Evaluating Your Retirement Options
As an employee of a public school, you likely have access to both a
pension and a retirement savings plan called a "403(b)"
plan. Let's examine what a 403(b) plan is, and then go through the
choices you'll likely need to make if you decide to invest in a 403(b)
What Is a 403(b) Plan?
A 403(b) plan is a type of tax-deferred retirement savings program that
is available to employees of public schools, employees of certain
non-profit entities, and some members of the clergy. Because you do
not have to pay taxes on the amount you contribute to a 403(b) plan for
the year in which you contributed to the plan, investing in a 403(b) plan
can lower your overall tax burden — at least in the present. You can
defer the income tax on your contributions until you begin making
withdrawals from your account — typically after you retire. The
earnings on your account also grow tax-free until withdrawal.
If you are eligible to participate in a 403(b) plan, you may have to
choose among different types of investments, depending on how your
employer structures the plan. It will be up to you to choose investments
that will best meet your financial objectives. 403(b) plans typically
offer fixed annuities, variable annuities, and mutual funds. Here is a
brief description of each:
Annuities are contracts with insurance companies that guarantee
that you will earn a minimum rate of interest during the time that
your account is growing. The insurance company also guarantees that
the periodic payments will be a guaranteed amount per dollar in your
account. These periodic payments may last for a definite period,
such as 20 years, or an indefinite period, such as your lifetime or
the lifetime of you and your spouse.
Indexed Annuities are a special type of contract between you and
an insurance company. During the accumulation period — when you make
either a lump sum payment or a series of payments — the insurance
company credits you with a return that is based on changes in an
equity index, such as the S&P 500 Composite Stock Price Index.
The insurance company typically guarantees a minimum return.
Guaranteed minimum return rates vary. After the accumulation period,
the insurance company will make periodic payments to you under the
terms of your contract, unless you choose to receive your contract
value in a lump sum. For more information, please see our "Fast
Answer" on Equity
Indexed Annuities, and read FINRA's investor alert entitled Equity-Indexed
Annuitiies — A Complex Choice.
||Variable Annuities are contracts with
insurance companies under which you make a lump-sum payment or
series of payments into a tax deferred account. In return, the
insurer agrees to make periodic payments to you beginning
immediately or at some future date. You can choose to invest your
purchase payments in a range of investment options, which are
typically mutual funds. The value of your account in a variable
annuity will vary, depending on the performance of the investment
options you have chosen.
Make sure that the features you're buying when you invest in a
variable annuity are worth the money you're paying. If you invest in
a variable annuity through a tax-advantaged retirement plan (such as
a 403(b) plan), be aware that you receive no additional tax
advantage from the variable annuity. Investors typically pay for
each benefit provided by any given product. Be sure you understand
the impact of these costs and all others fees and expenses.
Funds are companies that pool money from many investors and
invest the money in stocks, bonds, short-term money-market
instruments, or other securities. Mutual funds come in many
varieties. For example, there are index
funds, stock funds, bond
funds, money market funds, and
more. Each of these may have a different investment objective and
strategy and a different investment portfolio. Different mutual
funds may also be subject to different risks, volatility, and fees
What Questions Should I Ask About My Investment Choices?
The best tip we can give on how to invest wisely boils down to two
words: ask questions. Over the years, we've seen far too many investors
who suffered avoidable losses because they didn't ask basic questions from
the start. When it comes to planning your financial future, take nothing
for granted — ask questions, demand answers, and make sure you understand
the consequences of your choices before you commit your hard-earned money.
Although you may be eligible to participate in a 403(b) plan, don't
assume that your employer has checked out or approved any particular
investment product or any firm or professional that sells potential 403(b)
investments. School districts typically do not engage in that sort of
screening, and some states prevents school districts from limiting the
companies that can sell 403(b) plan investments. That's why it's so
important to do some homework on your own to assure yourself that the
choices you make as the best for you in light of your personal
circumstances and financial objectives.
For starters, be sure to ask at least the following three key
- Will I have to pay any penalties if I change my investment
choices? If so, how much?
Make sure you know the answer to this critically important question
before you make your investment choices. The answer will depending on
the type of product you initially chose and when you purchased that
product in your account. For example, if you withdraw money from a
variable annuity within a certain period after a purchase payment
(typically within six to eight years, but sometimes as long as ten
years), the insurance company usually will assess a "surrender"
charge. A surrender charge is a type of sales charge that
compensates the financial professional who sold the variable annuity to
you. Generally, the surrender charge is a percentage of the amount you
sell or exchange, and it will decline gradually over a period of several
years, known as the "surrender period." For example, a 7%
charge might apply in the first year after a purchase payment, 6% in the
second year, 5% in the third year, and so on until the eighth year, when
the surrender charge no longer applies. Some variable annuity contracts
will allow you to withdraw part of your account value each year — 10% or
15% of your account value, for example — without paying a surrender
Some mutual funds have a back-end sales load known as a "contingent
deferred sales load" (also referred to as a "CDSC" or
"CDSL"). Like a surrender charge for a variable annuity, the
amount of this type of load will depend on how long the investor holds
his or her shares, and it typically decreases to zero if the investor
hold his or her shares long enough. The rate at which this fee will
decline is disclosed in the fund's prospectus.
A redemption fee is another type of fee that some funds charge
their shareholders when the shareholders redeem their shares. Although a
redemption fee is deducted from redemption proceeds just like a deferred
sales load, it is not considered to be a sales load. Unlike a sales
load, a redemption fee is typically used to defray fund costs associated
with a shareholder's redemption and is paid directly to the fund, not to
a broker. The SEC generally limits redemption fees to 2%.
The question of whether you must pay a penalty or other fees for
switching among investment choices in your plan is completely different
from whether you must pay a penalty for taking money out of your 403(b).
The tax laws generally impose penalties for early withdrawals from
tax-deferred retirement plans, such as 403(b) plans, IRAs, and 401(k)s.
Before you take money out of your 403(b) account, be sure to consult
with a tax adviser.
- What annual fees will I pay?
As you might expect, fees and expenses vary from product to product —
and they can take a huge bite out of your returns. An investment with
high costs must perform better than a low-cost investment in order to
generate the same returns for you. Even small differences in fees can
translate into large differences in returns over time.
For example, if you invested $10,000 in a product that produced a 10%
annual return before expenses and had annual operating expenses of 1.5%,
then after 20 years you would have roughly $49,725. But if the
investment had expenses of only 0.5%, then you would end up with
$60,858 — an 18% difference. It takes only minutes to use the SEC's
Mutual Fund Cost Calculator to compute how the costs of different
mutual funds add up over time and eat into your returns.
For mutual funds and variable annuities, you can find information on
costs and fees in the prospectuses. For fixed annuities, check the sales
literature or the contract.
- Does my financial professional make more money for selling one
product over another?
Regardless of how much you trust your financial professional, it is
always legitimate to ask how - and how much - he or she receives for
selling a particular product. For example, you could ask the following:
||Do you receive a commission for selling
Product X to me? If so, how much?
||Do you get any other type of
compensation for selling Product X? If so, what? (This could
include a bonus or points toward some other reward, such as a trip
or a cruise.)
||Do you get more for selling Product X
over Product Y?
||Are there any other products that can
meet my financial objectives at a lower cost to me (even
if you do not sell those products)?
It will be critical for you to know in advance which products can
best meet your financial objectives and to identify a financial
professional who sells those products. Different
types of financial professionals sell different types of products, and
some financial professionals will offer only a limited number of
choices. When deciding what's best for you, shop around for the best
fit. When brokers or insurance salespersons stand to earn more
money for selling Product X over Product Y, they have a natural
incentive to steer you toward Product X — even if Product Y might
ultimately be a better choice for you.
Our online publication entitled Ask
Questions lists in greater detail the questions you should ask about
all of your investments. To learn how you can check out the background of
a financial professional (before you purchase products or as soon as you
finish reading this publication), be sure to read Check
Out Brokers and Advisers.
For More Information
For more information about the types of products available through
403(b) plans, please read the following SEC publications:
Where to Find Help with Questions or Complaints
If you have a problem with investments in your 403(b) plan, you may
want to turn to several sources for help. We always welcome hearing from
you. Here's how contact us: