403(b) accounts are important for teachers and non profit employees

A 403(b) is a Bad Name for A Good Product

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.

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