How should I invest my 403(b)?

There are times when teachers have opted to use a 403(b) and are very happy with their decision. Either their household income means they are phased out from using a Roth product, or they want to have their investing done on a more automatic platform.

Whatever you do – DO NOT LET YOUR 403(B) REPRESENTATIVE PICK YOUR ALLOCATION!

Let me tell you why:

How to successfully invest your 403(b)

1. They do not know your complete financial situation

When a representative opens up your 403(b), do you sit with them for an hour and explain everything else that is happening with your life; what else you’re saving for; what goals you want to accomplish? Some reps will do this, many won’t.

So why would you let someone who knows a tiny portion of your life and 20-30 answers on a “risk tolerance” questionnaire determine how you should invest for your retirement? You shouldn’t.

2. They may have a vested interest in what to select

Many 403(b)’s have funds from their own company as options to use. Chances are, the reps are incentivised to use these funds. Or they have investment funds, but also options called “Conservative”, “Moderate” and “Aggressive”. To save time and the hassle of building a portfolio, they may put you in one of these allocations.

There may be a legitimate reason for using these risk-based funds (such as a low initial investment balance and you can’t access other funds until you have more money), but I have seen teachers with a 7-year-old 403(b) and they are still in the “Moderate” allocation. That’s just lazy work on behalf of the rep.

So how do you get around this? Educate yourself and tell the rep you will be building your own portfolio.

1. Ask what “index funds” are available 

When you use a fund that is “actively managed” it can cost over 1% of your money to just be able to use the fund. This percentage is the “expense ratio”. When you select an index fund, they can be as cheap as 0.1%. Yep, 10 times less. In addition, an index fund will track what a specific market is doing and not do anything fancy like trying to time when the market is going up or down. Most times, they make a better option to use when investing. (Not convinced, see more research here).

2. Elect to rebalance the account on your own

Many 403(b) vendors will give you the option of rebalancing the account automatically which may cost an additional fee. If it does (it may be 0.1%-0.25% extra)  then suggest that you send them what you you want your account to look like on regular intervals. By doing this twice a year, and having the rep change your investments as a result, you will be saving a lot of money over your career. To do this effectively, write down the initial investments you use and what percentages you invest in them, and send that allocation when needed.

3. Understand what allocation is best for you

As well as understanding your risk profile (how aggressive you can tolerate your investments being), you will want to understand how your partner / spouse is investing their money. Building an allocation should be done by looking at all of your investments and taking into consideration all of your options. If you decide that you want your retirement accounts to be more aggressive because you have more time for them to “bounce around”, and then be more conservative on other accounts, then make that decision. It also works the other way around. (Want more on this, read about it here.)

Generally speaking, if you are younger (under 35) you should be using a more aggressive allocation in equities and then becoming more conservative as you get nearer your retirement goal. But you might want to think about different options.

  

 

4. Take ownership

Most of the time, problems arise when teachers aren’t paying attention to their accounts and investments. This is your money, and no-one wants it to grow more than you do – so it’s time to step up and take control.

Set aside time to call your rep once a year to get their opinion on your account, and investing in general.

Understand how to compare your 403(b) to others on the available to you (we can help here if you’re not sure how to go about this).

Take time to look at the funds you are investing in, and if there may be better alternatives in your 403(b).

Some of this may sound daunting, but once you have learned the basics, the maintenance of your account can be completed in a couple of hours per year. By putting in the work when you start investing, you’ll (hopefully) have more money at retirement and spend less time worrying about it.