If you’re a teacher or work for a school district, things are busy for you right now. With school starting, you’re likely consumed with lesson planning, parent-teacher nights, getting to know your students, and adjusting to your new schedule. And while planning for retirement probably isn’t at the top of your to-do list right now, it should be. Because if you aren’t participating in your district’s 403(b) retirement plan, you’re losing out on an opportunity – one that can reduce your taxable income now, and defer taxes on your savings until you retire.
Understanding the Pitfalls
As I wrote in July, the premise for 403(b) plans is the same as for a 401(k) plan; participants may save pre-tax dollars to fund their retirement. Unlike 401(k) plans, however, 403(b) plans are only available to employees of educational and healthcare institutions, certain nonprofits, and some members of the clergy, and have few of the investor protections available to 401(k) participants. Unlike 401(k) plans, most 403(b) plans are not covered by ERISA – the Employee Retirement Income Security Act of 1974, which legally protects plan participants. ERISA requires employers who establish a retirement plan to meet minimum standards. At present, 403(b) employers are generally not responsible for the selection of the investment sales consultants or the products they sell, and 403(b) plans do not require other basic protections you might expect like:
• Fee transparency that provides participants the ability to more easily evaluate the expense of the products they are considering against other products that may be offered.
• Best interest or fiduciary standards requiring those who exercise control over the plan’s management or assets to act as fiduciaries, meaning they have to place the plan participants’ interests first when managing the plan. These fiduciaries are accountable, and could be responsible for repaying losses to the plan. ERISA also gives plan participants the ability to sue for breaches of fiduciary duty.
• Competition that drives out bad products and bad actors, and works to bring down product pricing, resulting in participants benefiting and keeping more of their savings toward retirement.
So if 403(b) plans receive none of these protections, why are they considered a viable retirement planning option? Mainly, it’s because it’s the one chance a 403(b) participant has to invest via payroll deduction, significantly lowering his or her taxable income now. In some cases, employers may also contribute through matching programs to their employees’ 403(b) plans, so not participating could mean leaving money on the table!
The pitfalls of 403(b) plans don’t stop with the lack of coverage by ERISA. Other problems often include high fees and limited access to low-cost mutual funds. Once known as “tax-sheltered annuities,” or TSAs, 403(b) plans have strong ties to the insurance industry, so most offer fixed or variable annuities as investment options. Annuities maintain high annual fees that drag down a portfolio’s performance and can have steep surrender charges — all which benefit the sales consultant who sold them to you.
Choosing the Best Path
AMDG Financial recently joined Aspire’s Financial Advisor Network, making our firm one of several choices to advise employees of Ann Arbor Public Schools, Livonia Public Schools, Plymouth-Canton Community Schools, Walled Lake Consolidated Public Schools, Schoolcraft College and roughly 160 other districts in the State of Michigan on their 403(b) plans. We are a fee-only, fiduciary advisory firm, meaning we are obligated to place your interests first. Other advice providers may not have this obligation, so it’s important to do your research before choosing a plan advisor. I recommend asking these questions:
• Are you a fiduciary, and if so, will you confirm it in writing? 403(b)wise.com offers this handy “fiduciary pledge” template that you can print off and have the advisor sign.
• How are you compensated? (Watch here for possible conflicts of interest. If the adviser is compensated by the product manufacturer, what’s his/her incentive to recommend a different product that could be in your best interests?)
• Are you an independent adviser? Can you make recommendations from the universe of options, or are you tied to recommending only your company’s investment products?
• Explain how you will diversify my portfolio.
• What is your investment philosophy?
• Will I work directly with you?
In addition to these questions, be sure to ask about education, financial credentials, and whether the adviser or firm has ever faced legal or disciplinary action. For securities and brokerage firms, the Financial Industry Regulatory Authority offers BrokerCheck, an online database where you can check the background of a firm or individual. You can also check the Securities and Exchange Commission’s Investment Adviser Public Disclosure website. If your adviser is not listed in these databases, he or she may be selling high-cost insurance products — one more reason to learn more before you decide to invest.
It Pays to Do Your Homework
In the midst of grading homework for your students this fall, try to set aside some time to do your own homework when it comes to retirement planning. You’ll likely be contacted to attend a seminar by one or more of the advisers to your plan, and you should go. But don’t stop there – research all of the advisers before determining the right one for you.