Fixing the 403(b) Mess

Fixing the 403(b) Mess

A 403(b) is the 401(k) equivalent for educational institutions and non-profit organizations. It’s the retirement vehicle available to the majority of Rhode Island’s public school teachers. While recent legislation has prompted changes by school administrators to increase fiduciary responsibility, there’s still work to be done when it comes to educating our educators.

Make sure you contribute

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Given the changes that pension structures have undergone and will continue to undergo, it’s imperative that teachers set aside money on top of their pension contribution. Now, the pension contribution is around 9%, so how much is a person expected to save? The answer: as much as you can. Put together a budget and whatever is left over (after some leisure spending of course) should be directed towards a 403(b). Not only will this help with the tax bill, but you’ll have an account at retirement to supplement your pension dollars.

If you have an account, review the current structure

For the last 30 years, insurance company variable annuities have dominated the 403(b) market for public school teachers. These annuities contain numerous parts that may or may not be attractive to you. You could be paying “contract fees”, “administrative fees”, or a “mortality expense”. You may have a surrender penalty that lasts up to 9 years. To me, using a variable annuity in your 403(b) would be like buying the Kansas City Royals. Yes, you own a baseball team, but it’s the Royals. Isn’t there a better use for your money?

Yes, there is!

If they’re not currently options, talk to the school administration about adding no-load mutual fund companies like Fidelity and Vanguard, or low cost annuity company TIAA-CREF. It’s possible that you’re paying close to 3% in fees with a variable annuity. If you’re able to reduce this investment expense to even 1.5%, that can mean hundreds of thousands of more dollars available to you at retirement. Remember, the money you don’t spend on needless expenses remains in your account to make more money for you!

Hello, Can I Get some Help?

In my experience, teachers and administrators are so busy handling to their educational duties, they tend to neglect their own financial situation. As a result, educators have become the forgotten class when it comes to financial planning service. If the only time you see your “advisor” is when he or she appears in your lunch room to sell more annuities, you deserve better. Ask your advisor to project how much you need to contribute, how much you’re paying in fees, and what you can expect in terms of retirement income.

Dan Forbes is a regular contributor on business financial issues. His office is in Providence, RI. He leads the firm Forbes Financial Planning and can be reached at [email protected]