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Friday, August 5, 2016

Teachers and Other Public Workers Beware of Your 403B Plan

I started working as a public school worker in New Jersey nearly 11 years ago. On my first day of orientation I sat in on a presentation from an insurance advisor and I was sold on a 403b plan. A plan I contributed to for more than a decade.  In a way this was good. It got me putting some money aside for my retirement. But if I had it to do over again I would run for the hills. Now a good chunk of money is stuck there for a very long time. 

This is not an attack on all 403b plans I'm sure there are some good ones. If you work for a company that is matching any of the funds, it's free money. It is also true that the money grows tax free, which is a huge plus. But this is a warning to do your research before starting a 403b plan or continue contributing to one that there are dangers. Here is a list of some of them

1. Your money is going to be with them for a while: Entering into a 403(b) arrangement is kind of like making a decision to have children with someone. You will be connected to them for life (or at least until you turn 59.5. ) Any attempt to withdraw funds early (before 59.5) are subject to normal taxes plus a 10 percent penalty. This is fine. What's not fine is the surrender fees. If you are unhappy with the performance of your 403b plan or the advisor fees, good luck. Some companies have surrender fees that last a decade and are as high as 8 percent. This means it could cost you up 8 of any contribution made in the last decade just to switch. Not all companies have surrender fees that are that high or long. But it is something you should know before entering a 403(b) plan. If you do decide to switch plans you may be better off leaving your money with them until you can avoid paying fees on them.  

2. Fees, Fees, and more Fees: School districts have to give their employees a choice of 403(b) vendors. However, most aren't spending time to research which ones are the cheapest. Especially when they have advisors from company's coming to them and marketing their plans.  Keep in mind most advisors are selling a set of cookie cutter options that they will revisit with you once a year. In most cases this means 1 percent of your investment goes to paying an advisor fee. In addition to that the funds you are investing in also have fees, typically higher than average fees, especially if you are investing in an annuity. In addition some companies charge additional fees below certain minimum balances. In many cases you may be better off starting a Roth IRA and investing in a low fee index fund. Your total fees may be .25 percent as opposed to paying fees over 2 percent. 

3. Limited Investment Options: 403(b) advisors can only offer the funds by their company. If an advisor is trying to sell you on their funds it may payoff to look them up on Morning Star and see what they're rated. It can help avoid paying higher than average fees, for a below average fund. 

4. The Guaranteed Interest Fund: One of the ways that advisors attempt to protect their clients against market volatility is to tell people to invest a portion of their income in a guaranteed interest account. I would be cautious about making this investment.  If the company was to offer a 3 percent guaranteed interest account. You are still paying an advisor fee on that money. Leaving money in a guaranteed interest account may be just keeping up with or losing to inflation. So in essence you are safely losing money over time. 

In closing I am a social studies teacher and not a financial advisor. Please make any decisions based on this post. In some cases the work plan may be a good option. I am simply trying to encourage people to do their own research before blindly signing up for the work plan. 

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