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Think Your Retirement Plan Is Bad ? Talk To A Teacher
Good article. I'm sure the situation and plans vary greatly by employer and state. I believe that in Michigan there are some good 403B plans available in some public school districts, but they are highly dependent on what the employer and bargaining unit come up with. Dang - I've been searching for something about the original 403B, the year it began and why it began. Dry Hole!
What I think I know:
403Bs began in the 60s. They preceded the 401K by a decade or more. As Ted's linked article states, the 403B is for public employees like hospital workers and teachers. I suppose there are many reasons why they were first to have such plans. I suspect they may have been better organized and more politically active back than. Also, public DB (defined benefit) plans probably didn't measure up to those offered in the private sector in those days.
403Bs were originally synonymous with Tax Sheltered Annuity. My understanding is that initially they were by law limited to only annuities. Either thru law, jurisprudence or practice they broadened in the 70s to allow participant ownership of mutual funds and other investments. However, options had to be approved by the employer and were usually very limited (i.e. a single fund company).
A loophole well into the 90s allowed still working participants to transfer their funds from the employer's designated custodian to another plan custodian of their own choosing. (The plan retained the same employer/name - but another custodian agreed to manage the participant's assets). This, however was not widely known or understood. Further, in order to do this, the participant may well have had to pay high fees or loads on his initial in-plan contributions. Eventually the loophole was plugged either by legislation or regulatory fiat.
The 403B paved the way for the 401K that eventually followed. So in a sense, public sector workers did private sector workers a favor by paving the way. From Ted's linked NYT article it sounds as if the 401K is now much better designed and regulated.
Catch made a good point in another thread about participants not being savvy about money or motivated to invest and learn. Agree. But isn't this largely true of most employee contribution plans and most younger workers as well?
The history is generally accurate, except for minor details. 403(b)s began in 1958, as noted in the accompanying NYTimes article (link is at end of article, or here).
It's true that Section 401(k) of the IRC wasn't enacted until 1978 (and didn't become effective until 1980), but 401(k)s are just "Cash Or Deferred Arrangement" (CODA) plans. According to ICI, these go back to the 1950s (with IRS rulings in 1956 to regulate them). The profit sharing (employer contribution) portion of these plans goes all the way back to the beginning of the modern income tax (1913), i.e. not counting the income tax that Lincoln instituted.
Similarly, there were annuity plans for educators predating Section 403(b) of the IRC, going all the way back to the founding of the Teachers Insurance and Annuity Association (TIAA) in 1918.
The NYTimes article cited above confirms that mutual funds were added to 403(b)s in 1974. But that's for "real" 1940 Act mutual funds. Remembering that 403(b)s were created as annuities, we can also consider variable annuities (i.e. similar to mutual funds, but contained inside annuity wrappers). The first variable annuity was the College Retirement Equities Fund (CREF), created in 1952.
IMHO, if one wants to talk about the full history, one goes all the way back to the 1910s. If one wants to talk about the modern regulatory era, one starts in 1974 with ERISA.
Thanks for pointing that out msf - and all the additional information.
Here's the part near the end of the NYT article I may have overlooked (along with several links embedded in the article).
"The 64 million workers with 401(k) accounts are covered by the Employee Retirement Income Security Act of 1974, overseen by the Labor Department. The law outlines minimum guidelines and protections for workers and requires employers or plan overseers to act in the best interests of participants....But most assets in 403(b) accounts are invested in the murkier side of the market, which is not covered by the federal law, known as Erisa. Many hospitals and private colleges tend to hew more closely to Erisa standards, but a series of recent lawsuits against prominent universities argue there is still room for improvement."
A highly emotionally charged piece of writing - similar to how 60 Minutes manages to hype emotionally charged anecedotes while at the same time constructing the overall fact-based presentation. Not a knock on the style. Just a recognition of how the story is being presented.
But remember that most public employees also have a pretty generous pension plan that is far better than Social Security. Why else would the politicians not be a part of SS? Our experience has been that public employees who also have contributed to 403b (yes, most have hideous fee structures) plans are often in financially strong shape at retirement. Most mutual fund companies opted out of 403b plans years ago, so that left only those funds run by insurance companies as options for many plan participants. Interesting that a number of quality fund companies (T.R. Price, for example) remained in the 457 business, which is a plus for those folks who qualify.
Comments
What I think I know:
403Bs began in the 60s. They preceded the 401K by a decade or more. As Ted's linked article states, the 403B is for public employees like hospital workers and teachers. I suppose there are many reasons why they were first to have such plans. I suspect they may have been better organized and more politically active back than. Also, public DB (defined benefit) plans probably didn't measure up to those offered in the private sector in those days.
403Bs were originally synonymous with Tax Sheltered Annuity. My understanding is that initially they were by law limited to only annuities. Either thru law, jurisprudence or practice they broadened in the 70s to allow participant ownership of mutual funds and other investments. However, options had to be approved by the employer and were usually very limited (i.e. a single fund company).
A loophole well into the 90s allowed still working participants to transfer their funds from the employer's designated custodian to another plan custodian of their own choosing. (The plan retained the same employer/name - but another custodian agreed to manage the participant's assets). This, however was not widely known or understood. Further, in order to do this, the participant may well have had to pay high fees or loads on his initial in-plan contributions. Eventually the loophole was plugged either by legislation or regulatory fiat.
The 403B paved the way for the 401K that eventually followed. So in a sense, public sector workers did private sector workers a favor by paving the way. From Ted's linked NYT article it sounds as if the 401K is now much better designed and regulated.
Catch made a good point in another thread about participants not being savvy about money or motivated to invest and learn. Agree. But isn't this largely true of most employee contribution plans and most younger workers as well?
It's true that Section 401(k) of the IRC wasn't enacted until 1978 (and didn't become effective until 1980), but 401(k)s are just "Cash Or Deferred Arrangement" (CODA) plans. According to ICI, these go back to the 1950s (with IRS rulings in 1956 to regulate them). The profit sharing (employer contribution) portion of these plans goes all the way back to the beginning of the modern income tax (1913), i.e. not counting the income tax that Lincoln instituted.
Similarly, there were annuity plans for educators predating Section 403(b) of the IRC, going all the way back to the founding of the Teachers Insurance and Annuity Association (TIAA) in 1918.
The NYTimes article cited above confirms that mutual funds were added to 403(b)s in 1974. But that's for "real" 1940 Act mutual funds. Remembering that 403(b)s were created as annuities, we can also consider variable annuities (i.e. similar to mutual funds, but contained inside annuity wrappers). The first variable annuity was the College Retirement Equities Fund (CREF), created in 1952.
IMHO, if one wants to talk about the full history, one goes all the way back to the 1910s. If one wants to talk about the modern regulatory era, one starts in 1974 with ERISA.
Here's the part near the end of the NYT article I may have overlooked (along with several links embedded in the article).
"The 64 million workers with 401(k) accounts are covered by the Employee Retirement Income Security Act of 1974, overseen by the Labor Department. The law outlines minimum guidelines and protections for workers and requires employers or plan overseers to act in the best interests of participants....But most assets in 403(b) accounts are invested in the murkier side of the market, which is not covered by the federal law, known as Erisa. Many hospitals and private colleges tend to hew more closely to Erisa standards, but a series of recent lawsuits against prominent universities argue there is still room for improvement."
A highly emotionally charged piece of writing - similar to how 60 Minutes manages to hype emotionally charged anecedotes while at the same time constructing the overall fact-based presentation. Not a knock on the style. Just a recognition of how the story is being presented.