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.

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…

Read more: How to earn $100K as a teacher!

Who is managing your money?

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

Clark loves a provider called TIAA-CREF. They’re a low-cost investment house that focuses specifically on the target audience for the 403(b) plans—those in the academic, non-profit and medical worlds.

If TIAA-CREF is not an option for whatever reason, it’s also worth taking a look at low-cost provider Vanguard.

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 like TIAA-CREF, 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), Clark 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.

If you need help picking investments, check out Clark’s Investment Guide.

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!

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Theo Thimou About the author:
Theo has co-written several books with Clark Howard, including the #1 New York Times bestseller "Living Large in Lean Times."
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