FYI: How is it possible that two variations of tax-deferred retirement accounts, born of similar ideals and motivations, have evolved into shockingly different animals?
I refer to 401(k) and 403(b) investment accounts. Despite being part of similar tax codes with nearly identical goals, in practice the portfolios of each bear little resemblance to each other. As a result, millions of American teachers, among others, are retiring with less in savings than they deserve.
Regards,
Ted
https://www.bloomberg.com/opinion/articles/2019-03-15/teachers-deserve-better-from-retirement-plan-system
Comments
Regards,
Ted
In addition to those tax-sheltered retirement funds we purchased additional shares of both American Funds and American Century funds with whatever we could afford each year.
Both of us also contributed to our respective defined benefit pensions, and Social Security. Thanks to all of that saving we are in very good financial shape now.
(Shooting from 20 or 30 year old memories here.)
- The 403 B preceded the 401 K by a number of years.
- The IRS 403 B provision was originally intended to allow certain public employees (including teachers) to shelter from taxes a portion of their pay in annuities. In my early years the plan was often referred to by colleagues as a TSA (Tax-Sheltered Annuity) as that was the original scope of these plans.
- At some point early on it was expanded to allow these employees to invest in mutual funds. (Employees had pushed for this.) Haven’t time to check, but either by adjucation or legislation that change occurred in the early 70s.
- OJ is correct (as pertains to where I worked and perhaps more generally). The school district or other employer had control of which fiduciary (and fee based advisor) could handle their workplace account. At first only one fund company was allowed where I worked; and there was a 4+% front load on everything. A few years later the employees organization pushed the employer to include no-load T. Rowe Price as a second option. With Price there were no restrictions as to which funds we might purchase.
- There was a convenient IRS loophole that lasted until at least the late 90s. It wasn’t widely known. It allowed employees to do 403 B transfers from the plan’s designated fiduciary to any other fund company of choosing while still working / contributing. The transfers could be partial. There was some basic paperwork, but no harder than moving an IRA from one custodian to another would be today.
- The above loophole was plugged (either by the regulatory authorities or legislation) sometime after 1998.
Something doesn’t compute here that 75% of 403-B holdings are in annuities. Teachers aren’t dumb. They’re not going to sit idly by and allow their school board or state to push them into annuities during their working years.
Would be nice if Rithholtz could be a lot more specific? What age group? What state? What professions? Were this written 30 years ago I would have surmised these folks went into those annuities prior to the law being changed around ‘74 and held onto them. But today?
Now, there’s a move in Michigan and elsewhere to get rid of DB pension plans. In some cases they’ve been replaced by matching contributions into 403 B plans. I suppose that such a setup might possibly give both parties some incentives to go with traditional annuities - especially the employer.
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Racking my brain on this one. Maybe in some lower education, lower skill-set public sectors there’s a feeling among workers that stocks and mutual funds represent risk, whereas they may view annuities as safer. Don’t know. Just trying to make sense of that 75% figure.
That's also one of the main points in that article, so why is it "BS"?
I'll reiterate that the quality of the MFO board has really declined. IMO, there are many solid contributors with true investment acumen. However, there are also a whole lot of "contributors" (I use quotes because they don't MEANINGFULLY contribute) with hubris because they're qualified purchasers or accredited investors. I hope you all know that all that means is they have money. It means absolutely nothing when it comes knowledge investment knowledge.
Peace out.
@hank- Yep, a tough call on this one. Which is more dependable- an underfunded DB pension relying on unrealistic rates of investment return, or a matching contribution 403(b) which has a lower but probably reasonable rate of return? Present retirees are most likely OK, but what about those still working?
"Comprehensive research [5] on the topic has been published by Aon Hewitt, which concludes that 403(b) customers waste $10 billion dollars per year in excess fees."
Note [5]: "There are lots of anecdotes about how teachers’ 403(b)s participant-borne costs are far in excess for services than comparable 401(k)s – see for example this or this – but I want to focus instead on the hard data. For the mathematically minded, it paints a picture of public servants not being served by their own school districts."
In any case it appears that we are quibbling. On the main point, all are in agreement that the annuities are a bad deal. The question seems to be what percentage of 403(b)s actually are invested in annuities.
https://403bwise.com/