By Thomas Kostigen
It’s a terribly bland and boring
name for a financial product — any product, really: 403(b). Yet for some
reason, marketers have stuck with it, much like they have with the product’s
investment cousin, the 401(k).
These alpha numeric titles are
retirement plans. The former, designed largely for teachers and non-profit
employees, and the latter, designed for most working folks. For the purposes of
this article, we are going to focus on 403(b)s—what’s good about these plans,
what’s bad, and what to look out for.
First, a bit of history on the
403(b). The Internal Revenue Code
from which the name derives was set in 1958, making available a tax-deferred
savings device for employees of non-profit organizations, or 501(c)(3)s. In
1961, the arrangement was extended to employees of public educational
institutions. Tax sheltered annuities were the original underlying investment
vehicles. It wasn’t until 1974 when mutual funds entered the arrangements as
funding vehicles. And even then, retirement plans weren’t like what they are
today, with a plethora of investment options and fee schedules.
Today, there’s about $1 trillion in 403(b) plans.
That’s certainly a lot, but their cousin, the 401(k), has five times that
amount invested in the capital markets. An important distinction between 401(k)
plans and 403(b) arrangements is the Employee Retirement Income Security Act
(ERISA) doesn’t always apply to 403(b)s. That means there is less oversight and
protections. ERISA sets minimum standards by which most retirement plans must
abide.
Still, 403(b) plans offer similar
benefits as 401(k)s, such as tax-free investing. And in certain circumstances
the 403(b) is better. There are catch-up provisions after the age of 50, so you
can contribute more, and early withdrawals can be more flexible. Moreover, fees
are generally lower for 403(b)s than 401(k)s because there are, for example,
exemptions for non-profit organizations from certain administrative
costs.
But here is where it gets tricky:
403(b) arrangements usually have more limited investment options than 401(k)
plans. A financial advisor can point you in the right direction and explain the
different investment options in detail to determine if a 403(b) is right for
you. In most cases, they are worth contributing to, as retirement planning is
important the older you get.
A 403(b) plan is an easy way to
contribute. Employers often match your invested dollars. And money usually
comes straight of your paycheck. Or, as the IRS calls it, an “elective
contribution.”
The annuity linkage to 403(b)
arrangements is what to really look out for and be mindful of. Again, a
professional can help advise. The sum of the complication is with an annuity
contract that can be owned by you, the individual, or your employer, depending
on the circumstance. And the annuity can be variable or fixed—two very
different contracts.
By all means, consider investing for
retirement via a 403(b) program. But even more so than investing via a 401(k),
it’s worth seeking professional advice about your options and, let’s not
forget, your retirement goals.
Thomas Kostigen is a contributing
writer to www.myperfectfinancialadvisor.com, the premier matchmaker between
investors and advisors. Thomas is a best-selling author and longtime journalist
who writes about environmental, social, and governance issues.