403(b) or 457, which is best generally?

[Guest A-Team]

I have heard a number of times that a 403(b) is more preferable to a 457. Can anyone list the top reasons why (or even why not?) Thanks in advance.

I know this has been discussed here before, however every search failed.

[Ellie Lowder]

Probably the primary advantage of the 403(b) vs. the 457(b) is the participant's ownership and control. In the non-ERISA market, the 403(b) account is the "plan" which means that it is not subject to "plan" documents and plan rules. This permits greater flexibility and freedom for the participant to make his/her own decisions (as opposed to being restricted by plan rules) AND without employer or third party approvals. There is also more in-service access in 403(b) (e.g., age 59 1/2 vs. 70 1/2 in the 457(b)).

457(b) plans are a good "2nd plan" for public education employers to offer (and as Top Hat plans by tax-exempts) for those who want "double deferral" opportunity - and, also fill a "non-retirement" purpose for short term employees (those who will leave the employer before age 55 and want to use the money without restriction before age 59 1/2 since there is no IRS 10% penalty tax for 457(b) distributions at any age.

[Guest A-Team]

Thanks, Ellie.

For your information, I also referred to your Dearborn book for some help on this. Thanks again.

[Guest Joel Lee]

In those public school markets where employees are saturated with commissioned based variable annuities and mutual funds for 403(b) investing, one might elect the 457(b) as his/her plan of choice.

[Guest bill mahoney]

The biggest advantage for a 403b over 457 plans is the ability to do a trsutee to trustee transfer for investment selections. Another major advantage of the 403b is the ability to purchase life insurance with the money. Another advantage which is now being lost is the ability to tak loans froma 403b account. Another advantage is if the 403b is an ERISA based plan there maybe better asset protection, depending on that states laws.

Bill Mahoney

[mbozek]

The primary advantage of a 403(b) plan for the employee is that the deferrals are not subject to the claims of the employer's creditors. In a Non profit 457 plan the assets are owned by the employer and can be seized by the employer's creditors. Assets in a public employer 457(b) plan are exempt from creditor claims. In most states 403(b) annuities are not subject to the employee's creditors if the plan is exempt from ERISA and is completely exempt from the employee's creditors if the plan is subject to ERISA. Also 457 plan permits additional types of investments than a 403(b) plan which is limited to mutual funds and annuites. A 457 plan can invest 100% of assets in LI; however the death benefits are not excluded from income taxation when paid to the bene. LI can be provided under a 403(b) plan and the proceeds are exempt from income tax when paid to the beneficiary to the extent the proceeds exceed the cash value of the policy. Hardship withdrawals are permitted under a 457 plan. (Inservice withdrawals from a 403(b) plan are genrally limited to hardships from salary reductions and amounts attributable to employer contributions to a 403(b) annuity.) In a non ERISA plan the employees choice of investment in a 403(b) plan can be restricted by the employer who can limit the providers to whom salary reduction contributions will be sent.

[Guest Joel Lee]

In the K-12 teacher market the state teacher unions have gotten into the 403(b) act. For a fee they will "endorse/sponsor"a specific investment provider, usually an insurance company that charges about 200 basis points which includes the unnecessary M & E charge. In fact, both national teacher unions, the National Education Association and the American Federation of Teachers have endorsed such commissioned laden programs. THIS IS PROOF THAT THE LOCAL SCHOOL DISTRICTS ARE OUT TO LUNCH!