Key Questions to Ask to Better Understand Your 403(b)
by Susan Johnston Taylor
While 403(b)s share some similarities with the 401(k)s offered to corporate employees, these retirement plans are not identical and they can sometimes be confusingly complex in their fee structures and investment options.
It’s not always easy to untangle these concepts, but choosing a low-fee investment option with the provider that best suits your needs can help teachers, nonprofit workers and others with a 403(b) account set themselves for success in retirement.
We talked to retirement experts at Vanguard and T. Rowe Price, two companies that offer 403(b) accounts to employers, on the questions plan participants can ask to better understand their options.
1) Who is involved with my 403(b)? How are they getting paid?
You may be surprised by how many different entities are involved in various aspects of your 403(b). “Generally speaking, you can have third-party administrators, advisors, record keepers, investment providers and those investment providers can include asset managers and insurance companies,” explains Phil Korenman, principal and head of Specialty Retail Programs for Vanguard Retail Investor Group. “There can be one company providing services or in some cases upwards of four or so individuals providing pieces of services. If there’s multiple people involved, how are they getting paid?”
Alas, it’s not always easy to figure out all the many layers of people involved in your 403(b), but Korenman suggests looking at the names of companies on any forms you fill out or mail you receive in conjunction with your retirement account. “The more names you see, in all likelihood, the more different providers you’re paying fees,” he adds. If you’re unsure, you can also ask your employer questions like “Who do we work with? Who are we contracting with? Can you provide some fee disclosures?” Korenman adds.
Some K-12 school districts offer 403(b)s through multiple providers. Generally, higher education and health care employees have fewer and better options. If you’re choosing between several options, asking these questions for each provider can be time-consuming but worthwhile, because you’ll get a better sense of the fees associated with each one.
Those working in higher education may have an easier time identifying their record keeper. According to Andrew Heiges, vice president of T. Rowe Price and the Group Manager of Retirement Investment Platforms and Services, “the trend is moving in the higher end space to move to a single record keeper. They could provide all of the investment level information.”
If there’s an advisor helping you choose the investments in your retirement account, “[ask] them specifically how they’re compensated, both on purchases and sales and the advice they’re providing,” Heiges adds. “If you’re investing in funds that they may guide you toward or help you understand, they may be getting a management fee.” Also find out their credentials (many people consider the CFP or certified financial planner designation to be the gold standard).
2) What about other fees?
Depending on your plan and your investments, you may have additional fees to consider. “Some providers charge a withdrawal fee,” Korenman says. “If you plan to be using that [account] in retirement to draw down, some providers may charge you a lot to do that.”
If you’re invested in annuities, then you may be subject to a surrender charge if you sell or withdraw funds from that annuity during the surrender period (which can last for several years). “Sometimes you may not even realize that you’re invested in an annuity, especially if it’s a variable annuity,” Heiges says. “Being cognizant of any surrender charges is important. Ask the record keeper or the advisor if there is one on the plan.”
3) What are my investment options and how do they match my needs?
While fees can eat into investment returns, you also need to consider your investment options and how those address your financial goals. “The cheapest fund doesn’t always perform the best,” Heiges says.
Look at past performance (after fees) of investment options you’re considering, but remember that “the best performing fend doesn’t indicate they’ll be the same ones in the future,” Heiges says. The record keeper can typically provide you with fact sheets on investment funds through vendors such Morningstar.
Those with 401(k) retirement plans typically have the option of target date funds where investments automatically adjust over time as the account-holder nears retirement. On the 403(b) side, Korenman says he’s seeing a “tremendous uptick in target date funds because of their beautiful simplicity.” The account-holder chooses the fund that most closely aligns with their intended retirement year (for instance, 2050 or 2060) and the provider allocates investments accordingly.
“For folks who are just starting out, target date funds are really as you’re accumulating your wealth and your retirement nest egg,” Heiges says. “As you get more advanced in your career, you have to think about do you have other savings to make sure that you’re balancing the target date fund with the other investments.”
In addition to investment options, you might also consider how the provider suits your needs in other ways. “Many people make decisions on providers based on liking their client experience, like having the ability to contribute on a Roth basis or having access to loan features,” Korenman.
These questions may seem mundane but understanding your 403(b) and choosing the right investments with the right provider can provide greater financial stability and peace of mind headed into retirement. As Korenman says, “none of us have control over investment performance but over a lifetime of saving, controlling costs and controlling allocation are very much in an investor’s control.”
Susan Johnston Taylor is an Austin, Texas-based freelance writer for TraditionalIRA.com and RothIRA.com. She has covered personal finance and small business for publications including The Boston Globe, Entrepreneur, Fast Company, and U.S. News online.