Home » Best Practices

Category: Best Practices


The 403b and 457 Plan Comparison for Public School Employees

As a public school employee, pension plans are an important component of retirement planning. However, your pension alone may not provide enough retirement income to support your desired future lifestyle.

Fortunately, there are additional options available to help you achieve your retirement savings objectives. Contributing to 403b and/or 457 plan offered by your school district affords you the opportunity to supplement your defined benefit pension plan.


403b and 457b plans are both retirement plans offered to public school employees and certain 501(c)(3) tax-exempt organizations. Employees save for retirement by contributing to individual accounts. Employers may also contribute to employees’ accounts. Both plans have the following in common:

Tax-deferred Contributions
Both employer sponsored plans allow you make contributions on a pre-tax basis via a Salary Reduction Agreement. Contributions to qualified savings plans, are made on a pre-tax basis, reducing taxable income received by the employee, which typically equates to a keeping you in or lowering you to a lesser tax bracket. For the past 3 years, contribution limits have been the same for both plans.

Tax-deferred growth on earnings
Your taxes are paid at a future date which allows your investment to grow without current tax implications. The use of a tax-deferred investment account is most often a wise decision when you are in a higher tax bracket now compared to the income tax bracket you anticipate to be taxed at in the future when you will be taking withdrawals. This can help you to build wealth quicker because you are reinvesting all growth in your account rather than paying a chunk each year to Uncle Sam.

If you leave your job, your plan contributions and earnings can be exchanged into your new employer’s plan without tax implications if done properly.

Investment Options
Both plans allow you to select from various investment options like mutual funds and annuities.

ROTH option available
Both plans may have a ROTH option available where you pay income tax on the contributions to the plan, while distributions from the plan (if certain requirements are met) are tax-free. Choosing whether to use the ROTH option is a decision based on your age and when you need access to the funds.


While the plans have much in common, they do have a few key differences that may affect your decision to invest in one or the other. The main differences between 403(b) and 457 plans center on how and when you can access the funds.

Early/premature withdrawals

  • 403bs are subject to possible 10% penalty (link: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions) (if under age 59-1/2.
  • 457b does NOT have early withdrawal penalties.

Catchup provisions*

We recommend you speak to a professional when deciphering which catchup rules may apply to you. Below is a brief summary of the differences in catch up provisions.

403(b) Catchup Provisions:

  • 50 years or older rule. If permitted by the 403(b) plan, employees who are age 50 or over at the end of the calendar year can also make catch-up contributions of $6,000 in 2015 – 2019 beyond the basic limit on elective deferrals.
  • 15-year rule. Employees with 15 years of service with their current employer and an annual average contribution of less than $5,000 per year are eligible for an additional $3,000 contribution per year up to a lifetime maximum catch-up of $15,000.
  • When both catch-up opportunities are available, the law requires deferrals exceeding the standard limit ($19,000 in 2019 and $18,500 in 2018) to be first applied to the 15-year catch-up (to the extent permitted), and then to the age 50 catch-up.

457 Catchup Provisions: The 457 plan has special catch-up contributions that may be allowed.

  • If permitted by the plan, this allows a participant for three years prior to the normal retirement age (as specified in the plan) to contribute the lesser of:
    • Twice the annual limit of $38,000 in 2019 and $37,000 in 2018, or
    • The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions)

Fees and Expenses

Whether you ultimately choose a 403(b) or 457(b) you will also need to make important decisions regarding the investments within those accounts. Be sure to compare the fees associated with mutual funds and annuities before jumping into either plan. Choosing a plan with even a 1% higher fee could affect your retirement savings nest egg.


DID YOU KNOW? If eligible, you could contribute to a pension, a 403(b) AND a 457 plan at the same time.

Contact Us to find out if you qualify for this savings strategy.

There are many factors to consider when you decide which plan to enroll into, how much to contribute, and how to invest your money. Many of these decisions will also be based on your age, your personal goals for the future, and when you will need to access the money.

Warwick Valley Financial Advisors specializes in helping teachers and school district personnel understand the issues they face. We have become seasoned industry advisors on the 403(b) and 457 plans and can help you make informed decisions early in your financial planning journey.

If you have not yet signed up for a 403(b) or 457 plan, consider doing so as soon as possible. The sooner you begin saving, the more substantial the sum of retirement funds you can potentially save, and the better your chances to be able to afford to live the retirement lifestyle you want to live.

If the idea of picking the right plan intimidates you, contact a financial advisor who specializes in working with teachers and school district personnel to help you make an informed decision.

*Catchup Provision – Source: https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions

Free Guide: What Every K-12 Employee Should Know About Their 403B Plan

Retirement investing for teachers can be confusing. This guide is an excellent source of information about the various options available to you as a school district employee answering important questions.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

choose 403b

How to Select a Suitable 403b Vendor

Teachers have a lot going on. On top of their all-encompassing job, many have families, children and other personal obligations that they must juggle along with everyday activities and tasks around the home. So, when it comes to choosing a 403b vendor to work with, many teachers choose blindly, simply following the course that their colleagues or friends have taken. They trust the professional who came to their classroom, and, from a 10,000-foot glance, thought the plan summary sounded good – “There’s no time to read all the fine print.” But this can be a very costly mistake!

Not all school district employees have the same situation or needs. And more importantly, the vendor that “your friend/colleague” selected, may not have been researched. For example, did you know that some charge fees that are avoidable and could stunt the growth of your retirement nest egg?

Below are some guidelines to help you choose a 403b vendor.

Check the 403b Vendor Fees

Fees may have the biggest impact on the return of your 403(b) plan because they cut directly into your rate of return.

For a mutual fund held in a retirement plan, these fees can include:

  • Expense Ratio: It costs money to run a mutual fund, sometimes more than others. This expense, also known as a management fee or operating expense, is typically deducted from the fund’s total assets before your share price is determined.
  • Sales fees or Commissions: On certain mutual funds, you will pay an upfront fee sometimes called a “front-end load”. Depending on the amount of your investment, you could qualify for a lower upfront fee called a “breakpoint”.
  • Redemption or surrender fees: On certain mutual funds,, you pay a “back-end or deferred load”. These fees will apply if you sell the mutual fund within a certain period of time.
  • Short Term Trading fees: Mutual funds are designed to be long-term investments, so trading fees were created for some funds to discourage short-term trading.
  • 12(b)1 Service fees: Many funds have an ongoing service fee that is paid to a financial advisor or the firm he or she works for as compensation for marketing the fund. Just like the expense ratio, this service fee will be deducted out of the total fund assets before your share price is determined.

For an annuity within a 403(b) plan, fees can include the following:

  • Mortality and expense risk fees: Also known as the Death Benefit. Participants pay the mortality and expense (M&E) fee each year to an insurer to offset the risk of investment loss, plus fees involved to pay annuity provider expenses. According to the Securities and Exchange Commission, that generally means an average of 1.25 percent annually, which equates to $250 a year on a $20,000 account. (Read our recent blog post for more on this).
  • Administrative fees: These can be flat fees or a percentage of an account (typically, 0.15 percent, or $30 for a $20,000 account).
  • Sales loads: These are sales commissions an investor typically pays up-front when buying an annuity. These costs cut directly into the actual amount available to invest. For example, a 7 percent fee on a $10,000 investment will cost $700, meaning you’ve effectively only invested $9,300. These are common in 403(b) plans.
  • Investment Expense Ratio: Inside a variable annuity, the underlying stock and bond investment choices, called sub-accounts, will have an investment management fee which can range from .25 – 2.00% of the value in that account per year.
  • Surrender charges: These will apply if you sell an annuity within a certain period of time, known as the surrender period, which can last up to 15 years after purchase. This charge, also called a Contingent Deferred Sales Charge (CDSC), is a percentage of the asset balance at the time a person withdraws or transfers and depends on how long the money has been in place.
  • Fees for Optional Features:  Special features offered by some variable annuities, such as a stepped-up death benefit, a guaranteed minimum income benefit, or long-term care insurance, often carry additional fees and expenses.

Ask for a Fee Disclosure

To evaluate the fees of an investment product you’re considering, ask about them.

If you’re working with a financial advisor,

  • Ask if he or she receives a commission based on the sale of the product, and if so, the amount of this commission
  • Ask if the advisor will receive any additional compensation (including any bonuses or incentive gifts) associated with selling this product
  • Ask if the advisor will receive a greater sales commission by recommending a particular product over another, and whether your needs would be equally served by the lower-priced product

Performance Information

Fees can dramatically impact an investment’s potential performance, so, when evaluating investments, it is also useful to review, compare and contrast their previous performance. However, keep in mind that past performance is not necessarily an indicator of future returns.

A good way to assess past performance is to compare a product’s performance to a comparable benchmark index. This information can be found in a fund’s investment prospectus. And can be done for you if working with a financial advisor.

For example, if you’re considering a large-cap growth fund, how does its performance compare with the S&P 500 benchmark? If the fund has come close to matching or exceeded the performance of the index, it may be worth considering. On the other hand, if the fund has significantly underperformed the index, you may wish to look elsewhere.

If you’re considering an insurance company as your 403(b) plan vendor, it is prudent to review and compare its financial strength and stability before purchasing a product from that company. Because these companies sell insurance products that obligate the insurer to pay a benefit/return at some point in the future, it is important to verify that the insurer is in good financial health so it can make good on this obligation.

The Benefits of a ‘Financial Tutor’

Choosing a suitable 403(b) vendor takes time. That’s why more and more education professionals are turning to advisors who act as  fiduciaries  for help and expertise with their financial and retirement planning. The right financial advisor can take on this task for them and aim to help ensure they’re on the right track toward reaching their retirement goals.

But beware: Just like 403b vendors, not all financial advisors are created equal. Choosing a financial professional is an important decision. It can take a little time to research a financial advisor, but time spent now can save you time and money in the long-run.

Hiring a financial advisor to help you make informed financial decisions can be extremely beneficial. But choosing a professional to work with is one of the biggest decisions you will make. This person can determine when you can retire, how you’re able to spend that retirement and what you’re able to leave behind when you’re gone, if anything.

Don’t follow the herd. Instead, start a new trend that includes research, insight and smart decisions. It may take some time, but it’s time well spent for sure!

Warwick Valley Financial Advisors works specifically with teachers and school district employees and is familiar with the needs and issues these hard-working professionals face. Contact us to find out how we can help, or schedule an appointment now to discuss your personal situation in more detail.

*Investing in mutual funds involves risk, including possible loss of principal.

Variable annuities are suitable for long-term investing, such as retirement investing. Withdrawals prior to age 59-½ may be subject to tax penalties and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

Free Guide: What Every K-12 Employee Should Know About Their 403B Plan

Retirement investing for teachers can be confusing. This guide is an excellent source of information about the various options available to you as a school district employee answering important questions.

financial review

The Annual Financial Check-Up

Don’t ignore it. Here’s why.

Here’s the scenario … you get a card in the mail, one of those little reminders that tells you it’s time for your annual financial checkup. Your reaction: I’ll take care of that later. Here’s why you should look forward to it.

Why do I need an annual financial checkup also known as an annual review?

Because things change, and during the course of the last 12 months, you may have … changed jobs, made major purchases, welcomed a new child, retired, bought or sold a residence, decided upon new goals. These developments can change your financial objectives. Also, it is just sensible to measure your financial progress. If you are not making progress in accumulating assets, or if you are assuming too much risk as a result of your current portfolio or financial decisions, it’s time for change.

The annual review is a “deep breath” where you can get away from daily distractions and think clearly about financial planning.

Just imagine. Imagine letting your investments go for five or ten years, assuming that they’re doing okay while you wonder what the quarterly statements mean. Imagine being a few years from retirement only to find you have less than a year’s salary in savings. Imagine passing away and leaving unresolved money issues for your loved ones, or subjecting them to a contentious probate process.

These scenarios are all too real; people run to financial advisors for help with them every day. If they had only reviewed what was happening with their lives financially, they could have planned to avoid these issues in advance. Putting things off can be dangerous.

This is an ideal time to take a look under the hood – financially speaking. During your annual review, you can estimate your net worth, and also possibly learn about any tax changes that might affect your investments, business or estate. It’s also a good time to make voluntary IRA contributions, and get college funding and financial aid applications underway.

Financial planning is not an event you do once in your lifetime and forget about. Financial planning should be an ongoing priority.