EP 9 – 2 Types Of 403b Plans

Understanding 403b Retirement Plans: Differences, Pros, Cons, and Recommendations

Let’s talk about the two types of 403b retirement plans available: the 403b or TSA plans and the 403b7 plans. We’ll explain the differences including their functioning, fees, and investment selections.

We will also give a brief on surrender charges associated with annuity-based plans and commissions. The pitfalls of picking certain 403b plans are discussed, particularly those run by life insurance companies.

We will provide tips on how to identify and choose better 403b7 plans. At the end, we’ll talk about a new DIY investing solution to manage their own 403b account.

00:25 Understanding 403b Plans

02:11 The Two Types of 403b Plans

02:35 The Pros and Cons of TSA 403b Plans

05:32 The Benefits of 403b7 Plans

08:41 Choosing the Right 403b Plan Provider

12:20 Identifying Your Current 403b Plan

13:15 DIY Investing Solution for Your 403b Plan

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Transcript

Hello, and welcome to another episode of the Washington state retirement planning podcast. I’m your host, Ethan Meikle.

On this podcast, we talk all about your Washington state retirement benefits should get a better sense of how everything works.

So hopefully you can retire earlier, pay less in taxes and spend more free time with your loved ones.

And today’s episode, we’re continuing our conversation on fourth of B plans. And we’re going to be talking about the two different types of 403b plans that exist. And yes, you heard that right? There are two different types of 403b plans.

However, they both go by the name, 403b school districts will often label them as TSA or four, three BS on their forums. And there’s really no good for sure. Way of knowing what type of plan you have, unless, you know, What company is with and what you’re signed up for to begin with. So today I’m going to give you guys the insight and the breakdown between both of them.

So can kind of self-diagnose what type of plan you might be in. What are the pros and cons of each one? And you can get better, a sense of, should you stick with that plan or should you seek a different type of four-three plan that is out there.

I also put a link to our five questions you need to ask before starting a 403b plan in the show notes. So make sure you go ahead. And download a copy of that. So you can be well-equipped. To know what to ask. And what to look for when interviewing different financial planners when starting a, your own 403b account.

Now, if you are a DIY person, you want to do your own investing. And then we actually do have a service. That gives you guys the advice, no matter what 403b company you are with. So currently we have aspire fidelity and Vanguard, which are the big three. Currently in the system. So if you are forced to be with any one of those providers and you’re like, Hey, I would like some advice to know exactly what I should be investing in.

So don’t take on too much risk. And when I should be making changes, I got you guys covered. That service is currently open.

You can go ahead and sign up using the link in the show notes below. You can also head over to our website, WATRSPERS.com and there’ll be a link to learn more and sign up on there as well for that service. Alright, let’s read along with the two types of 403b plans.

 Alright, so the two types of 403b plans available are the 403b or TSA plans, and you have the 403b7 plans. And there’s a really big difference between the two, and it can get even more confusing because sometimes the school district We’ll label a 403b7 plan as a TSA, so let’s just quickly break down how to identify which one you have.

So, the first type of 403b plan there is are ones known as TSAs or Tax Shelter Annuity. So, these are annuity based 403b plans and they are issued by life insurance companies.

So, they work just like any other account, but a couple of key differences here is because it’s annuity based, these things have surrender charges attached to them. So, what that means is, when you put money into them, That money has to stay there for a period of time, whether it’s 5 years, 10 years, or 15 years.

It’s going to depend on the company you selected. And if you were to take that money out or move it to a different company before that time period was up, you’re going to be hit with an extra penalty. So it’s kind of a sticky situation. And that’s why it may cost you extra money to try to leave that company.

Now, the other thing with this is those same surrender charges operate often on a rolling basis. So what that means is every time you add new money into the plan, It’s going to start a new, you know, 10 or 15 year, whatever your surrender charge period is. So if I put in a hundred dollars this month, that money has to stay there, say for 10 years.

Next month, I put in another hundred dollars. That month’s contribution has to stay in there for another 10 years and so on and so forth. It just keeps on rolling and rolling and rolling. So it can take quite some time to be able to get all your money out without paying these kinds of penalties. Now, the other thing to know about these plans is typically the fees in these are often higher.

Because they’re annuity based plans, you have to pay something called an M& E fee, or mortality expense charge, and oftentimes they’re going to be set from, you know, 1 to 1. 2, even 1. 5%, just as like an administrative charge. The other thing to know is when it comes to the investment selection of these plans, they’re very limited, often less than 100 funds to choose from.

They seem like a lot, but often they’re not going to be the best funds available for those categories. and most times, they’re going to be operated by the life insurance company you bought the 43b from. So it’s going to be that company’s own mutual funds. So when you pay them a fee for those investment funds, it actually goes back to the company.

So you paid them the original M& E or administrative fee plus the investment fees all go to that company. So you can see it’s a real money maker for them. So with these plans, because they have that short list, you may not be getting the best deal there. And oftentimes the fees are going to be pretty high as well.

Often 1 percent or higher for those plans. So in total, we see these plans running anywhere from 2 percent on average in total fees. So it can really eat away. at your future growth potential. Now because these are annuity plans, they pay commissions out to the advisors that sell them, so that’s why oftentimes when you have people knocking on your door, can they actually work for one of those life insurance companies, and they’re going to put you into this model, it’s because they have to, you know, feed their family, and it gives them the quickest payout.

And I’ll even admit it, that’s how I got my start in the industry, was working for a company doing exactly that. However, once I realized What the other options were and the errors of my way, that’s why I left to become independent. So now I do things totally different and actually utilize the other 403b option that I’m about to tell you about now.

So the 403b 7 is an investment based 403b plan. So there are no commission payouts.

I put money in every single month. If I wanted to switch providers of that 403b plan, you can do so with no kind of penalties at all. If I want to pull some money out because I’m, hey, I’m retired, I want to spend the money. Also, no penalties at all. So you totally avoid that whole surrender penalty thing.

And because there’s no commissions, you just pay, you know, the advisor that fixed rate. Oftentimes it’s, you know, one to one and a half percent depending on the institution that they work for or what they’re going to charge you. So it’s just an ongoing fee. You know exactly what it is. And there’s not any kind of big incentive for them to put you in that particular one or any kind of particular company because they all pay the same.

He’s charging the same percentage no matter what company you select. So because just like here at Scenic we’re independent, I really don’t care what provider you choose from because I charge the same fee no matter where you go. Unlike the TSA plans where they have those commission based ones, oftentimes you’ll see people leading you into Their own company’s plans are ones with the highest payouts.

So the bottom line here, if you’re going to use a 403b plan, make sure it’s one that’s a 403b7 that’s not paying out commissions, that’s not going to have any kind of surrender charges, that you can take your money out anytime you want to without incurring any kind of fees. Also with this type of plan is when it comes to the investment selection, you have a such a bigger range of what you can choose from.

Literally tens of thousands of funds that are available to you because there’s no restrictions or no, you know I knew any company telling you what they can and can’t use Also, it allows you to use cheaper funds. So if you want to use a Vanguard fund charging, you know 0. 05 percent You can do that on this side here You can find that over on the TSA side.

So when it comes to the fees here, you’re going to pay an advisor. Oftentimes it’s about 1%. You’re going to pay the investment you want to choose. So say if it’s like Vanguard charging 0. 05, and then there’s always going to be an administrative cost for the company we select. And usually it’s not too high.

So all in, we try to keep things under 2%. Often times 1. 5 or less, and the more money you have in the plan, often times the cheaper we can get those fees down to. So you can see there’s a very big difference in the type of 403b plan you have going for you. So if you already have a 403b plan, and you’re like, oh man, I already have one of those TSA plans, how do I get out of it?

It’s very simple, all you do is stop putting money into that plan, start up a new 403b plan, because there’s no limit on how many plans you can have, and you simply shift the funding up to there. And if there actually is any money here that’s out of surrender, so there’s not going to be any penalty if you transfer it, you can go ahead and do that, and take that money and put it in that new account there, and save yourself a lot of money and fees in the long run.

If you haven’t started one yet, Then you can actually start one up anytime you want to . Now it’s important to remember that there’s only a few providers that offer the 403b7 option and unless you know what you’re doing or which one to select It’s going to be hard to sniff them out.

It’s also important to know that many people that work for other institutions often don’t use this type of plan because it cuts into their paycheck, but also because their company doesn’t allow them to do so, or if they do, they have to charge a higher fee. The company dictates the fee, not the advisor in that case.

. So as far as what force would be companies, should you be using or which are the best ones out there? I’ll give you guys my top five. So number one would probably have to be aspire. This company really liked just because they don’t have their own funds. So with aspire, there’s literally 10,000 funds you can choose from. You have pretty much all of the Vanguard funds available. You and in fact, you actually have more Vanguard options. With aspire than you did.

If you just went to Vanguard directly. You also have all the fidelity there’s black rock American funds. So many, many different types of mutual fund providers out there. Inside of aspire. So that’s probably my preferred vendor. And that’s, you know, if someone comes to me and says, Hey, can help me. We start a fourth P plan.

If I see a aspire, a vehicle in their district. That’s where I’m going to go. 10 out of 10 times. Now the next best option out there is going to be someone like Vanguard or fidelity. I really don’t have a preference between the two. They . Have their own mutual funds. So when you sign up with them, you’re probably going to get their mutual funds.

You can’t sign up with Vanguard and ask her fidelity funds or anything like that. You’re stuck with just Vanguard funds . So nothing wrong with that. Just knowing that you, if you wanted something that was offered by a different company, you really can’t get it. Most these companies are going to offer the same. Type of investment models.

The fees might be a little bit different between them, but. If you want more diversity. That’s where I usually go with aspire.

Now two other options you could use. Is one is called. Security benefit now. Be careful security benefit because they do have. Annuity based models and the mutual fund based model. So it depends on the advisor you talk to when which one they steer you into, they do offer both. I would also recommend staying on of course the 43, B seven side. The one that’s, you know, liquid and you’re able to move around whenever you want to.

Now, secured benefit does have a number of different funds out there. They don’t have their own mutual funds, so you can kind of use different ones there. They do offer Vanguard. However, they do add an extra admin charge. Take us to make more money off of it. So while you might end up with a 0.05 Vanguard fund secured benefit tax on an additional 0.4 or five. Percent on top of those funds and they do that for a couple of other providers or different other mutual fund companies as well. So security benefit while it’s not a bad option. It’s one.

I would probably pick behind. You know, aspire Vanguard. Or fidelity. Now another one you could consider. It’s one called Orion four, three plan. They’re not that widely known. But they do have a decent four, three B. Plan options. So they’ve made different mutual funds to choose from things like that. . But I have had some success. You have using them. In the past. Now there’s no, they’re not the only ones. That out there. Of course you have ones like Franklin Templeton, Invesco. Those are also mutual fund based plans. Oppenheimer’s another one. The reason I’m not real big fans of these guys is again, they own and operate their own mutual funds. So typically you’re limited to just using Oppenheimer funds or just Invesco funds. And these mutual funds. They actually have a pretty good fee on that. So there are a lot higher than what you’d find at aspire fidelity or Vanguard. So I just like, you know, if I’m going to get locked into a mutual fund company, I want to be a lower cost option.

I don’t see the point of saying no to Vanguard and saying yes to, you know, American funds or something like that, that only offers their mutual funds and charge, you know, five to six times more in fees for no real other benefit other than you’re stuck with them. And that’s what they offer.

.

Now, if you’re trying to decide. Trying to figure it out. You know, what type of plan you currently have? Chances are, if the advisor. That you signed up for it, or if the account is with. A life insurance company. Nine or 10 times it’s going to be a tax shelter annuity for three B plan. So the biggest ones out there you’re gonna run into are, you know, equitable. VALIC, which actually stands for variable annuity, life insurance company.

They actually rebranded. To AIG advisers for a little while. I think now they’re known as Corbridge they keep changing their name.

Otherwise, you might run into our American fidelity Horace man.

Voya will be another one.

If you’re for there to be accountants with any of those writers. You can pretty much bank on it is a TSA account.

. So with all that, or the way that hopefully that gives you guys insight, so you can figure out what type of 43 plans that, that are out there, the differences between the two. So you make the right choice for you.

Now, if you’re interested in managing your own force, there’d be a count. So you can save on fees and just have more control over your retirement accounts, but you’re unsure of what you should be investing in or just confused by it all. Or maybe it’s something you’re thinking about doing, but you just don’t have the education or. Really the trust to know that you’re doing the right thing for you. We actually have a service for you guys.

So it’s our quick and easy and streamlined DIY investing solution. So essentially you log in. You’ll let us know what plan you guys need help on. And we’ll give you guys a set of different portfolios to choose from. And then once you guys decide on which type of risk you wanna take. You’re instantly given the investment recommendations. Now with those recommendations, all y’all do now is log into your four-three account provider and then place the traits. Now if you’re not sure how to place trades, that’s something that we can help you. We can walk you guys through as well. Now, once you get the hang of it. It only takes maybe 10 minutes every three months to rebalance your portfolio and you’re on your way.

Now that’s a wrap on today’s episode, be sure to tune in next week where we dive into more of your retirement benefits as Washington state employee, and always know that your future depends on what you do today

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