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Need Opinions on Two Employer Retirement Plans

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  • Need Opinions on Two Employer Retirement Plans

    Hello all - my partner (age 31) is a fresh out of residency physician, he's about 3 months into his first attending job at a FQHC, and is now getting notifications that he is eligible for their two retirement plans, and I wanted to get some input.  Some background:  We live in CA, so state income tax is high, but we aren't on the coast, so our other costs aren't quite as bad, but would probably still call it HCOL. His base salary is around $240k, but he makes a stipend when he's on call, so his annual salary will be around $325,000.  I'm self employed, and since we moved here for his job, I'm expecting low income for the next year while I rebuild my business in a new location, but I can typically count on a minimum of $50k but usually closer to $100k.  He has disability insurance in place, we have around $75,000 in home equity set aside in an Ally savings account which we plan to pad over the next few years while we rent.  I have a little over $100k in an IRA at Fidelity.  Student loans (around $215k) will be getting refinanced shortly.  We aren't exactly living like residents at this point, but we haven't let lifestyle creep catch us just yet.  We aren't currently married, but we are engaged with a wedding planned for late 2018.

    I just want some opinions on what he should do with these plans, both are through Pacific Life:

    #1: They offer a 162 Bonus Plan:  Essentially the employer gives him a bonus that is equal to 18% of his base salary.  33% of that goes to income tax and 67% will be credited to the plan.  His base is $240k, so $43,200 total with $14,256 going to tax and $28,944 going to this "plan".  It is an "after-tax" plan so contributions go in after tax (thus the 67/33 split) and it will grow tax deferred and provides tax free income when it's taken out.  The $28,944 goes into a life insurance policy and it has cash values (sounds like whole life, which I know we are to avoid).  They give an example in the brochure of someone getting a $37,800 bonus, $12,600 goes to taxes and $25,200 goes into the policy.  Year 1 the net cash surrender value is $0, year 2 it's $13,415, year 3 is $28,998 and so on.  The death benefit starts at $879,221 in year 1, $892,142 in year 2, and so on.  So by the time the example person is 64 the net cash surrender value is $1,277,202 and the life insurance death benefit is $2,141,002.  We know it is highly unlikely that he would stay in this job until then, so it's kind of a rotten deal, since he's only getting roughly half the paid-in amount in cash value per year, so if he leaves in say 5 years, his cash value would be $62,711 based on the example scenario.  BUT, since it's "Free money" from the company and you either take it or you don't, we decided he should just go ahead and take it.  He chose their standard index rate account and we are moving on with it.

    #2 is a 457(b), and this is the one that gives me heart burn, mostly because I don't understand it. though it sounds similar to a 401k but it has a life insurance component.  He can defer up to $18,500 of his salary per year into the plan (NO EMPLOYER MATCH).  It also has a life insurance component similar to the 162.  The 162 plan didn't bug me because it's a bonus so it's really not costing him anything.  Just like the 162 brochure, they give an example of an employee starting at age 42, using an index account making 6.29%: Year 1, put in $18,500, the Cash Surrender value is $17,545 and death benefit is $467,015.  Year two Cash Surrender value is $34,273 and Death benefit is $481,872... and so on... until you're 65, your Cash Surrender Value is $754,968 and death benefit is $1,205,616.  They don't clearly explain how much you are paying in life insurance premiums, so it sounds like he is losing money every year rather than earning it if the example is to be believed.   He can choose a fixed account that currently accrues at 3.65% with a guaranteed minimum of 2% or he can choose from various indexed accounts:

    1-Year (100% of S&P 500 indesx's gains up to 10.5% current Growth Cap (Cap); 0% guaranteed minimum interest rate (floor)

    1-Year International (Average of 3 international indexes/ 1-year change after each is applied to 11% current Cap and 0% guaranteed floor

    1-Year High Par (150% of S&P 500 index's gains, applied to 8.5% current Cap; 0% guaranteed floor

    1-Year High Cap (100% of SP 500 index's gains up to 13.5% current Growth Cap (Cap); 0% guaranteed minimum interest rate (floor) - with a monthly charge of 0.80% annually)

    1-Year No Cap (1005 of SP 500 index's gains with crediting anything over 5.00%; 0% guaranteed minimum interest rate (floor)

    2-Year (100% of SP 500 index's gains with crediting anything over 5.00%; 0% guaranteed minimum interest rate (floor)

    5-year (110% of SP500 index'x gains with No growth Cap; 0% guaranteed minimum interest rate (floor)

    The plan cannot be rolled over into anything but another 457(b) plan, so if he leaves in a few years and goes to work for a different group, he would either take the cash value at that time, he can postpone the distribution to a date of his choosing before age 70.5, or he can take a payment stream.  Since this is HIS money coming from his paycheck, we are trying to figure out if it's the best way to invest?  In the examply the rate is 6.29% but the cash value is always less than the total he's putting in, so it sounds almost like his gains are getting eaten up in premiums?  And of course there is a salesman involved that is telling him "maxing this out will lower your tax rate".

    We have interviewed an accountant and a CFP to discuss working with them, and I was going to set up an additional meeting with the CFP to see what he thought, but after months of lurking on here, I trust the people of whitecoat investor more than anything.  I feel like he could take the $18,500 per year and invest it in some other way outside of his employment and make more than enough to cover the loss of tax benefits, but I'm not sure what...

    Sorry for the long post, but I'm really confused about what he should do, particularly as it relates to the 457(b).  Any thoughts?


  • #2
    nomindforfinance how does FQHC loan forgiveness work with refinanced private loans? i thought it was only for federal loans.


    • #3
      Good question.  Are you referring to PSLF?  California has a program for those working with underserved populations that pays up to $105,000 for a 3 year commitment.  He's applying for that.  There is also NHSC loan repayment, which is structured in a similar way.  Both of those allow refinancing (only the educational debt, can't be rolled in with any other debt), and that's where our minds have been.  But I think perhaps you are referring to PSLF?  I suppose he would qualify for PSLF, but we've always thought he would have them paid off before he got to the full 120 payments just based on minimum payment requirement?  To be honest we never even thought about it, so maybe we need to give it a second look, since he hasn't gone through with refinancing yet.


      • #4
        I was asking about loan forgiveness/repayment options through your husband's current program so you answered my question. I assumed (refinanced) private loans would be ineligible for forgiveness under that program. However, I probably scrambled PSLF requirements into a different, foreign program's requirements. Thank you for the clarification.

        So if you all get California's 105k forgiveness money that still leaves 110k. Will you all pay for that out of pocket or will the NHSC forgiveness money cover the remaining student loan debt?


        • #5
          So let me get this straight - these are the only two employer plans offered?  No 401k, or anything else not tied to life insurance?  The first one is a horrible plan.  Why would you need escalating life insurance as you get older?  The second one doesn't look much better.  Would avoid both - or opt for a different employer.


          • #6
            I agree, but the pay was about 30% higher than any other group he got offers from, so we felt it it would be ok since he could just save in some other way outside of an employer based plan.  I knew the plans they offered were stinkers, I just wanted to verify that I wasn't being crazy.


            • #7

              I agree, but the pay was about 30% higher than any other group he got offers from, so we felt it it would be ok since he could just save in some other way outside of an employer based plan.  I knew the plans they offered were stinkers, I just wanted to verify that I wasn’t being crazy.
              Click to expand...

              First, let me apologize for my response to the first plan.  It's not "horrible".  It's not "ideal".  I agree the first plan is superior because it doesn't involve you sacrificing any of your money.  You're definitely not crazy and did a good job looking at this.  Sometimes, as you said, you have to take the higher offer.  I'd have to do a head to head comparison between a job earning $75k less ($325 is 30% more than $250) but with a more standard employer plan vs earning $75k more, having this plan and getting taxed at a 50% marginal rate on that money.  Can't let the tail wag the dog - sometimes it's just better to earn more, especially if it's relatively lower COL.