Friday, June 22, 2012

To 403(b), or not to 403(b), that is the question

There is an excellent article on 403(b) and 457 retirement plans in the July 2012 edition of Kiplinger's (a personal finance magazine).  Every teacher should read the article, and peruse these two websites:


403(b) plans are typically found in K-12 school districts and other state a local government entities and are similar to corporate America's 401(k) plans.  However, the 403(b) market is referred to as the "Wild West" of retirement systems due to the lack of oversight.  Unlike a typical 401(k) that might have 8 to 12 specific investment options vetted by someone in the finance department of the company, many school districts merely hand their teachers a list of phone numbers of different sales reps in the area.  For example, California teachers must choose from 72 different providers, offering 275 different products, encompassing 3,165 separate investment options!  

If there is a low-cost option, a teacher has a low probability of finding it among the 72 phone numbers given.  Typically the very highest cost firms win the business simply by showing up in the teacher's lounge with lunch and a slick sales pitch the first week of school.  If you are in such a situation, look for some of these lower cost firms on your list:

Quite often, there is not one single low-cost product available in a 403(b) system.  In that case, if your system also does not match your contributions, you might be better off NOT participating in the 403(b) at all.  Instead, start your own Roth IRA with a low cost firm like Vanguard

If you work for an organization that has too many vendors to choose from, send the link to this article (Whose Watching the Door: How Controlling Provider Access Can Improve K-12 Teacher Retirement Outcomes) to your human resources department or union representative.  Tell them you want the provider options narrowed based on a competitive bidding process.  This will result in fewer, but better, and lower-cost options, and a fatter retirement account for everyone in your organization.

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