FAQ – 403(b)/457 Costs and Surrender fees

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I am currently contributing to a 457 plan and a 403(b) plan at my school. I would like to roll both of them over into a new 403(b) equity index annuity with a new company. Can I consolidate the 403(b) and the 457 so I only have one account?

Before you decide to invest in an equity-indexed annuity, it’s important to be sure you understand how they work, because they can be complex. When you own an equity-indexed annuity, the issuer agrees to pay you a fixed rate of return based on a percentage (often 75%) of a stock market index (such as the S&P 500). The issuer also agrees to pay at least a minimum return, in case the stock market index falls short of the guaranteed minimum. Thus, you have potential to receive some (but not all) of the upside of return in a stock market index, and are protected on the downside. To provide these benefits, equity-indexed annuities typically charge higher fees than other types of fixed annuities.

Now, as to consolidating accounts: If you were moving to a new employer, you would be able to roll both your 403(b) and your 457 plan into your new employer’s plan, if the new plan permitted rollovers. But if you’re staying with your current employer, you are not allowed to consolidate 403(b) and 457 accounts. You could start contributing to an equity-indexed annuity and leave your funds with your current 403(b) and 457 plan providers. Or you could move your current 403(b) assets to the new 403(b) equity-indexed annuity.

However, it could be to your advantage to maintain both your 403(b) and your 457 plan:

  • It doubles the amount of pre-tax contributions you’re allowed to make each year – $18,000 for each account (plus an additional $6,000 for each if you’re 50 or older).
  • Each plan may offer different investment options, which can help you build a well-rounded investment portfolio that’s suited to your goals, timeline and risk tolerance.
  • With a 457 plan, if you leave your employer before age 55, you have the flexibility to take penalty-free distributions. With a 403(b) plan, you will pay a 10% penalty for early withdrawals.

Within both your 457 plan and your 403(b) plan, you may switch to a different vendor on your district’s list of approved vendors. (It’s important to note that your district may not endorse or recommend any vendors and is complying with the California open vendor law. You are responsible for doing your own research.) For example, you can move your current 403(b) assets to the new 403(b) equity-indexed annuity. However, if you own a 403(b) annuity, you’ll want to investigate any surrender fees you may owe if you sell it. In addition, it’s good to be aware of what other costs might be involved in switching investments. For instance, if your 403(b) plan is invested in mutual funds, you may have to pay front- or back-end loads (sales charges) when buying and selling shares, or transfer fees.

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