Texas Educators be aware of 403(b) plans
A New York Times article, interestingly entitled, Think Your Retirement Plan Is Bad? said that it is ironic that teachers who do the most good in the world, spending their careers helping others in exchange for modest paychecks, often get the worst retirement plans.
Unlike private-sector corporations that have the 401(k) plan, public education employees (both higher and public school) in Texas need to be very careful of their choice of 403(b) plan.
With 401(k) plans the employer under the Employee Retirement Income Security Act (ERISA) is responsible for due diligence of the plan for its employees. There is a more careful vetting of plan providers. Many corporate 401(k) plans typically have lower-cost options for employees to choose from because of ERISA.
But in education, especially in Texas, there is either too much or too little choice and much higher fees since 403(b) plans are not regulated under ERISA.
What are the issues with 403(b) plans?
For instance, in Texas public higher education there are usually fewer providers for 403(b) plans, but these are often higher costs providers. These plans typically come with limited investment options with many higher-priced annuities included in the mix. The financial advisors are the ones selling the products, so faculty and staff often do not get unbiased advice. As a result, there may be an incentive for financial advisors to push their own high priced products, rather than showing faculty and staff other lower-cost options.
For Texas teachers, there is an array of providers and higher costs in terms of fees for many providers. This is a result of a new law passed in 2019 which deregulated 403(b) plans for teachers that removed oversight. Before this law all of the providers were placed on the Teachers Retirement System (TRS) of Texas website and were vetted. The new law eliminates the need for financial firms to register products with the Teachers Retirement System. It also removes the caps on expense fees that had provided some protection for teachers for nearly two decades.
What is the impact of greater costs on your retirement savings? For example, Vanguard noted that imagine you have $100,000 invested. If the account earned 6% a year for the next 25 years and had no costs or fees, you'd end up with about $430,000. If, on the other hand, you paid 2% a year in costs, after 25 years you'd only have about $260,000.
According to 403bWise.org, variable annuities, commonly found in 403(b) plans can have fees as high as 3% annually, compared to a lower-cost index or mutual funds. Index funds can charge 0.07% annually and mutual funds can have fees up to 1.74% annually. Besides, there will be surrender chargers upwards of 5-7% for variable annuities. These variable annuities are very profitable for the insurance industry and salespersons often provide elaborate presentations to educators on all of the virtues of these high commissioned products.
What are your options?
So if you are stuck in a bad 403(b) plan what are your options? Unless you separate from service there are not great options. Surrender charges can be very high and to roll over to another plan may take time since only a certain percentage can be rolled over each year. Essentially, it is very hard to get access to your money without paying a lot in surrender charges.
1) You could first examine your options and see if there are lower-cost plans with index funds. You could start to contribute towards these plans with any future contributions. Ideally, you might have at least one high quality, low-cost vendor available with reasonable fees such as Fidelity, T. Rowe Price, TIAA, and Vanguard available at your work.
2) Another option is to contribute to a 457(b) plan. The benefit of this plan is that they are more regulated since assets are held in a trust for the benefit of employees. While 403(b) are held directly by employees. There is no federal 10 percent premature distribution penalty imposed on withdrawals from a 457(b) plan when separating from service.
3) A final option is to contribute towards and Individual Retirement Account (IRA), either a Roth or Traditional IRA. An IRA gives you more investment options because it is under your control. For example, you will have more options for low-cost index funds in an IRA.
Be aware of 403(b) plans. Saving for retirement is important, but you don't want your nest egg to be absorbed by high fees. Know your options and talk to a financial planner to see what options best fit your retirement goals.
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