I have access to both a 403b and a 457 retirement account at my new employment university (along with a mandatory retirement plant that I cannot increase or decrease my contributions to). I think that you contribute to both these types of accounts because you are super-awesome savers, but if I’m just going to do one, which should I do? A little background: the mandatory plan will take 5.5% of my yearly salary, and the uni will contribute 10% of my yearly salary to that plan as well. I can contribute whatever I want to the 403b or 457, but will not get a match. I’m 33 years old, and only started contributing to a retirement account about two years ago (~15%/year), because I have been financially idiotic for most of my life.
Well, gee. There’s not a straight-out answer here. It’s going to depend a lot on the characteristics of the two plans. Most likely, it won’t matter too much which you choose, but here are some things to think about.
1. What are your investment options for the 403(b) vs the 457? Is Vanguard a choice for either? In terms of investment options you want two things:
A. Low fees
B. The ability to have a diversified portfolio
The return that you get is going to depend a lot on these two options. In my university, there are a lot of choices for the 403(b), but only one option for the 457. We like the options in the 403(b) a little bit better, so that’s the way we’ve gone. The fees were tough to compare between the two types of plans, but that should be changing soon with legislation to make comparisons clearer. (I had to do some math to figure out what the step-function flat dollar fees for the 457 plan translated to compared to the straight percent for the 403(b). At the amounts we were investing, the fees were about the same.)
2. When do you plan on drawing down for retirement, and do you plan on leaving state employment, and if you do plan on leaving state employment, would you need to access that money?
The 403(b) has larger early withdrawal penalties, and if you leave state employment, you can roll it over into an IRA, but you pay a penalty to directly access that money. With the 457 plan, you don’t have that penalty (note: you can still roll over into an IRA upon leaving your job). There are a few other small differences if you are older or need hardship withdrawals. Also note that you can actually save in BOTH, if you have enough extra money floating around.
So if you want to make it more difficult to tap into your retirement money before you hit retirement age, go with the 403(b). If you think you’ll need that money in case of job loss or leaving your job (or if worries about job loss are keeping you from contributing), then go with the 457.
Those seem to be the relevant points to consider to me. What am I leaving out? Has anybody in the Grumpy Nation made a decision between the two types of plans?