4 things for teachers to consider about their 403(b) retirement plans

4 things for teachers to consider about their 403(b) retirement plans
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We talk a pretty good game in our society about how we value our teachers and what they do for our children. But then we as a nation turn around and dis them by giving them some of the worst retirement plans of anybody out there.

Teachers get a raw deal on retirement

In its infinite wisdom, Congress set up inferior retirement plans for teachers called 403(b) plans way back in the 1950s. 403(b) plans come loaded with massive commissions and huge ongoing fees from the insurance companies that push them.

Unions and even school districts can be complicit in this colossal rip-off of our country’s teachers via crummy 403(b) plans in some cases.

Case in point: This New York Times article which profiles a number of educators stuck in high-cost retirement plans that are demolishing their financial future.

Some of these teachers the newspaper writes about would have 20% more money in their nest egg if they had a lower-cost retirement plan. Others would reportedly have 50% more money if they were educated about the high fees they were paying to invest!

Here are four things to keep in mind when considering your 403(b) plan…

RELATED: Teacher has to panhandle for money to stock her classroom! 

Who is managing your money?

The first thing you want to do with your retirement money is determine who is managing it.

I used to love a provider called TIAA-Cref. But that all changed in November 2017.

The $1 trillion investment and insurance giant was accused of creating an internal corporate culture that forced salespeople to use underhanded tactics to sell financial products that were revenue-heavy for the firm, but that didn’t put their clients’ best interest first.

So now I’m no longer recommending TIAA.

In the absence of my TIAA recommendation, it’s worth taking a look at low-cost provider Vanguard.

NEW: 403bWise.com has a list of financial advisors they believe pass the fiduciary test. That means they work for you instead of trying to line their own pockets by steering you to bum investments with high profit margins for them.

Is there a match being offered by your employer?

In the private sector, it’s common for companies to offer a match on your 401(k) — maybe 50 cents on every dollar you save up to 6% or something similar.

In the education world, some school systems will offer a match, too. If there is an employer match, you need to at least contribute as much as you have to pick up the maximum match. Then from there, you can go one of two ways…

If you’re with a low-cost provider, you can continue investing in your plan. But if you’re with a high-cost provider, every dollar after you pick up the match should go to a Roth IRA at a low-cost provider like Vanguard, Fidelity or T. Rowe Price.

If there’s no employer match on your 403(b), I would rather see you be disciplined and do your own Roth IRA from the get-go. Again, check out Vanguard, Fidelity or T. Rowe Price to get started.

Earnings on a Roth are tax-free, and tax-free withdrawals may be made after age 59 and a half. By contrast, every dollar in a 401(k) or 403(b) will be taxed when you use it in retirement.

How much are you paying to have your money managed in your 403(b)?

If you get new plan info on your 403(b), find out what’s in it. Don’t be intimidated or confused by the verbiage. Look at the expense ratio. Most 403(b) plans are over 2%. You want that number to be below .5%. Vanguard in particular can be as little as .2%.

Why are management fees important?

A simple difference of 1% point in fees can mean tens of thousands of dollars in the long run.

For example, the average variable annuity may charge fees of 2.25% annually; the average mutual fund may charge 1.4% annually; and the average no-load index fund, 0.18% annually, according to Meridian Wealth Management.

That means a $250 monthly contribution with 8% growth over 35 years will amount to either $336,320; $409,585; or $548,750 at retirement, depending on whether you paid fees of 2.25%; 1.4%; or .0.18%.

You decide which scenario you want!

RELATED: 6 ways to get free books for your classroom

Clark Howard About the author:
Clark Howard is a consumer expert whose goal is to help you keep more of the money you make. His national radio show and website show you ways to put more money in your pocket, with advice you can trust. More about Clark
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