Deferred Compensation Plan

[luneau]

I'm an incoming intern, and have some questions about things I heard during HR orientation. This guy came in and was telling all the interns to fill out a form to defer paying into social security. Instead using that money to "pay themselves". He said that money would actually go into a Target Day fund, based on your birthday. He told everyone they should do it today. I was a little skeptical because I don't like anyone telling me I need to do something right away. After his talk, I asked him a some questions and found out that he is works for Empower Retirement and there is an annual fee of 0.18% of the first $50,000, with a quarterly fee of $2.50 up to $5,555.56, with 0.045% charged after that.

I'm not sure if this is a good plan. I became even more leary when I told him that I will think about it and not sign up today, he said well social security is going broke. Which may be true, I just felt like it was a scare tactic, to get me and all my colleagues to sign up. By the way most of them were signing up without asking questions.

I'm wondering everyone's thoughts. Is this a good plan? Can I defer social security and invest in something else? Should I not pay into Social Security?  I've read in WCI that residents should invest in Roth 401 (K)/403 (B) or Roth IRA.

 

 

[jfoxcpacfp]

Something is rotten in Denmark. Taxpayers cannot indiscriminately "opt out" of SS. The most common exemption is for members of the clergy who opt out on the basis of "religious principles to accepting public insurance" on penalty of perjury. I have known clergy who have used this option to save $$ and they have later regretted it. I have no sympathy for them, fwiw.

• I would have strong suspicions about the above (your post).

[jfoxcpacfp]

Something is rotten in Denmark. Taxpayers cannot indiscriminately "opt out" of SS. The most common exemption is for members of the clergy who opt out on the basis of "religious principles to accepting public insurance" on penalty of perjury. I have known clergy who have used this option to save $$ and they have later regretted it. I have no sympathy for them, fwiw.

• I would have strong suspicions about the above (your post).

[Zaphod]

Its not uncommon at large state universities which is common for residency.

I would find out your other options. I think its criminal and predatory to allow these people to come in and prey on young workers.

[StarTrekDoc]

I believe this goes back a whole long way when we were residents in the 90s and universities challenged that residents were students on stipends, hence exempt from FICA (and university not needing to pay their end of FICA).  I believe there was a settlement that allowed residents to choose one or the other.  This played a role too not only from FICA, but pension considerations for long term residents.  We have PGY-7 was not uncommon for us and our resident union needed to watch out for those guys too -- arguing for the employee status to get pension and matching funds (instead of the FICA credit).

If you're a three year and done resident, opting out of FICA makes sense.  the fees don't look bad   question is where it goes into.

[jfoxcpacfp]

Zaphod wrote:

Its not uncommon at large state universities which is common for residency.

Click to expand...

StarTrekDoc wrote:

I believe this goes back a whole long way when we were residents in the 90s and universities challenged that residents were students on stipends, hence exempt from FICA (and university not needing to pay their end of FICA).

Click to expand...

Ah - thanks for the education!

[q-school]

Zaphod wrote:

Its not uncommon at large state universities which is common for residency.

I would find out your other options. I think its criminal and predatory to allow these people to come in and prey on young workers.

Click to expand...

+1

[luneau]

After some more research, I discovered that it is a 457 plan. It will invest money into a default plan based on birth year called a Target date plan. The plans are called BlackRock Life Path Index Fund J, which I believe is a mixture of stocks and bonds. They younger you are the more aggressive they are. On the documents he passed out, it only give the option to contribute before tax dollars. But on their website their forms give the option to invest in either pre or post tax dollars.

So I think I will do the after tax contribution, because I'm currently in a lower tax bracket then I will be at retirement (hopefully).

[Zaphod]

luneau wrote:

After some more research, I discovered that it is a 457 plan. It will invest money into a default plan based on birth year called a Target date plan. The plans are called BlackRock Life Path Index Fund J, which I believe is a mixture of stocks and bonds. They younger you are the more aggressive they are. On the documents he passed out, it only give the option to contribute before tax dollars. But on their website their forms give the option to invest in either pre or post tax dollars.

So I think I will do the after tax contribution, because I’m currently in a lower tax bracket then I will be at retirement (hopefully).

Click to expand...

I bet you have an option to do a regular 401k type plan as well, though it may be labeled "alternative" as thats what ours were labeled in this situation. Turns out they were just regular style plans but not the main offering. I'd make sure you know exactly your options and have them spelled out clearly by someone without a conflict of interest.

[StarTrekDoc]

Your HR should have the answers.  As Zaphod mentioned, you probably have access to a 403b/401k  if there's a 457 plan.   Double check is governmental or non-governmental and the withdrawal/rollover options upon separation on the 457 and see if it's really a 457 vs DCP.

As a resident ask for the Roth 401k option; the DCP should definitely be post tax.  My gut feeling is that you'll be able to roll that over to a Roth IRA since they're calling it a DCP.

[luneau]

Isn't a 457 plan better than a 401(K) because there isn't a 10% withdrawal fee? My understanding is that a governmental 457 is basically a 403b without the 10% withdrawal fee.

Also I'm not sure we can defer social security and put that money into a Roth 401K. I'm not entirely convinced I want to opt out of social security. Obviously it may not be there when I retire, but if I don't contribute to social security than it will not be there.

[StarTrekDoc]

The first question is what you're planning to do with these funds.  With your W/D fee response, are you really targeting these to be retirement funds 20-30 years from your residency?  Also, how many years is your Residency and/or fellowship and are you planning to work entire career or a shortened career with FIRE intended--which SS probably is a low contributor anyways)

 

SS is based on 35year calculation (420 months actually) and then averaged out of those months of income.  So, amount AND duration play into the account.  Any overage over the SS max doesn't count; so if your residency is 7+ years, it'll definitely play into the calculation.

Caution--- in all likelihood, the amount one in this forum puts into FICA will never equal the amount one gets out of it.   In all the case scenarios, money you save now from FICA and place into the market will outperform any buyin into the governmental trust that's doomed to be insolvent.

 

 

[luneau]

Forgive me because I know very little about these kinds of things. Yes I am targeting the 457 to be a retirement fund probably 40-50 years down the road, should it not be? It won't be my only retirement fund, as I will continue to save throughout my career. My residency is 3 years. So I guess I shouldn't worry about not contributing to SS.

[ENT Doc]

Here is more history on residents and FICA:

http://www.scotusblog.com/2011/01/court-medical-residents-not-students/

My reading of this is that there is no opt out (everyone had to pay as if 2005), but I'm curious if anyone knows something different.