403(b) Tips to Make the Most of Your Savings
1. Carefully evaluate your options before signing up for your 403(b). Just because representatives are on your district’s approved list does not mean they are your best choice. For many years, the 403(b) space has been full of high-fee, low choice, poorly performing options sold by representatives of large financial companies.
This is still pervasive in most school districts with the approved lists full of representatives from these firms. It’s so much of a problem that the State of California and several advocacy websites have starting working to educate teachers on their options before signing up for a 403(b) because the difference between a good and a bad 403(b) provider choice could cause you to lose out of tens of thousands of dollars of your retirement savings. Two great sources of information on this are 403bwise and 403bCompare.
So, if you and the entire list is full of poor choices, it may be best to steer clear of your district’s 403(b) and pursue another option for retirement savings including lobbying for A Better 403(b) Plan or utilizing a Roth IRA.
2. In a similar vein to #1, watch out for annuities in a 403(b). There is much confusion around this point for a couple reasons. One, the old moniker of tax-sheltered annuity ends up confusing many teachers into thinking their 403(b) must be an annuity. Two, many representatives as mentioned above sell annuities in 403(b) plans under the advice that annuities provide tax-advantaged growth.
Yes, it’s true annuities do provide tax-advantaged growth… BUT by design 403(b)s are tax-advantaged accounts. They don’t need an annuity for tax benefits, they already have them built-in. Today, annuities in 403(b)s do little more than imposing an extra layer of fees that decreases earning potential, limits investment choices (typically to proprietary funds with subpar performance compared to options outside an annuity), and locks up retirement funds for long, and unnecessary surrender periods.
If you only remember one thing from this tip, make it this: If you go to sign up for your 403(b) and the representative begins touting the benefits of an annuity or something that sounds like “downside protection while still being able to get the upside” it’s probably an annuity and isn’t your best option for retirement savings.
3. No matter which choice you make, remember that FEES MATTER! The higher the fees, the less you'll have come retirement, it's that simple. So, your choice between a good or bad 403(b) vendor early in your career can end up either saving or costing you tens of thousands of dollars. Below, we've projected the hypothetical growth of two 403(b) accounts based on an average teacher.
The orange line represents choosing a vendor with "all-in" fees of 1% and the blue line a vendor with "all-in" fees of 2%. The difference over a 35 year career is $60,191.
Wouldn't you rather keep that $60,000 in your pocket?
Have questions? No problem, we'd love to hear from you!
Mychal Eagleson, CFP®, AAMS® is the President of An Exceptional Life Financial, a firm that specializes in financial planning for teachers and families with special needs. He frequently writes and speaks on personal finance topics relating to these clients. Mychal also serves on the board of the Financial Planning Association of Greater Indiana as the Director of Public Relations & Social Media. To read more of his articles and learn about An Exceptional Life Financial please visit: www.anexceptionallifefinancial.com.