What is 403b Plan in Florida New York – Guide
What is 403b Plan in Florida New York – Guide
What Is A 403(b) Plan?
The 403(b) Plan is nearly identical to a 401(k) plan except it’s available to employees of educational institutions and certain non-profit organizations as determined by section 501(c)(3) of the Internal Revenue Code.
A 403(b) plan works the same way as a 401(k) regarding the withholding process, contribution limits, withdrawal policies and other details.
How Do 403(b) Plans Work?
- Participation in 403(b)plan is optional for employees.
- You decide the percentage of your salary that you’d like to contribute, and that amount comes out of your paycheck and goes into your account every pay period.
- You decide how you invest your money. Your employer’s plan has a selection of investments for you to choose from. Most plans offer a diversified spread of mutual funds, including stocks, bonds and money market investments.
- When you leave your job, you still own your account; your employer can’t touch your funds.
5 Top Disadvantages of 403(b)s Plan
Limited investment options – Not all plans are created equal. Some 403(b)s have many different asset classes available with low-cost, strong-performing funds. Others have limited options. It isn’t uncommon for a plan to offer 12-15 funds total. Plans with limited options don’t always offer access to an asset class you want to invest in. The glaring weakness I often find is with the fixed income (bond) offerings.
Annuities – Many 403(b) plans still offer their funds through an annuity chassis. Problem is, it is rare for someone to ever choose to annuitize their plan upon retiring. What this means is that investors are paying extra fees for something that they will never end up using. Also, these annuities make it difficult to access your funds in many situations.
Lack of comprehensive advice – The big players in the higher ed 403(b) space are TIAA and Fidelity. One thing they don’t do well is offer comprehensive advice. It’s not their business model. I believe that everyone should have a comprehensive plan that helps get their financial house in order. Your 403(b) is just one piece of your financial puzzle.
Service – Another area that is lacking in these plans is customer service. I have met with many employees who haven’t met with anyone since opening their account. In some instances, this has been 5-10 years or more. The model is to send a sign up sheet around and the employees can choose to meet or not. Not good enough! If the amount of a household’s wealth is in this plan, shouldn’t you receive more proactive service?
RMDs – Like other qualified plans, 403(b)s are subject to required minimum distributions. When you turn 70 ½, you must begin taking distributions, whether you want to or not. The amount you must take will increase each year. RMD amounts are based on the previous year’s ending balance and your current age. Uncle Sam wants his money!
What is a Typical 403(b) Plan Fee Structure
The reason 403(b) fees are higher than what they are for 401(k) plans is in the available investment selection. The fees charged by the investments available in a 403(b) plan are higher than what is commonly accepted by investors who have a choice in the matter.
Once again, according to the analysis prepared by Aon Hewitt, the fees charged on variable and fixed annuities and mutual funds included in a 403(b) plan look like this:
- Variable annuities: 2.25%.
- Fixed annuities: 1.15%.
- Mutual funds: 0.97%.
What makes the situation even more complicated for 403(b) plan participants is the fact that those investment fees charged on the annuities and mutual funds are often invisible. This is in part because they are buried in the literature describing the investment vehicles. Most people lack understanding about the significance of these fees.
The other issue is the lack of options. Since 403(b) plan investors don’t have low-cost investment options, they also lack the basis of comparison to make the determination that the investment fees they are paying are excessive.
What are 403(b) Fees: The Long-Term Damage Done by High Fees
The best way to demonstrate the damage caused by the high fees charged by 403(b) plans is by example. We’ll do one based on two people saving for retirement through their employer plans under identical parameters. The only difference between the two is that one participates in a 403(b) plan and the other in a 401(k) plan.
Sam and Tara each earn $75,000 per year and invest 10% of their respective salaries into their employer’s retirement plans. Sam is a teacher who participates in a 403(b) plan. The plan has average annual fees of 1.50%. Meanwhile, Tara works for an IT firm and participates in a 401(k) plan that has average annual fees of 0.50%.
The big difference in fees is a result of Sam’s investment mix of annuities and mutual funds. Tara’s investment is entirely in low-cost ETFs.
Both plans average 7% annual returns before deducting fees. This means Sam’s net return on investment in his 403(b) averages 5.50% per year after fees. Tara’s gets a net return on investment in her 401(k) that averages 6.50% per year after fees.
How does this look at the end of a 40-year career? To keep it simple, we’ll ignore employer matching contributions as well as annual salary increases.
Sam: He contributes $7,500 per year for 40 years, for a total career contribution of $300,000. He earns an effective net rate of return of 5.50% over that time. At the end of his career, Sam’s 403(b) plan has grown to $1,054,824.
Tara: She also contributes $7,500 per year for 40 years, for a total career contribution of $300,000. She earns an effective net rate of return of 6.50% over that time. At the end of her career, Tara’s 401(k) plan has grown to $1,363,183.
The difference between the two terminal plan values? $308,359
3 Best Benefits Rolling over 403b to Roth IRA
- Investment choices in 403b are limited and they are often expensive. It’s also very difficult to even know what the real costs are of the choices provided. To make matters worse, many plans only offer fixed and variable annuities. This is a very expensive proposition because on top of the plan expenses, the annuities have their own costs. Also, annuities often have ridiculously long surrender periods. It almost never makes sense to buy annuities within any retirement account but the 403b plans often leave you no choice.
- IRAs offer a lot more investment flexibility. You can invest your IRA just about any way you want and usually much less expensively. You can change your investments whenever you like and you can even hire a financial adviser to manage your IRA for you. The 403b plans are limited in the choices you have and the frequency with which you can make changes.
- IRAs offer a lot more flexibility with respect to beneficiary planning. For example, if Mary dies and she names a non-spouse beneficiary, that person could take advantage of Inherited IRA rules that provide much greater deferral than the 403b offers.
Should You take a loan from your 403(b) Plan?
The majority of the time, I think it’s a bad idea. Sound financial planning would suggest that you should have anywhere from 3-6 months worth of expenses set aside as a cash reserve. If you come into a pinch, that is where you should start.
If you have no emergency fund and your only other option is to charge a significant amount on credit cards, then I think it’s fine to use a 403(b) loan. This isn’t an ideal scenario but you also don’t want high-interest credit card debt.
The biggest thing to consider is how it will impact your retirement savings. Many times, young people take these loans to buy their first house. I am strongly against this idea. Save money outside of your retirement plan to use on a home purchase. Compound interest within a retirement plan is a young person’s (or any person’s) best friend. It is so important not to stunt the growth of your retirement savings. Waiting to invest down the line when you are closer to retirement age makes accumulating significant savings more difficult. Invest early and often, when time is on your side.
403(b) Plans Advisors – Retirement Planning
Most school districts provide their teachers with a list of “approved providers” when they setup their 403(b) account.
We can serve as investment advisor to those pre‐defined platforms.
We assist you with evaluating the various investment platforms, assist you with setting up an asset allocation that meets your risk tolerance and time horizon, and we monitor the account on an on‐going basis.
We do have a $25,000 minimum account balanced requirement for this service.
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