Anyone who is an IPERS employee in the State of Iowa who is eligible can participate in their provided RIC (Retirement Investors Club).  Education employees have a 403(b) option that you can contribute to. Public and State employees have a 457 option. Depending on where you work you also have the option to contribute to the traditional (pre-tax) or roth (post-tax) version of your 403(b) or 457.  In addition, state employees receive a $75 per month match (free money).

 

Investments Inside the RIC 403(b) / 457

The four main providers each employee has to pick from our Voya, Mass Mutual, Horace Mann, and AIG.  Within all four of those providers you have 131 fund options to pick from.  Needless to say that is to many options.  In addition, the options from a cost perspective are expensive for most of what is available.  The fees that get charged when investing year after year from mutual funds over a long-time period can have a dramatic effect on the ending value of your investment(s).  When there are other low-cost options available that are the exact same investment.

 

For example, if you are investing in the S&P 500 and one option you have cost 0.27 and the other option you have cost 0.04 for the exact same fund, which would you want?  It’s like going to buy a car. You decide that you want a 2019 Ford Fusion for example and one car dealership is selling it for $23,000 and another dealership is selling it for $25,000.  Both cars are the same model with all the same bells and whistles so you are comparing apples to apples. Which are you going to choose? I would imagine you would decide to save the couple thousand dollars and go with paying less for the exact same car.

In that example of the S&P 500 the 0.27 vs 0.04 for the fees. If a person were to contribute $6,000 annually ($500 per month) for 40 years and it earns 10%.  The difference in ending value would be over $155,000 for investing in the exact same fund. The only difference is the fee.

Benefits and Drawbacks of Investing Inside your 403(b) / 457.

  • A benefit is that you can contribute a lot more than in an IRA (Individual Retirement Account).  In 2019 an individual can contribute up to $19,000 inside a 403(b) / 457 for example.  Add $6,000 onto that if you are over the age of 50. For 2019 in an IRA you can contribute $6,000 and add $1,000 if you are over the age of 50.
  • The second benefit is that you can have it automatically deducted right from your paycheck.
  • A drawback would be that you don’t have very many low-cost options on which to pick from.
  • A second drawback which wouldn’t apply to everyone is if your employer only lets you contribute traditional (pre-tax) and doesn’t allow you to contribute roth (post-tax). You should be able to decide based upon your situation and not be handcuffed by what the employer provides.

Benefits and Drawbacks of Investing Inside an IRA

  • A drawback would be that you can’t contribute as much as you could inside of your 403(b) / 457.
  • A benefit would be that you have more low-cost options to pick from to grow your portfolio over the long-term.
  • Another benefit is you have the option to contribute inside a roth and/or the traditional option.

 

A third option in all of this is investing some money in both your 403(b) / 457 and IRA.  You could have the best of both worlds!  Having the option to pick fund(s) that would better allow you to diversify your portfolio while contributing a lot of money.  In addition, the option of contributing both traditional (pre-tax) and roth (post-tax).

 

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