While I couldn’t possibly cover all the ins and outs of 403(b) plans in one post, my goal is to provide answers to some frequently asked questions I receive from STRS Ohio Members regarding 403(b)s.
What is a 403(b)?
A 403(b) is a tax-deferred retirement savings account available to most members of STRS Ohio. 403(b)s are separate from the three retirement plan options offered by STRS Ohio (i.e. Defined Benefit, Defined Contribution, and Combined), but may be used to supplement the retirement income provided by one of the plans. Participation in a 403(b) is voluntary and does not impact your STRS Ohio retirement benefits.
What’s the difference between a pension and a 403(b)?
Many STRS Ohio members participate in the Defined Benefit plan, which, upon retirement, pays a monthly pension based on years of service, age, and final average salary. Investment decisions related to the Defined Benefit plan are made by plan officials, NOT the participants.
In contrast, a 403(b) is a self-directed retirement account that may provide a stream of income based upon how much money the participant accumulates in the account. In other words, the income provided during retirement is based on participant contributions AND investment performance. The participant is responsible for all investment decisions within the 403(b).
How should I select a 403(b) provider?
In my experience working with STRS Ohio members, I frequently find school districts offer several options for 403(b) providers. It’s important to note that just because a provider appears as an option that doesn’t mean the district endorses the provider. Nor does it mean the providers are all the same, in terms of the 403(b) plan they offer.
So how should you evaluate your options? What types of things should you be looking for?
1. Many 403(b) providers are insurance based. That is, the 403(b) they provide is offered through an insurance company, which typically leads to higher than necessary expenses for you, the participant. It’s important to avoid insurance based 403(b)s. Examples of these companies may include AXA, Great American, VALIC, Nationwide etc.
Instead, find a 403(b) provider that’s investment oriented. They aren’t part of an insurance company and typically offer less expensive and more flexible investment options. Examples of this may include FTJ FundChoice, Fidelity, TIAA, etc.
2. A 403(b) plan should offer investment options from multiple fund families, if possible. If a plan only offers options centered around their own brand or fund family, it may be wise to look elsewhere.
3. It’s important to consider the ongoing expenses of each investment option. It probably goes without saying, but it’s typically best to keep investment costs as low as possible.
4. In most cases, you should avoid annuity plans that offer a “guaranteed” stream of income. Remember, your 403(b) is separate from the pension you may be accruing from STRS Ohio as a member of the Defined Benefit plan. With proper planning, you may not require a separate stream of income, which means you would be paying unnecessary fees to the 403(b) provider.
Do your homework to thoroughly evaluate each option listed on your district’s approved provider list. Just because your co-worker has selected ABC Company or you frequently see a representative from ABC Company at your place of employment doesn’t mean that’s the best option for you!
Should I invest in a 403(b)?
Whether an STRS Ohio member should utilize a 403(b) completely depends on his or her circumstances! Careful consideration should be given to the following:
- Income tax advantages and/or disadvantages
- 403(b) provider options
- Investment knowledge
- Employer matching contributions
- Cash on hand (i.e. Does the member have sufficient cash already set aside for emergencies or other goals?)
Some STRS Ohio members may be better off saving to a different investment account such as a Roth IRA or even an after-tax investment account. It’s important to understand your full financial picture before determining whether a 403(b) is in your best interest.
I hope this answers some of the questions you may have about investing in a 403(b). If you have additional questions about 403(b)s or STRS Ohio benefits in general, don’t hesitate to schedule a free, initial consultation so that we may begin sorting through your options.