We Need to Fix 403(b) Retirement Accounts

The start of the school year is nearly upon us. Each year, I try to get the word out to teachers about the best way to invest in their retirement plan, the 403(b). A 403(b) is the 401(k) equivalent for educational institutions and nonprofit 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

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. There's already money being contributed to pensions, so how much is a person expected to save? The answer: as much as possible. 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 having the money to buy any baseball team and choosing 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. If you're invested in a variable annuity, it’s possible that you’re paying close to 3% in fees. 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.