Superpower Vectors by Vecteezy and altered by SOS
***Bottom Image Wimpy character from Popeye comic find it here
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