The Teachers’ Retirement System of Illinois (TRS) is rolling out a new 457b plan in January of 2022 called the Supplemental Savings Plan (SSP). This does not change anything with the TRS pension, but is simply an optional additional tax-advantaged savings vehicle. This post will look at the pros – and cons – of this new plan based on the information they mailed out to members (pdf).
457 plans typically have some advantages over 403b plans.
- Fees: TRS has negotiated low investment fees for this plan, whereas 403b plans are notorious for often having high fees. This can make a difference of hundreds of thousands of dollars in your eventual investment earnings. There is, however, a flat $100 per year ($25 per quarter) administrative fee which is a bit higher than we would like. I will discuss this more below.
- Additional Savings: Public employees are allowed to save a certain amount (up to $20,500 in 2022 if under age 50, the amount can increase in future years) in a 403b plan. But a 457 plan is a separate “bucket”, allowing you to save an additional $20,500 (in 2022 if under age 50). In addition, once you turn 50 and have “catch-up contributions”, the additional amount ($6,500 in 2021) is allowed in both plans (so an additional $13,000 in 2021). Finally, 457 plans also have a special “3-year catch up provision” in your last 3 years of employment where you can save up to twice the annual limit ($41,000 in 2022). Put all these together and you have a much higher total amount you can shelter from taxes.
- Easier Access: In most 403b plans, if you want to access your money before age 59.5 you have to pay a penalty in addition to taxes. In a 457 plan, you can access the money at any age as long as you have left that employer without paying a penalty (you still pay taxes). This can be particularly helpful if you want to retire before age 59.5 but want to delay getting your TRS benefit until you are age-eligible for a full benefit.
Here are the investment options available to you in the SSP, along with their expense ratios.
- BlackRock LifePath Index K Series (0.09%) (Default Option)
- Stable Value: Vantagepoint Plus Fund R10 (0.53%)
- Money Market: Vanguard Federal Money Market (VMFXX, 0.11%)
- PIMCO Income Fund, Instl (PIMIX, 1.09%)
- BlackRock U.S. Debt Index Fund F (0.0279%)
- PGIM High Yield Fund R6 (PHYQX, 0.40%)
- BlackRock Equity Index Fund F (0.0087%)
- BlackRock Mid Cap Equity Index Fund F (0.013%)
- BlackRock Russell 2000 Index Fund F (0.0186%)
- BlackRock MSCI ACWI ex-U.S. Index Fund F (0.0597%)
- Vanguard Real Estate Index Admiral (VGSLX, 0.12%)
- Garcia Hamilton ESG Core Bond Fund (0.35%)
- BlackRock MSCI ACWI ESG Focus Index Fund F (0.09%)
As you can see, many of these investment choices have excellent fees associated with them, particularly the four BlackRock Equity Index Fund choices, the BlackRock U.S. Debt Index Fund, and the LifePath Index Fund (target-date fund) choices. These are much, much lower than most choices that TRS members will have in the 403b or 457 plans offered by their district. But, unfortunately, there is a catch – the administrative fee.
There is a flat $100 per year administrative fee (assessed $25 each quarter). While flat fees (as opposed to percentage fees based on your investment balance) are generally a good thing, $100 is a bit higher than is typical and make the SSP less attractive for many folks. To see why, let’s take a look at the effective percentage rate for different account balances.
- If you have a $1,000 account balance, then the $100 fee is an outrageously high 10% (on top of the possibly very low fund fees).
- If you have a $10,000 account balance, then the $100 fee is still a very high 1% (on top of the possibly very low fund fees).
- But if you have a $100,000 account balance, then the $100 fee is a very reasonable 0.10% (on top of the possibly very low fund fees).
- And you have a $1,000,000 account balance, then the $100 fee is an amazing 0.01% (on top of the possibly very low fund fees).
If you are able to invest a large amount in the SSP and/or rollover a large amount from an existing plan (401k, 403b, 457, IRA), this is a great plan to be in. If, however, you can only invest a small amount of money, then that $100 annual fee likely makes it less attractive than other options you may have. You will want to carefully compare to the fees (both administrative and fund fees) offered by the 403b and/or 457 plans offered by your district to see what is best for your situation.
I’m not sure why TRS wasn’t able to negotiate a lower flat administrative fee and/or waive or lower the fee for low balances. Perhaps this is something they can negotiate in the future, as the SSP is a great plan once you have accumulated some assets in it, but the $100 administrative fee makes it a bad plan for most folks when you are just starting.
Update 11-30-21: Along with Eric McClarey, my co-author on our book for Illinois TRS members, I developed a spreadsheet allowing you to compare the effect of the TRS SSP fees to other 403b/457/IRA providers (with Equitable, Vanguard 403b, and Vanguard IRA as the defaults for comparison). Feel free to make a copy of the spreadsheet and put in the choices available to you in order to see if the SSP is a good choice for you or not.