Dear Liz: I have taught for 22 years and recently accepted a position in a neighboring school district. I have a 403(b) retirement plan invested in a low-cost target date fund. The neighboring district’s vendor list does not include this option. Would it be more advantageous to leave my money in the current account or to roll it into a brokerage with a target date fund? If so, how do I choose what’s right for me?
Answer: As a teacher, you need to be aware that many districts’ 403(b) plans are scandalously bad. Instead of offering sensible, low-cost options, these subpar retirement plans are filled with high-fee annuities.
Your current plan is one of the better ones, since you have access to low-cost mutual funds. You can investigate the neighboring district’s plan at 403bwise.org, a nonprofit site dedicated to educating teachers about the issue. The site has reviews of many districts’ plans. If your new district isn’t included, the site has tips on how to get more information, evaluate your options and press for change.
If the new plan is a stinker, you can leave your money in the old plan, although you won’t be able to make new contributions. You also could consider rolling the account into an IRA at a brokerage. (Don’t move it to a regular brokerage account, as that would be considered a withdrawal that can be taxed and penalized.) An IRA would give you vastly more investment options, but if your 403(b) allows loans you’d lose the ability to borrow against your account. Also, workplace retirement plans such as 403(b)s and 401(k)s typically allow penalty-free withdrawals starting at age 55 if you leave your job, while with IRAs you generally must wait until age 59½.
The question remains if you should consider investing in the new district’s plan. The answer is yes if it includes any of 403bwise’s “green” rated options of low-cost funds. The answer is probably no otherwise. Teachers without good investment options should consider lobbying their district to adopt another type of retirement account, the 457(b) plan. For more information, check out 403bwise’s sister site, 457bwiser, at https://457bwiser.org/.
Liz – Please encourage your readers who are members of the CalSTRS pension system in Calfornia to learn about the “Pension 2” offered through CalSTRS. It is the 403b and 457b plans. They are very low cost and have excellent fund options. No insurance products, no high fees, no commissions to middleman sales folks.
Also encourage your readers to compare the 457b vs the 403b or if they have the ability to do both.