Should I change my 403(b)?

When was the last time you looked at your 403(b)?

I mean REALLY looked.

Chances are you fall into one of three camps:

  1. You have never looked at it, but pretended to understand what everything meant when you opened it.
  2. You have thought to check to see if you were getting a good deal, maybe talked to other teachers, but didn’t take it much further.
  3. You looked at a statement, were disappointed with how much money you were earning, but didn’t know where to go next.

Whichever camp you fall into – you’re not alone. Many of my clients fall into one of these camps, and work with me to take them to the next stage.

When we work through their financial plan, I give them a recommendation of a new 403(b) vendor to move to, but advise them it may cost them some money to do so.

 

How do I get to that decision in deciding if it’s worth the move? It comes down to three things:

Should I change my 403(b)?

The fees on the current 403(b) can be drastically reduced

For many teachers, they have started saving for retirement inside of a Tax Sheltered Annuity (TSA). These are typically 403(b)s offered by insurance companies (AXA, VALIC, MetLife, etc.). While they help with the saving aspect, the fees they can charge are very high – sometimes over two times as much as other vendors. This then eats into the final amount you can grow your money to before retirement.

If I see a client is using an insurance-product-403(b), this will cause me to double check their fees, and then likely suggest they move to something that is considerably cheaper, but does the same job.

By not having to pay these fees (which comes out of your account balance), teachers will end up with more savings when it comes to retirement.

“More savings, just by changing which type of account is used?” Seems like a no brainer, but many teachers are not aware of this.

 

The penalties you would incur from moving accounts could be made back within 24 months

One of the major insurance companies that offer a 403(b) has annuity products that can lock a teacher into a 403(b) for 5-12 years. This means that if they try to move money before their account between 5 to 12 years old, they will charge a penalty to do so.

The penalty isn’t a small one either – it can be as large as 6% of the account balance.

One of my younger clients had been diligently saving and wanted to move to another annuity company. On her $14,000 account, it cost her just under $1,000 to break the contract and move to another vendor. For having a change of heart, it cost her 6% of her retirement savings to move her account. On top of the expensive fees she was already paying.

I had a hard time keeping my cool with one.

This is what causes most people to stop in their tracks and keep their money in the same place. But it pays to compare accounts before making a final decision.

Here’s what an annuity (insurance company) 403(b) looks like when compared to one offered by an investment company:

Screen Shot 2015-07-08 at 4.33.39 PM

 

While the spread of costs may not seem that much different, when you are able to design an account with an investment company that costs 0.9% of your account balance with over 2,000 investment choices, it pales into comparison with being locked into an annuity contract for over 5 years and only being able to use 20 investment choices.

Additionally, if you were being charged 3.8% versus 1.8% on your money, this is the same as getting a 2% lower return EVERY YEAR that you used this company to hold your 403(b).

 

By having an account with lower fees, less expensive investment options and no insurance contracts, a teacher can often make up the money they get charged in a transfer fee within 24 months. 

 

The investment choices in other 403(b)s are far better

It takes some advanced knowledge when it comes to understanding if you have good investment options available in your 403(b). But it doesn’t mean you need to take some classes – just some reading will help you understand most of what you need to know.

First – ask your 403(b) vendor for all of the investment options at your disposal. If they are able to give you a list of them, that isn’t a great sign. As there are over 2,000 mutual funds (collections of company stocks), if they limit you to 20, then you may not get the best choices that are available. If they tell you that they can’t because you are able to choose between 20-30 fund families and all of their options (fund families have between 30-100 investment options), at least you know you are not being limited in any way. However, this only happens with investment companies who offer a 403(b), not with insurance companies – another reason why I steer clear of the insurance companies.

If you have an insurance company 403(b), you’ll notice out of the 20-30 choices, that some may be funds that the insurance company owns. This is a big red flag.

  • You’re paying a (large) fee for the insurance company to hold your account
  • You’re now paying them to invest your money into one of their funds
  • As it’s a proprietary fund of the company, chances are it may be hard to find out what it actually invests in, and it may be more expensive than another fund that does a similar job.

To back up that last point with some data – the Vanguard S&P 500 fund charges 0.2% in management fees while the AXA Equitable Equity 500 Index charges 0.63% (http://www.siue.edu/humanresources/benefits/pdf/AXAExpensesChart.pdf.) Put in other words – to access the same investment inside of AXA’s 403(b) product – IT WILL COST YOU MORE THAN THREE TIMES AS MUCH.

If I’m not making myself clear, if you have a 403(b) that is offered by an insurance company, you are paying too much and should look into changing.

I don’t have a single client who hasn’t moved their account out of an insurance company’s 403(b). The price to the teacher for staying in this account is too damaging to their financial future.