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403(b) Plans: Participate or Not?
These days, employee benefits seem to be few and far between, enough that you may automatically think that you should participate in the plan if you are eligible. But are these plans really worthwhile?
403(b) plans are tax-deferred retirement plans available to employees of educational institutions and 501(c)(3) non-profit organizations — such as public foundations, hospitals and other employees of health-related services. Like a 401(k) plan, you may elect to defer up to $16,500 of your salary into a 403(b) plan in 2011 ($22,000 if you are age 50 or older). Also like a 401(k), your employer may make matching or discretionary contributions into your account.
When 403(b) plans originated in 1958, they began as annuity contracts with insurance companies, so they are sometimes still referred to as tax-deferred annuity plans, or TDAs. Today, a vast majority of 403(b) plans are still dominated by these types of investment structures, from fixed annuities — in which an insurance company may guarantee a minimum rate of interest during the time your account is growing — to variable annuities — in which you have some choice over your investment options.
Although a few plans are beginning to offer competitive, low-cost investment options, many annuity products in typical 403(b) plans come with exorbitant fees. In addition, unlike 401(k) plans, administrators of a 403(b) are not considered fiduciaries — therefore, they have no legal or ethical obligation to monitor the plans to ensure that they serve in the best interest of the participants.
To illustrate how such fees could impact investment returns, let’s say you contribute $250 monthly into a 403(b) plan with an average annual return of 8% over 35 years. If invested in a variable annuity charging 2.25%, the account would grow to only $336,320. That investment made in an average mutual fund with a fee of 1.4% would grow to $409,585 — a difference of $73,265.
Given such disadvantages, is it better not to participate? It depends. If there are low-cost investment options available, it’s still a good idea because, like a 401(k) plan, it can be a very effective tax-deferred vehicle. Over time, you can accumulate significant retirement savings if you take advantage of the high elective contribution limit of up to $16,500 and the potential for employer matching contributions.
However, if your 403(b) plan only offers high-cost annuity products, you may want to consider opening a traditional IRA account and directing your retirement savings there. In 2011, you would be able to contribute $5,000 tax-deferred (or $6,000 if age 50 or older) and invest the money in low-cost mutual funds or exchange-traded funds. This may be a more attractive option, particularly if you are not in a position to defer the maximum of $16,500 allowed through the 403(b) plan and intended to contribute a smaller amount anyway.
403(b) plans are tax-deferred retirement plans available to employees of educational institutions and 501(c)(3) non-profit organizations — such as public foundations, hospitals and other employees of health-related services. Like a 401(k) plan, you may elect to defer up to $16,500 of your salary into a 403(b) plan in 2011 ($22,000 if you are age 50 or older). Also like a 401(k), your employer may make matching or discretionary contributions into your account.
When 403(b) plans originated in 1958, they began as annuity contracts with insurance companies, so they are sometimes still referred to as tax-deferred annuity plans, or TDAs. Today, a vast majority of 403(b) plans are still dominated by these types of investment structures, from fixed annuities — in which an insurance company may guarantee a minimum rate of interest during the time your account is growing — to variable annuities — in which you have some choice over your investment options.
Although a few plans are beginning to offer competitive, low-cost investment options, many annuity products in typical 403(b) plans come with exorbitant fees. In addition, unlike 401(k) plans, administrators of a 403(b) are not considered fiduciaries — therefore, they have no legal or ethical obligation to monitor the plans to ensure that they serve in the best interest of the participants.
To illustrate how such fees could impact investment returns, let’s say you contribute $250 monthly into a 403(b) plan with an average annual return of 8% over 35 years. If invested in a variable annuity charging 2.25%, the account would grow to only $336,320. That investment made in an average mutual fund with a fee of 1.4% would grow to $409,585 — a difference of $73,265.
Given such disadvantages, is it better not to participate? It depends. If there are low-cost investment options available, it’s still a good idea because, like a 401(k) plan, it can be a very effective tax-deferred vehicle. Over time, you can accumulate significant retirement savings if you take advantage of the high elective contribution limit of up to $16,500 and the potential for employer matching contributions.
However, if your 403(b) plan only offers high-cost annuity products, you may want to consider opening a traditional IRA account and directing your retirement savings there. In 2011, you would be able to contribute $5,000 tax-deferred (or $6,000 if age 50 or older) and invest the money in low-cost mutual funds or exchange-traded funds. This may be a more attractive option, particularly if you are not in a position to defer the maximum of $16,500 allowed through the 403(b) plan and intended to contribute a smaller amount anyway.
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disagree
Your advice is poorly thought out.
a) Most 403b plans have index funds with rates from .3 to 1.5%
b) If you go the IRA route you will leave 10K on the table to be taxed at 33% (and probably higher in the near future).
Rule number one is maximize all that is tax deductable.
Crazy to consider otherwise.
a) Most 403b plans have index funds with rates from .3 to 1.5%
b) If you go the IRA route you will leave 10K on the table to be taxed at 33% (and probably higher in the near future).
Rule number one is maximize all that is tax deductable.
Crazy to consider otherwise.
July 1, 2011 - [ 14:11:59 ]
Anonymous
disagree, there is an income limit on ira's
July 4, 2011 - [ 12:49:28 ]
DKLA
There is also the stipulation with traditional IRA's that withdrawals can be made over the age of 70 and one-half, while Roth IRA are for those making <$105K per year for the full $5000 contribution per year.
Great thing with an IRA is that the money it accumulates is the money you keep, plus you pay taxes now rather than later. Plus tax-deferred is an often used bait for medium to high earners.
It all comes down to how much is it going to cost you to participate.
It depends if you believe taxes will increase in the near future or if further restrictions will be placed on retirement plans.
Great thing with an IRA is that the money it accumulates is the money you keep, plus you pay taxes now rather than later. Plus tax-deferred is an often used bait for medium to high earners.
It all comes down to how much is it going to cost you to participate.
It depends if you believe taxes will increase in the near future or if further restrictions will be placed on retirement plans.
July 4, 2011 - [ 14:26:30 ]
flycatcher
If the employer makes a 50% matching contribution, the argument for contributing is strong. Nothing else comes close to a guaranteed 50% return on investment for the amount you add each year. How the vehicle performs is another story, but that's the case no matter where you put your money. You just have a much more limited choice when you put it in the company sponsored option(s).
July 12, 2011 - [ 11:17:37 ]
403 b maximum contribution
You really can't compare the 2. Annuities have death benefits that ira's don't. Good try trying to compare them though.
January 7, 2012 - [ 18:35:59 ]
Anonymous
December 31, 1969 - [ 19:00:00 ]
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Author Bio
Thomas A. Orecchio, CFA, CFP, ChFC, CLU, AIF is principal and wealth manager at Modera Wealth Management in Old Tappan, NJ. From portfolio management and tax planning alternative investments and estate planning, Tom assists physicians through truly comprehensive wealth management. Mr. Orecchio can be reached at TomO@ModeraWM.com.Blog Information
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