A “Miner” Change to the Government 457(b) May Make a Major Difference To Teachers

The one constant in the defined contribution world is change. For once, Congress may have made a change that could unintentionally alter the course of teacher supplemental retirement plans.

Up until the end of 2019, there was one big difference between the 403(b) and the 457(b) that tended to favor contributing to a 403(b) over a 457(b). Thanks to a law passed at the end of 2019, that major difference is now gone and contributing to a 457(b) before a 403(b) could make more sense. In fact, it could completely change the defined contribution plan landscape for public school employees going forward.

A 457(b) is a little known plan that is similar to the 403(b) and generally the primary defined contribution option offered to state and municipal employees. The 457(b) has been available to teachers as well, but has largely been ignored in favor of the 403(b). Both plans have similar contribution limits and the ability to contribute on a pre-tax and Roth basis. The one major difference was that money contributed to a 457(b) is never subject to a 10% federal penalty if withdrawn prior to age 59 1/2 (with a few exceptions including the fact you must separate from service). A minor, but meaningful difference was that 457(b) money cannot be accessed prior to a teacher separating from service completely (meaning not just retirement, but also for subbing). 403(b) plans grant access to money without penalty at 59 1/2 regardless of employment status. This is a big advantage for teachers who plan on working past age 60. This access to money difference is what is changing and it’s due to a struggling coal miner pension fund.

The United Mine Workers of America health and pension funds, like more than 1,400 similar one-industry plans, were underfunded. Then along came The American Miners Act of 2019. This new law will help stabilize the private multi-employer pension, but it could also inadvertently nudge teachers away from the 403(b) and towards the 457(b). Let me explain…

Congress requires expenditures for new laws to be “paid for” and one way of raising money for the coal miners pension fund was to accelerate taxes on 457(b) money. Included in the new act, is a provision that allows in-service 457(b) withdrawals at age 59 1/2 leveling the playing field with the 403(b) on access. 

Currently, the favored defined contribution plan for teachers is the 403(b). But because the K-12 403(b) is not subject to ERISA fiduciary oversight, most plans feature high-cost products sold by high-commission sales agents. The New York Times and The Wall Street Journal have documented these issues. My pod partner and owner of 403bwise.org, Dan Otter, touched on the ERISA issue in a recent blog post.

By design, the 457(b) requires more fiduciary oversight which has generally led to better, lower cost investment options. It now might make more sense for teachers to contribute to the 457(b) before contributing to a 403(b). Teachers are allowed to contribute the maximum permittable to both plans. I still love the 403(b) and will continue to advocate for better 403(b) plans, but it might be time for employers (and employees) to begin favoring the 457(b) over the 403(b).

The biggest advantage of the 403(b):         Ability for ER contributions*

The biggest disadvantage of 403(b): Embedded multi-vendor system, no fiduciary

The biggest advantage of the 457(b):         No 10% penalty, ever

The biggest disadvantage of 457(b): Odd Salary Reduction rule (month prior)

The agent in the lobby or lunch room isn’t going to tell you about the 457(b) because they normally don’t get paid to do so. They might even actively try to get you to invest in the 403(b) over the 457(b).

There is one caveat, not all 457(b)s are worthy. You still need to do due diligence. In California there are two great state based 457(b) plans, CalSTRS Pension2 and CalPERS 457. Yet most school districts fail to offer either, opting instead to offer substantially lower quality 457(b) plans that pay revenue to their compliance administrator, insurance agents or both. Just like with the K-12 403(b), teachers may have to lobby their school district to get a better plan. 

*Technically 457(b) can have employer contributions, but they count toward the employee contribution limit. This can be overcome by adding a 401(a) plan.

Miners Act of 2019

With help and edited by Dan Otter of www.403bwise.org

403(b) Hack: Why You Might Want To Leave A Few Dollars In Your 403(b), Even If You're Retired And Don't Want It

When public school employees retire they should think twice before rolling their 403(b) money (or 457(b)) over to an IRA. I'm not talking about the hordes of insurance agents and brokers who are trying to sell you poorly structured products so they can take fancy trips, that's of course a good reason not to rollover, but there is another, potentially powerful reason why you should keep at least some money in a 403(b)/457(b) as long as you are retired.


When the financial crisis hit in 2008, interest rates were pretty high on mostly safe products, but that quickly changed as rates plummeted to nearly zero. Insurance companies who offered 3 and 4% guarantees were caught off guard and quickly shut down product lines and restricted new money. As the years went on, it became more difficult to find a product with a good rate and a high degree of safety. But there were still some products that didn't restrict new money and other companies that came out with new 403(b) products that had higher rates than similar IRA products, in some cases substantially higher. In other words, some 403(b) products offered higher rates than IRA products or had lower fees.

A client of mine had money in an IRA and we wanted to put some of it in a fixed account type product, but rates were terrible. The best we could find was 1.35%. I knew of a 403(b) with no surrender fees and a fixed account that was paying a net rate of 3.5% from a highly rated insurance company (yes, no commissions, no surrender fees, no surrender period), but my client was retired and if you're retired and you don't have an existing 403(b) you cannot open a new one. Then my client showed me an old policy that he had forgotten about. It was a 403(b) with a school district he had worked in years before (like 25 years earlier). It dawned on me, he was still a member of that school district's plan, the fact that he was retired had no bearing, he was still a participant because the vendor was still active and his policy meant he was part of the plan.

Since my client was a participant in the plan and that plan had the 403(b) option that paid the 3.5% rate, I opened a new 403(b) (remember, he is allowed to open it because he is still a participant in the plan due to him still holding that old 403(b)) and moved IRA money into it and started earning that higher rate.

My client earned in excess of 2% more than he could have gotten in an IRA because we didn't settle. We didn't require all his money be kept at one place for ease of accounting, it was a little more work on my part, but it was the right thing to do and made my client significantly more money. It's what a fiduciary does.

The moral here is that even if you find a great IRA to roll your money into, don't roll everything over. Leave some money in your 403(b) or your 457(b) just in case an option later comes along that can't be found anywhere else. Think of it almost as an insurance policy. Yes, it's a pain (another statement, another login an another RMD), but that pain just might pay off in the end like it did for my client.

Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? 403bwise.org is the place on the internet to learn, advocate and build community.

Bermuda, Ireland, Florida or Argentina - Just Sell Enough LSW Annuities

Want to goto Bermuda in 2018? Just become an indexed annuity salesperson who contracts with the National Life Group (also known as Life of the Southwest or LSW) and sell enough of their products and you could be heading there in business class!

Perhaps you want to stay in the United States, Naples, Florida at the Ritz-Carlton was a destination for 2017.

Want to go to Ireland or maybe Argentina? No worries, LSW has options for those as well. Again, you only need to sacrifice your soul and sell their surrender charge laden annuity and insurance products to unsuspecting people, including hard working school employees and you too can board business class.

The 403(b) and 457(b) markets are littered with companies and insurance agents selling indexed annuity products to teachers and other school employees who are not informed enough to know what they are purchasing. These products often come with 10 year or longer surrender periods with surrender charges exceeding 10%.

Don't believe me...see for yourself:

National Life Group Destinations by Scott Dauenhauer, CFP, MSFP, AIF on Scribd

These disgusting incentives should be not be legal. Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? 403bwise.org is the place on the internet to learn, advocate and build community.