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.
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)
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:
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 NASD's investor alert entitled
Annuitiies — A Complex Choice.
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, 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 and expenses.
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 questions:
- Will I have
to pay any penalties if I change my investment choices? If so,
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 charge.
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.
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
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?
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
||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:
of Investor Education and Advocacy
U.S. Securities and Exchange Commission 100 F Street, N.E.
Washington, D.C. 20549-0213
Fax: (202) 772-9295
Questions: Fast Answers
Complaints: Online Complaint Form
If the problem
involves a product that we don't regulate (such as fixed annuities
and many equity-indexed annuities), you should contact your state
insurance commissioner. Your state
securities commissioner may also be able to help.
For problems concerning
the management of the plan — such as money being credited to your
account or being put in the wrong investment — be sure to complain
in writing to the firm that is handling your account. You may
want to send a copy of your complaint (or write a separate letter)
to the school district that provides the plan and your state attorney