It’s open enrollment time at many universities, including Texas A&M and the University of Texas. With temperature and humidity high, it’s an excellent time to spend some time indoors exploring options to optimize your benefits. The first choice is between two tracks known generically as a defined benefit plan and a defined contribution plan. We’ve published this helpful article on the topic. Assuming you have elected the defined contribution option, you’ll need to choose a provider.
While most Americans have a 401(k) plan as their primary vehicle for retirement savings, making these plans far more popular in the press and better known to the public, professors and college administrators utilize a 403(b) plan. These are also known by names such as ORP and ARP and are similar to the 401(k) with a few notable differences.
A comparison of 401(k) and 403(b) investment plans
Here are some similarities between a 401(k) and a 403(b):
- The same maximum contribution limit for 2019 at $19,000; and $25,000 for those over 50 (these numbers change yearly)
- Depending on the plan, you can make pre-tax or post-tax (Roth) contributions
- The contributions are deposited to the plan from your paycheck.
- Withdrawals can only be made without penalty after the owner reaches 59.5 (with a few exceptions)
- Depending on the plan, both types of accounts allow you to make a loan to yourself from your investment savings
Here are some of the differences between a 401(k) and a 403(b):
- In a 401(k), depending on the plan, you can invest in a variety of investments, like individual stocks, bonds, CDs, mutual funds, and annuities. Some 403(b) accounts allow for a brokerage account offering a full range of investments, but there are many still which permit only mutual funds and annuity products.
- At many companies, you do not get a choice where to keep your 401(k) plan. However, it is common for higher education institutions to offer a variety of options (for example Texas A&M College Station has six choices; the University of Texas at Austin has five)
The choice of provider is important as each has different investment options along with different fees that will impact the growth of your retirement savings. Below are a few items to review before making that choice:
403(b) providers are compensated by charging fees, which are part of the investment funds within the annuity or mutual fund products they offer. The amount charged can vary widely in many cases for similar investments. These fees can make a huge difference in how much you save. Here is a good example of why fees are so important when making 403(b) provider choice (article taken from the Chicago Tribune):
“On average, variable annuities charge 2.25 percent annually, compared with 1.4 percent for mutual funds and 0.18 percent for no-load index funds. Over 35 years, assuming a $250 monthly contribution and a 6 percent average annual return, an employee who invested in a variable annuity would end up with a balance of $214,429, compared with $255,712 for the mutual fund and $331,820 for the no-load index fund.”
Each provider will have a set amount of investment choices available. For example, the Texas A&M Fidelity 403(b) has over 200 investment options to choose from, and the TIAA Texas A&M plan has over 50. The average number of investment options in a 401(k) plan is 21.
Further, it is often possible to work with more than one 403(b) provider at a time. This array of options is a blessing for some and a curse for others. Navigating these options is one of the ways we at Briaud Financial Advisors help our clients. Feel free to contact us if we can help guide your choices.
In some cases, your account will be handled by a financial advisor associated with the 403(b) provider that you choose. In other cases, you will be working directly with a call center to handle your needs, so it is vital to pick a financial custodian who excels in this area. Further, if you already have a financial advisor or plan to work with one, you may wish to verify that your provider offers the option of an external advisor.
After you leave your university or retire, you may be able to transfer the balance of the 403(b) account to a traditional or Roth IRA. The IRA can be opened at the custodian of your choice and is not limited to the options offered in your plan.
If you would like help with your 403(b) contact us. We would love to review your options and help you with the best choice for your situation.