Planning for retirement can never happen too soon, and it’s something that all sorts of employees worry about from the beginning of their careers. For employees in tax-exempt organizations, as well as teachers, government employees, doctors, librarians, and school administrators, most retirement plans come in the form of a 403(b) plan. A 403(b) plan is like a 401(k) plan, but it’s specifically designed for the aforementioned positions. Here’s how to find the best 403(b) plans to secure your retirement funds, along with how to choose a 403(b) provider.
Benefits of a 403(b) Plan
Before you can start searching for the best 403(b) companies, you need to first understand what kind of benefits these plans are meant to offer. As it turns out, there are quite a few benefits that can help employees in a wide variety of positions. These are the most important benefits you need to look for while searching:
Matching Contributions. When you put money into your 403(b), your employer makes matching contributions. While it’s often not a 1-to-1 match— for example, your employer may contribute a dollar for every $5 you contribute — it will still essentially function as a way for you to get free money. There may be certain limits on matching contributions in your chosen plan, but make sure that your plan includes employer contributions.
Access to Low-Cost Funds. It’s not uncommon for a 403(b) plan to control well over a million dollars’ worth of assets in total. Since financial institutions want to draw in big accounts like retirement plans, they’ll often look past their high minimum-investment requirements, granting low-cost access to these funds. That means employees will be able to invest without having to deal with additional expenses for the most part.
High Contribution Limits. Just about every kind of retirement plan has a limit on how much you can set aside each year, but 403(b) plans have some of the highest contribution limits. An employee may put up to $23,000 in a 403(b) each year unless they’re over the age of 49. Thanks to the catch-up contribution, employees who are 50 or older may put up to $30,500 per year into their plans. If the plan administrator allows for it, an employee may qualify for a special 403(b) catch -up contribution if they have completed at least 15 years of service with the organization. This special 403(b) catch-up is the least of:
$15,000, reduced by the sum of:
amounts not included in gross income for prior taxable years by reason of this special 403(b) catch-up and
the aggregate amount of designated Roth contributions (per IRC Section 402A(c)) permitted for prior taxable years by reason of this special 403(b) catch-up; or
$5,000 multiplied by the employee's years of service with the qualified employer, less all elective deferrals the employee made in prior years to the organization's plans.
Loan Provisions. If you’re ever in a situation in which you need to withdraw money from your 403(b), it’s a lot easier to do so compared to other retirement plans, which can come in handy for big purchases like buying a home, for example. However, after withdrawing, you’ll want to make sure every subsequent payment is made on time. Missing even one could lead to defaulting on the entire amount of the loan, which will incur penalties from the IRS.
Roth Option. Instead of a traditional 403(b), you may want to opt for a Roth 403(b) plan. While they’re generally the same, the Roth plans allow for tax-exempt withdrawals from the account. Just remember that the contributions aren’t eligible for a tax deduction. The fact that it’s an option, however, sets it apart from many other retirement plans.
With the necessary benefits in mind, it’s time to start evaluating the various options you have to implement a 403(b) plan.
There are numerous 403(b) vendors that offer plans suitable for a wide variety of circumstances, but you need the plan that works best for you. Fortunately, there are a few things you can do to evaluate whether a plan is suitable. Your options are primarily focused on the practical application of the plan and the subsequent costs the plan will incur.
Getting involved with any kind of provider is going to incur a cost of some kind. Additionally, employers need to worry about how the administration and investment options of the plan itself are going to fit into their likely already-stretched budget since 403(b) plans are for nonprofits. Money is the primary cost to consider, but control also matters. Consider how many assets the provider will manage in the 403(b) plans they offer.
Given the complex nature of these plans, you should also use customer service as a barometer for evaluating the best 403(b) plan providers. How far is the provider willing to go to help with the setup, the administration, and answering questions? Most 403(b) vendors are happy to help since a successful implementation of any plan is beneficial for them, but your evaluation needs to go a step further. Consider how much the provider is willing to do to help you. Look through the additional services they offer that may be helpful.
Finally, make sure the plan itself works. A good way to evaluate a 403(b) vendor’s commitment to quality service is to examine the diversity of their permitted investments. It’s important to note that 403(b) plans already limit investments to annuities, mutual funds, and target-date funds. Given the three options, a provider should be flexible enough to provide options for all three in some form or another should you need it.
Dealing With High Investment Fees
When searching for the best 403(b) plan providers, there’s a major drawback you’ll have to accept: 403(b) plans have high investment fees. In fact, it’s not uncommon for investment fees to take out around 3% of the net investment income. Be aware that many providers also hide these fees deep within their oddly worded annuity contracts, so be on the lookout for hidden fees when evaluating plans.
Insurance accounts typically have these types of fees. For example, imagine an insurance and an investment account can guarantee a 7% return on contributions. If the insurance company charges a 3% fee while the investment company charges just a 1% fee, you’ll be generating the same kind of growth either way. You’ll just be getting 4% of that growth with an insurance account as opposed to 6% with an investment account. Just keep in mind that brokerage firms typically manage whole investment accounts.
Finding the Best 403(b) Plan
If you’re looking for a quality 403(b) plan, you don’t have to search on your own. Human Interest is happy to help plan retirement savings for your company, taking on the hassle of management for you entirely. From testing to paperwork to even automating syncs with your payroll, we can help you manage flexible and customized retirement plans easier than ever before. Contact us today to get started or check out one of our guides:
Article ByThe Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.