Benefits, drawbacks
of 457 plans
Typically offered to employees of state and local governments, 457 plans resemble private-sector 401(k) plans in many respects, but there are some key differences — both good and bad.
As with 401(k) plans, participants in 457 plans have pretax contributions deducted from their paychecks. The contribution limits are the same as they are for 401(k) plans. In 2017, workers can contribute up to $18,000 ($24,000 if they're 50 or older). More than half of large 457 plans allow participants to borrow from their accounts.
Unlike the majority of large-company 401(k) plans, however, most 457 plans don't match employee contributions. Public-sector employees are more likely to receive a traditional pension than private-sector workers. Those two factors may explain why only about 55 percent of public-sector employees with access to a 457 plan contribute to it.
But even if you're confident you'll receive a pension, you might still want to fund a 457 plan because it offers important benefits that could pay for health care and other big expenses in retirement. First, you can withdraw funds from a 457 plan at any time without paying a 10-percent penalty, although you'll still have to pay income taxes on withdrawals. (Participants in 401(k) plans must wait until age 55 to take penalty-free withdrawals, assuming they have left their job, and IRA owners must wait until they're 591/2.) To take advantage of this feature, avoid rolling your plan into an IRA when you leave your job.
A 457 plan also offers a way to supercharge your savings during the final years of your public-service career. Instead of making catch-up contributions, workers who are within three years of their “normal retirement age” — typically the age at which they collect their full pensions — can double the $18,000 maximum contribution for three years, as long as they haven't maxed out on contributions in the past. Three years of $36,000 contributions would allow you to shovel up to $108,000 into your plan.
Although 457 plans aren't covered by the Employee Retirement Income Security Act, which requires plan sponsors to act in the best interests of participants, most 457 plans follow ERISA guidelines, says Gregory Dyson, senior vice president for the ICMA-RC, which provides financial services to public-sector retirement plans. As with any savings program, it's important to pay attention to your plan's investment options, particularly fund expenses and administrative fees. In recent years, plan administrators have moved toward using a single investment provider, which has lowered costs, Dyson says.
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