What is a Roth 403(b)? For years I have had a vendor’s low-risk 403(b) that gives at least 4.5% guaranteed interest and I was told by a friend to get out of that vendor! Should I? I was told by the vendor that my money was protected up to $100,000. Is that true? I was also told that our money is not guaranteed to be there when we retire in any of the retirement plans including 403(b) or 457. Is that true? Do you have authentic and truthful information about any of these companies? Many are after our money and promising the world when we retire. Can CTA help teachers with the real facts?
CTA can help! CTAinvest.org was developed by California Teachers Association to help you learn more about your retirement benefits, voluntary retirement savings, basic financial topics, insurance and estate planning. This website is purely educational, and contains no mention of products or plans.
First, if you want to learn more about Roth 403(b) plans, read What Is a Roth 403(b) Plan? Basically, the wages you defer in a traditional 403(b) are not taxed in the year they are paid. You are taxed later on, when you (or your beneficiary) withdraw funds from the traditional 403(b) account. In a Roth 403(b), you must pay taxes on the wages you defer in your 403(b) in the year the wages are paid to you, but (in most cases) no tax is due when you or your beneficiary withdraws funds from the Roth 403(b) account. What Is a Roth 403(b) Plan? explains some of the factors you should consider in choosing between a traditional and a Roth 403(b) account.
In addition, the Small Jobs Business Act of 2010 provides a new option for members interested in Roth Plan options. As of January 1, 2011, school employers are allowed (but not required) to offer Roth 457 plans, as well as Roth 403(b) plans. Second, as far as your vendor's low-risk 403(b), it sounds as though you are investing in a fixed annuity. These types of options have a guaranteed interest rate and guarantee your principal.
Other characteristics of these plans include insurance fees and charges including surrender fees. Surrender fees work like this: You are generally tied into the investment plan for a number of years, often six or seven, although it can be longer. If you decide the fixed annuity is no longer appropriate for you and you decide to get out of it, you will have to pay a fee. Fixed annuities also often pay low rates, and sometimes the surrender fee ends up being more than you earned in the annuity. Read more about surrender fees here.
Insurance companies often pay high commissions to sales agents who may try to sell or maintain fixed annuities by saying other 403(b) plans won’t guarantee your savings or be there when you retire. That can be viewed as a scare tactic, because even though fixed annuities offer a guarantee, it is subject to the financial strength and security of the issuing insurance company.
We can't cover every aspect of the different ways to invest in your 403(b) plan in this short answer, but you can read more about fixed annuities, variable annuities and mutual funds on this site. And, we can help you ask the right question of the 403(b) representative so that you have disclosure regarding commissions and fees. Click here to learn more.
It's important to understand that every investment has some risk. For example, even with a guaranteed fixed annuity, you may not earn enough to keep up with inflation if the annuity pays 3% but inflation is 3.5%.
403(b) mutual fund investments are not guaranteed. However, by investing in a diversified mix of stock funds, bond funds and cash funds, and choosing high-quality mutual funds, you can pursue greater growth potential while helping to manage the downside (potential losses). You may also have access to target-date mutual funds. These adjust your investments over time, so that as you get closer to retirement, your money is invested in lower-risk funds. Although it is not always the case, generally mutual funds have lower fees than annuities, and that can have a significant impact on how much you accumulate for retirement over time.
It's very important that you get educated about the investment options in your 403(b) plan. Unlike your CalSTRS or CalPERS benefit, where pension plans make the investment decisions and bear the investment risk, those responsibilities fall on you when you invest in a 403(b) or 457 plan. How much money you have when you retire depends on how much you save, how long your money has to compound, which investments you choose, what their fees are and the performance of those investments.
Compare Specific Products
The 403bCompare website offers free, objective information about 403(b) vendors and the products they offer. You can use it to research the vendors and products available in your district’s plan. You should always be sure that any guarantee you get from a vendor is made in writing.
Download and read Closing the Gap: Supplement Your Pension Benefits with a 403(b) or 457 Plan. It's also helpful to download and read Selecting a 403(b)/457 Advisor & Understanding Plan Fees for help identifying strategies for making good choices for your plan, including choosing a financial advisor who puts your interests first.
Back to FAQs