This post aims to be a resource for Depew teachers to use to help them select the 403b provider and the difference between the available options. Please take your time to review this post and make sure you and your colleagues are using the best possible option – with the understanding that the best option for you may be different than your colleague’s, depending on everyone’s circumstances.
As a Depew teacher, you have access to a retirement plan known as a 403b. These accounts are very similar to the more popular private-sector retirement plan known as a 401k except for one big difference, CHOICE.
Now, this choice can be a good thing or a bad thing. In the private sector, when you get a job and want to save for your retirement, you use the one option the employer has selected. This is not the case for Depew UFSD, as they don’t have just one option but instead offer eleven different ones. Great! Choices! However, the district does not provide any guidance on the various options meaning you have to figure out which of those ten you should use. I have listed them below in alphabetical order:
This can be overwhelming for anyone who doesn’t have any experience with retirement planning. Most of us will go to a friend or co-worker and ask who they use. However, this is like comparing apples to oranges. Your financial situation and life circumstances are different than your co-workers. So how do you know the difference between the companies and which one is the best option for you? If you’re at this crossroads, I hope to help you break down this long list of options into different groups based on what they offer.
These insurance companies primarily offer variable annuities¹ to their clients. While annuities do offer tax deferral, investing in one as part of a 403b account receives no additional tax advantage. Under these circumstances, consider purchasing an annuity only if it makes sense due to its other features.
Variable annuities typically cost between 2% and 4% per year and often come with surrender periods lasting from 5 to 12 years. For example, a $100,000 deposit would range from $2,000 to $4,000 a year in annual expenses locked up for 5 to 12 years. Investments within a variable annuity are typically limited to 20 to 50 options.
While variable annuities may be a valid option for some investors, they can be expensive, have surrender charges, and lack investment options available. As a result, variable annuities may be the most expensive option for your 403b.
A mutual fund² is an investment that pools your money together with other investors to purchase shares of a collection of stocks, bonds, or other securities, referred to as a portfolio that might be difficult to recreate on your own.
Mutual funds may come with an upfront commission of about 5.75% and an annual cost of about 1.25%. On a $100,000 deposit, this would be $5,750 paid out in upfront commissions and the remaining $94,350 being deposited into your account with $1,180 in annual expenses. There are usually 20 to 100 investment options inside a mutual fund company.
These companies hire financial professionals that primarily distribute their own company’s mutual funds, so their recommendations are often limited to these companies.
These companies have financial professionals that are independent and not captive of a financial company so that they may offer the widest variety of investment options to teachers. For example, most can provide variable annuities or mutual funds.
The costs for these professionals can range between 1% and 2% of assets. On a $100,000 deposit this would range from $1,000 to $2,000 in annual expenses. These companies usually have the most freedom and flexibility as most have 1,000+ investment options to select from.
Because a specific list of investment products does not bind them, they can generally offer whatever investment is best for you.
The next step is to meet with the financial professionals from these companies – and make sure to meet with more than one.
(It’s important to note that you do not just use the professional your fellow teachers are using. They might be using them based on another teacher’s recommendation, which may not have been properly researched. Many clients have told me they did not know the difference between the companies and were going on what their colleagues told them. Sadly, no one was informed of the differences, and everyone was using a product that potentially cost them thousands in lost investment returns.)
Look these reps in the eye and get a good feel for them. It’s important to note that this person will be investing thousands of dollars of your money, so take as much time as you need to make this decision.
Email me for more unbiased guidance and support if you’re still unsure.
Please review plan website and documents for the most current information regarding the Depew options.
Withdrawals from a 403(b) are taxed as ordinary income in the year received. Tax penalties and penalties for early withdrawal may apply if funds are withdrawn prior to age 59 ½.
¹ A variable annuity is an insurance contract which offers three basic features not commonly found in mutual funds: (1) annuity payout options that can provide guaranteed income for life; (2) a death benefit; and (3) tax-deferred treatment of earnings. When applicable, the tax deferred accrual feature is already provided by the tax-qualified retirement plan (e.g. 403(b), IRA, etc.). The U.S. Securities and Exchange Commission (Investor Tips: Variable Annuities) has suggested that ) that since a tax-qualified retirement plan (e.g., 403(b) plan) already has tax-deferral advantages, for most investors it may be advantageous to make the maximum allowable contribution to a tax-qualified retirement plan before investing in a variable annuity. The separate account of a variable annuity is not a mutual fund. While separate accounts may have a name similar to a mutual fund, it is not the same pool of funds and will experience different performance than the mutual fund of the same or similar name. In addition, the financial ratings of the issuing insurance company do not apply to any non-guaranteed separate accounts. The value of the separate accounts that are not guaranteed will fluctuate in response to market changes and other factors. Variable annuities are designed to be long-term investments and early withdrawals may be subject to tax penalties and charges. None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation.
² Actual investment return and principal value of both investments will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Variable annuities differ from mutual funds in that they provide lifetime income payments and death benefit protection. A plan of regular investing does not assure a profit or protect against loss in a declining market. You should consider your financial ability to continue your purchase throughout periods of fluctuating price levels. Please obtain a prospectus for complete information including charges and expenses. Read it carefully before you invest or send money. None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation.
The Lincoln Investment family of companies nor any of its representatives is affiliated of Depew UFSD; and Depew UFSD does not sponsor, authorize or endorse the retirement educational services described in this other communications of Lincoln Investment.