Tag: retirement

July 30, 2018

An Independent Review of: The AXA EQUI-VEST® (Series 201) contract for employer-sponsored 403(b) retirement plans

Dear Reader,

This is a detailed post about a popular 403(b) annuity product, the AXA EQUI-VEST variable annuity. As a participant in a 403(b) account, you have the choice to invest in either mutual funds or annuities. If you work in K-12 school and participate or plan to participate in a 403(b), there is a good chance you may get pitched the AXA EQUI-VEST variable annuity. In 2017, the North American Securities Administrators Association listed “variable annuity sales practices” as one of its top investor threats. If you own this annuity, or you’ve been pitched this by an agent/advisor and want an independent, objective review—then you’re in the right place.

For readers who have found my website and don’t know much about me, I am a fee-only financial planner held to the Fiduciary Standard. I am legally obligated to make recommendations that are in the best interest of my clients. I’m also on a mission to inform teachers about this commonly available variable annuity.

About this Review

Today I’m going to break down an annuity that is issued by AXA Equitable Life Insurance Corporation. Unlike other fee-only planners, I find that some annuities may be a part of a comprehensive financial plan when used correctly. My goal is to make my review of annuities as impartial and objective as possible.

This independent review will cover the following information on the AXA Equi-Vest Annuity:

Product type
Investment Options
Contribution Limits
Fees
Benefits
Features
Advantages
Disadvantages
Conclusions/Opinion

How will this AXA annuity product review help you?

If you are like many school district employees, there is a good chance you are using a 403(b) plan as a way to supplement your pension in order to build a healthier retirement. Many of you probably signed up with a sales rep or agent that came to visit your school. Maybe they bought you lunch in the teacher’s lounge and gave a short presentation about the basics of the 403(b) plan. You listened and absorbed as much as you could, but there is a chance that some of the facts were not fully understood during the sales process.

The world of investments can be intimidating, but really it’s like any other shopping experience. You want to compare prices and features, and understand exactly what you’re buying. This review will help you do that.

In this review you will:

Learn facts/information you need to know about one of the most popular products being sold in school districts around the country today so that you can decide whether or not it is a good fit for you.
Get familiar with the various types of fees so that you’ll know exactly what you’ll be charged by the AXA Equi-Vest variable annuity.
Understand how to compare this product’s fees, features, and benefits against other available 403(b) investments options in order to determine whether this product is reasonably priced.
Gain a much clearer sense of whether this annuity fits your individual savings needs so that you can make an informed decision.

LEGAL DISCLOSURES

This is a review, not a recommendation to buy or sell a variable annuity. AXA has not endorsed this review in any way, nor do I receive any compensation for this review. This review is meant to be an independent review at the request of a client so they can see my perspective when breaking down the positives and negatives of this particular annuity model. Before purchasing any investment product, be sure to do your own due diligence and consult a properly licensed professional should you have specific questions as they relate to your individual circumstances.

This information was gathered from their prospectus dated May 1^st 2018 and is not a substitution for individual tax or legal advice. I’m just reporting on the main facts; to find answers specific to your situation may require a review of the full prospectus for applicable the details.

So let’s get started.

AXA Equitable Life Insurance Company Variable Annuity Review

AXA Equitable Life Insurance Company is the #1 provider of retirement plans for K-12 schools, serving more than 820,000 participants in over 17,000 plans.

The AXA EQUI-VEST® 201 series for 403(b) plan is a deferred annuity contract that is designed for school district employees.

Product Name	AXA EQUI-VEST® 201
Type of Product	Variable Annuity
Issuer	AXA Equitable Life Insurance Company
Standard & Poor's Rating	A+ (Strong)*
Phone Number	(800) 628-6673
Website	https://us.axa.com

*Standard and Poor’s Rating Service provides ratings which measure the claims-paying ability of an insurer. These ratings are the opinions of an operating insurance company’s financial capacity to meet the obligations of its insurance policies in accordance with their terms.

Product Type: Variable Annuity

Investment Options: AXA EQUI-VEST variable annuity offers a wide range of investment options inside this contract. It offers Structured Investment Options (SIO) that enables you to invest for growth with some downside protection for a set period of time. Personal Income Benefit investment options give you the ability to turn your retirement savings into an annual withdrawal benefit. Investors have access to over 80 variable investment options including numerous equity and fixed income portfolios as well as various asset allocation and target date portfolios.

AXA has entered into sub-advisory agreements with Fidelity, Goldman Sachs, Invesco, Ivy Funds, Lazard, MFS, Oppenheimer, PIMCO, Franklin Templeton and Van Eck. (12b1)

Summary of Fees

Administration charge: 2% or $30
Separate Account Charges: 1.20 % (Mortality & Expense charge 0.95% + other expenses 0.25%)
Underlying Portfolio Operating Expenses: 1.03% (average fund expense)
Personal Income Benefit Charge: 1%
Withdrawal Charges: 5%

If you’re not familiar with variable annuity products and how they work, fees can be confusing to decipher. With a variable annuity, in order to get the investment selection combined with the income options, you pay two types of fees:

Fees to the insurance company associated with risk protection
Fees associated with the investment funds inside the contract

This is something you want to look very closely at if you are still working and making contributions to your retirement plan. For someone trying to save for a retirement, fees are an important consideration. Let’s examine each fee and how they stack up against other investment options.

Administration Charge: This fee is charged on the insurance side and it will be the lower of either 2% or $30 of your account value plus any amounts withdrawn. They won’t charge you the $30 fee if your account value is $25,000 or more. This fee is pretty standard for annuity contracts of this nature.

Separate Account Charges: This is what the AXA Variable Annuity calls the M&E or mortality and expense fee at 0.95%, and they add another 0.25% for a total fee of 1.20%. This fee comes right out of your account annually for the life of the investment, whether your investments earn money or not. It compensates the insurance company for the risk it assumes under this particular annuity contract, and it applies to all variable investment options.

This charge is common for variable annuities, but it’s not something you have to pay with all annuities. A variable annuity is the only type of annuity that charges the M&E fee. Mutual funds typically do not charge you this fee.

While 1.20% might not sound like that much, this fee can make a significant difference to the value of your portfolio when you retire. The SEC’s Office of Investor Education and Advocacy has issued bulletins warning investors how much fees can impact the growth potential of a portfolio. While the difference between .25% and 1% might not sound like a lot, assuming a hypothetical investment of $100,000 earning a 4% annual return, in 20 years’ time, that difference could reduce your portfolio by nearly $30,000. That could mean the difference between retiring early or late. Once you do retire, the difference between paying 1% or 2% could mean running out of money sooner.

Underlying Portfolio Operating Expenses: This is another ongoing fee charged for the investments inside of the variable annuity. Detailed information about these fees can be found by digging through the prospectus. I did that for you. The internal expenses of the sub-accounts for this particular variable annuity range from 0.61% to 2.09% and average around 1.03%.

Personal Income Benefit Charge: This is the charge for Income Rider, an optional fee common for deferred annuities. This fee is charged by the life insurance side to cover the cost of providing the “Personal Income Benefit.” For this benefit, you will pay 1% annually, based on the value of your Personal Income Benefit account. One percent is a pretty standard charge for income riders, but do you need it?

For the younger investor in their 40s or 50s, paying the additional 1 percent for an income guarantee now may not make sense, especially when you consider that the income rider fee is assessed for the life of the policy. I’ll be going into the details when we get to the benefits and features section.

Withdrawal Charges: In addition to all the fees listed above, the AXA Equi-Vest variable annuity also charges a surrender fee (sometimes known as a withdrawal charge). Typically speaking, a surrender fee is only assessed when an investor makes a withdrawal prior to a specified time.

Deferred annuities are long-term contracts and most annuities of this type charge surrender fees during the first 5 to 10 years of the contract. They also typically allow a 10% free withdrawal amount subject to federal income tax withdrawal restrictions.

In this case, AXA charges its contract holders a 5% penalty on any funds withdrawn that exceed the free withdrawal amount, but the duration of this fee starts over when you make a contribution. AXA states in the prospectus: “. . . the amount of the withdrawal charge deducted is equal to 5% of any contribution withdrawn attributable to contributions made within the current and five prior contract years, measured from the date of the withdrawal.”

It’s very common for people to withdraw money from their retirement plans. One in four workers currently in a qualified plan will take some form of an early withdrawal from a 401(k) or similar plan (according to the 17^th annual Transamerica Center for Retirement Studies (TCRS) report). One thing to be aware of with this particular annuity is that the surrender charge is based on how long your contributions have been in the contract.

For example, if you are contributing $1,500 a month to your retirement plan, and 10 years into your contract you want to make a small withdrawal to pay off your home, you would have to pay 5% to AXA on any contributions made during the five previous years. Furthermore, withdrawals may “significantly reduce” the future income payments of the Personal Income Benefit for which you’re paying that additional 1%.

There are situations when the withdrawal charge is waived—for example, if you are confined to a nursing home for more than 90 days—and they no longer apply after the completion of 12 contract years.

How do the fees in this particular annuity stack up against the fees inside other investment options? According to one analysis from the independent investment research company Morningstar, the most popular version of the AXA Equi-Vest annuity has total annual operating costs that can range from 1.81% to 2.63%. By contrast, the average investment fees for mutual funds inside a 401(k) retirement plan cost investors 0.88%, according to a 2015 BrightScope report. However, variable annuities offer features and benefits that may not be available with other investment options. Whether the higher fees make sense for you will depend on your specific needs and situation.

BENEFITS & FEATURES AS ADVERTISED BY THE AXA EQUI-VEST ANNUITY:

Contribution Limits

$18,500 / year (same as with a 401(k))
$6,000/ year allowed for catch-up contributions if over 50

Features

Tax-deferred Growth
Guaranteed Death Benefit
Personal Income Benefit
Structured Investment Option
Target Date Allocation Portfolios
Guaranteed Investment Option
Dollar cost averaging
Required Minimum Distribution Services
Roth Eligible

HOW IS AXA PAYING THE AGENT?

The salespeople who come out to your workplace and present you with investment options typically earn a sales commission whenever they get someone to buy into their annuity. AXA Equitable pays contribution-based and asset-based compensation to their agents.

Brokers generally receive an up-front commission when they sell a variable annuity.

This annuity also gives the agent commissions based on your contributions.

AXA pays agents 1.5% to 2% commissions on every future dollar you contribute to your 403(b) annuity. This creates ongoing compensation for your broker.

If you’re contributing the maximum 2018 amount of $18,500 to your plan and, if over 50, also taking advantage of $6,000 catch-up contributions, then AXA could be paying as much as $490 a year to your broker.

HOW AN AGENT MIGHT TRY TO SELL YOU THIS POLICY

EQUI-VEST® is a deferred annuity contract issued by AXA Equitable. This product is marketed as a solution to help supplement your retirement income needs. Its benefits include providing for the accumulation of retirement savings via tax-deferred growth. The contract also offers death benefit protection and, as discussed earlier, it offers a Personal Income Benefit for an additional cost.

A variable annuity is a type of deferred annuity, so there are two phases to your contract: the growth phase, and the income phase.

During the growth phase, you can invest on a tax-deferred basis in one or more of AXA’s variable investment options or guaranteed interest options (GIO) or structured investment options (SIO). There is no charge to move among the investment options. The sales agent may also tell you that these investments all benefit from tax-deferred growth.

Here’s what you may not realize:

If you have a 403(b) plan, then you’re already getting tax-deferred growth. It’s a perk that comes with the plan. Buying this variable annuity or any annuity cannot give you double tax-deferral because there’s no such thing. Furthermore, any investment that you purchase inside your 403(b) account can give you tax-deferred growth.

There is no additional tax benefit to you when you buy this annuity inside a 403(b) or retirement plan.

On AXA’s website it will tell you this:

“An annuity contract that is purchased to fund an employer-sponsored retirement savings plan should be done so for the annuity’s features and benefits other than tax deferral. For such cases, tax deferral is not an additional benefit for the annuity.”

AXA also reminds you that you should buy this annuity based on its features and benefits, so let’s take a look at those.

ADDITIONAL BENEFITS AND FEATURES OF THE AXA VARIABLE ANNUITY

The Guaranteed Death Benefit Feature

Variable annuities invest directly in the market, and as such, they can lose money just like stocks and mutual funds. The death benefit is often sold as a way to guarantee that even if the market goes down and your contract loses money, a death benefit would still be paid. In this case, the AXA Equi-Vest variable annuity agrees to pay out your total contributions even if your account takes a terrible market hit.

Here are 3 things to keep in mind:

First, the death benefit is only paid out if you die. It does not guarantee that your account won’t lose money.
Second, this benefit doesn’t come free. You’re paying for it with the M&E fee we talked about earlier.
Third, you really have to ask yourself, what are the chances that you will die during the same year as a big market downturn?

Let’s say hypothetically you’ve contributed $100,000 over a 15-year period, and the investment performance helped it grow to $150,000 over that time period. Then the market takes a turn for the worse and drops by 30%. You basically lose all the returns you’ve gained. You see a $45,000 drop in your total account value, and your new account balance is now $105,000. You have a heart attack and go into the hospital. But you remember you have a death benefit! So, even if you die, you’ve been paying that 1.25% M&E fee all this time to guarantee that your beneficiary (in this case, your spouse,) will still get all the money you paid into this account. Then, you do the math and realize, you’ve only paid in $100,000. Even if you do die, your account didn’t drop below your total contributions, so the death benefit guarantee did not provide any guarantee in this example.

Statistically speaking, the chances of meeting with an untimely death when the market is down AND when you’ve lost a portion of your contributions may be relatively low. Yes, it could happen. But you should consider whether the cost of this feature is worth the potential benefits you could receive.

Case in point: A class action lawsuit brought against Hartford Life on behalf of about 24,000 municipal employees in San Diego County and Los Angeles CA illustrates one potential outcome: The plaintiff’s lawyers asked Hartford Life during the discovery process how much in death benefits the company had paid in the 17 years that both the San Diego and Los Angeles plans had existed. The answer: $119.[1]

Income Rider Benefits: Personal Income Benefit

The Personal Income Benefit^SM is a “pension-like” plan benefit, available through the Retirement Gateway^® group annuity, which the company says provides guaranteed withdrawal payments and helps employees be more confident about retirement. The Personal Income Benefit investment option is available to plan participants between the ages of 45 and 85.

Annual fee: 1% of the participant’s Personal Income Benefit account value.

Features: The amount of your income withdrawals under this feature will never decrease—unless of course you make early or excessive withdrawals as specified by the contract.

Benefits: Once your Personal Income Benefit withdrawals start, they continue for as long as you (or you and your spouse) live, even if your Personal Income Benefit account value drops to zero

These are pretty standard features that typically come with most income riders sold on annuities, and you can get them for less cost. What’s different about this annuity is that you remain invested in the stock market even while you are taking income withdrawals, which is why you have those additional fees. Does that mean you get to earn higher returns?

The one rider I analyzed had a 1% fee and it locked in returns at the high-water mark. Some annuities that offer this fee add a guaranteed income base growth rate that typically range from 4.5-5.5% on top of the locked-in watermark. This annuity does not offer that. It locks in your account value at the high-water mark, which is a crediting method based on the highest level attained by the reference index over a given period of time. Says AXA:

“The percentage varies depending on the type of contribution (e.g., payroll, rollover, or direct transfer) and the date of the contribution or transfer. The percentage can be as high as 7% and never less than 2.5%.”

For the investor who is age 65 and near the time of retirement, this might give you a layer of protection, but keep in mind that with this type of annuity, you’ll be paying over 2.5% annually just to get this benefit, and these fees negatively impact your return potential.

And speaking of return potential, selecting the income benefit rider will restrict your investment options. Once a contract owner selects a Personal Income Benefit^SM, they will be limited to one of these five allocation models:

AXA Moderate Growth Strategy,
AXA Balanced Strategy,
AXA Conservative Growth Strategy,
AXA Conservative Strategy, and
EQ/AB Dynamic Wealth Strategies.

EQUI-VEST® Structured Investment Options, Target Date Allocation, and Guaranteed Interest Option

AXA also gives you other options if you don’t want to pay the income rider fee. In fact, that’s one thing this annuity does have—a lot of choices.

If you’re looking for protection from market risk, you may select the Structured Investment Option (SIO) available within certain EQUI-VEST variable annuities. The SIO enables you to seek growth, up to a limit, with some downside protection. But how good is the protection?

The EQUI-VEST overview states: “There is risk of substantial loss of principal because you would
agree to absorb all losses to the extent they exceed the protection provided by the SIO at maturity. If you
want a guarantee of principal, you should consider other investment options or products that provide
such guarantees.”

Okay. So, then you might select a Target Date Allocation Portfolio. This option gives you different investment strategies designed to adjust with you as you move through the phases of your life and become more conservative. Does being more conservative inside this variable annuity mean you won’t lose money right before your retirement date?

Says AXA: “The Target Date Allocation Portfolios are not guaranteed at any time, including the target date.”

How about the Guaranteed Interest Option (GIO)? This offers a guaranteed rate of interest and a guarantee of principal. That might sound good for someone who is nearing retirement and wanting to protect their nest egg. But how much can you protect?

25%. What if you know you need more money than that? Says AXA: “No more than 25% of any contribution can be allocated to the GIO.”

Let’s recap: As a participant in a 403(b) account, you have a choice to invest in either annuities or mutual funds. As previously noted, mutual funds may be less expensive, but do not offer the same features and benefits.

However, in general, variable annuities will add at least 1% in costs just for the M&E fee alone, not to mention the fees for the variable sub-accounts and income riders that can (and often are) added on. Over time, these additional costs can negatively impact your return potential.

POTENTIAL CONSIDERATIONS

Tax-deferred Growth: One of this annuity’s main advantages is that the investments inside this product give you tax-deferred growth. Investments growing tax-deferred can accumulate and compound untouched by federal, state, or local income taxes until you begin making withdrawals, which is usually after retirement. This is a good thing. But you’re probably already getting this benefit.

All deferred annuities provide tax-deferred growth potential, not just this one. Any investment inside a 403(b), 401(k), IRA, or tax-qualified retirement plan has the potential to grow tax-deferred, even if they aren’t inside an annuity.

 A variable annuity in a 403(b) does not give you any additional tax benefits.

Overall Fees: There are additional fees associated with variable annuities that are not found in other types of annuities or mutual funds. If you don’t need the benefits of an annuity at this time, then paying for these fees for the next 10 to 20 years may not be in your best interest. Over time, higher fees can negatively impact your return potential.

 The variable annuity carries additional fees that should be considered.

You may annuitize your money

Deferred annuity contracts such as EQUI-VEST® provide for conversion to payout status at or before the contract’s “maturity date.” This is called annuitization. When your contract is annuitized, your money is converted into payouts (this being the payout phase). During this phase, you may receive periodic payments for life or for a specified period of time.

 The contract may be annuitized.

Conclusions on the AXA Equi-Vest Variable Annuity

Before buying into an annuity, it’s important to understand how it works, what benefits it may provide, the cost to you in fees, and perhaps most importantly, the role it can help play in your overall retirement plan. If the annuity doesn’t help move you toward your retirement goals, then it might not be the right choice for you.

Things to consider about this policy:

Overall fees including a Mortality and Expense Risk charge
Surrender Charges based on ongoing contributions
Agent commissions and compensation based on ongoing contributions
Income rider features that limit investment options for a lifetime fee
Annuitization of the contract may be required
Death benefits
No additional tax benefits when part of a 403(b)

When this investment might make sense: If you have already maxed out all your qualified retirement accounts and would like to put aside more money into a tax-deferred account, then a variable annuity might be an appropriate option. However, think carefully about whether or not this specific variable annuity with the structure of its surrender fees, agent commissions, and income rider options would best support your retirement goals. You may also want to consider the relative features, benefits, and costs against or with any other investment that you may use in connection with your retirement. Be sure to read carefully the marketing materials and prospectus, and if you don’t understand what you’re paying for, ask questions and receive a full disclosure before making a decision.

If you currently own this annuity: Now may be a good time to take another look and evaluate this product in light of your long term goals. If you are interested in a more detailed analysis specific to your situation, feel free to contact me.

Thank you

Thanks for reading this review. It’s always satisfying for me to break down complicated financial products out there to try and provide some clarity on how they really work.

If you have an annuity or other financial product you’d like to see an in-depth review on just let me know, I’d be happy to take a stab at it. If you know a teacher or someone who is thinking about an annuity and might benefit from this post, feel free to forward it on to them via email. If you have a Facebook account, one of the best ways to spread this message around is by “sharing” the post by using the Facebook icon below (it’s a blue square with a white F on it).

Thanks again for reading, and as always, if you have any questions or would like to have your retirement portfolio reviewed, don’t hesitate to reach out and schedule your no-obligation consultation.

FREE GUIDE: WHAT EVERY K-12 EMPLOYEE SHOULD KNOW ABOUT THEIR 403B PLAN

Retirement investing for teachers can be confusing. This guide is an excellent source of information about the various options available to you as a school district employee answering important questions.

Get your FREE 403b GUIDE.

[1] “Can Annuities Pass Muster?” The Free Library. 2000 A.M. Best Company, Inc. 20 Apr. 2018

None of the third parties referenced in this communication are affiliated with Warwick Valley Financial Advisors, Private Advisor Group or LPL Financial.

Variable annuities are long term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component. They have fees and charges, including mortality and expense risk charges, administrative fees, and contract fees. They are sold only by prospectus. Guarantees are based on the claims paying ability of the issuer. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value.

Asset allocation does not ensure a profit or protect against a loss.

The target date is the approximate date when investors plan to start withdrawing their money.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Investing in mutual funds involves risk, including possible loss of principal.

Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Private Advisor Group, a registered investment advisor. Private Advisor Group and Warwick Valley Financial Advisors are separate entities from LPL Financial.

Investors should consider the investment objectives, risks, charges and expenses of the variable annuity contract and sub-accounts carefully before investing. The prospectus and, if available, the summary prospectus contains this and other important information about the variable annuity contract and sub-accounts. You can obtain contract and sub-account prospectuses and summary prospectuses from your financial representative or by clicking on the prospectus link within this article. Read prospectuses carefully before investing.

April 23, 2018

Teachers: Is the Death Benefit Killing Your Retirement Plan?

How One Fee Might Be Draining Your Nest Egg

As a teacher, knowing facts is part of the job. But when it comes to 403(b) plans, many teachers and educational administrators will readily admit that they don’t have all the facts.

As a financial advisor, it’s my job to present facts to clients so they can make informed decisions. Over the past few years I’ve discovered that many of my 403(b) clients were paying for insurance benefits to protect their retirement savings and getting charged exorbitantly for it. The goal of this article is to shed some light on Variable Annuities and one fee that can take a significant chunk out of your savings.

One of the most important things to know if you participate in a 403(b) retirement account is that you have the choice to invest in either Annuities or Mutual Funds. If you aren’t sure what the difference is yet, we highly recommend you first read our Teacher’s 5-step 403b Shopping Guide.

If you have been sold a Variable Annuity, it’s imperative to find out which fees you are being charged for and if they can be avoided.

There are many additional insurance related fees associated with Variable Annuities that are not found in Mutual funds. These fees pay for insurance guarantees that are automatically included in the annuity, and the selling and administrative expenses of the contract. The one that often goes unnoticed is known as the Mortality and Expense Charge (aka the M&E fee or the Death Benefit). The death benefit is one of the highest fees incurred in association with insurance-based retirement accounts, and statistics show that almost nobody “benefits” from its presence, except for the insurance company charging you for it.

Death Benefit 101

The death benefit feature is found in variable annuity products that are sold by many insurance companies.

The death benefit guarantees that if you die, your beneficiaries will receive the greater of two values: The current value or the total amount you contributed over the lifetime of the account.

This feature is being sold to prospective buyers as an attractive benefit. They assert that it will protect the money that you contributed to your account, should the market cause the annuity to lose money at the time of your death. This might seem like a comforting safety feature to have, but let’s weigh the costs and see if they are worth it.

Know Your Odds

So what are the statistical probabilities of this death benefit paying off?

A class action lawsuit brought against Hartford Life on behalf of about 24,000 municipal employees in San Diego County and Los Angeles CA illustrates the probabilities: The plaintiff’s lawyers asked Hartford Life during the discovery process how much in death benefits the company had paid in the 17 years that both the San Diego and Los Angeles plans had existed. Hartford claimed it had paid only a single death benefit totaling just $119 in San Diego and no death benefits in Los Angeles. ¹

HOW MUCH IS THIS COSTING YOU?

Now that you know the odds of receiving this “benefit”, it’s time to figure out how much it is costing you. Death benefit fees on average are usually 1.25% of the total value of the account per year ². This may not seem like a lot, but as the years go by, it becomes much more significant. Imagine what you pay in this fee alone over 30 years as your investment grows. I can tell you that it will probably be much more than the amount your beneficiary could lose on your contributions, were you to die young, unexpectedly, and in a time of a market low.

WHAT’S THE SOLUTION?

If you participate in a 403(b) plan, you have the choice to either invest in annuities or mutual funds. Mutual funds don’t carry the insurance based fees that annuity companies charge for.

Both Mutual Funds and Variable Annuities have investment related fees. These fees can range from high to low and you can choose to invest in lower fee investment choices in order to keep your expenses low.

You want to make sure that you are getting good value for every dollar of investment expenses you pay. This is because every dollar you save from fees & expenses (i.e. the death benefit fee) is one more dollar that has the potential to grow in your 403(b) account.

NEXT STEPS: Get the Facts on Your Current Investments…

Hopefully after reading this article you will look at your own investment product and answer these questions:
• Is my 403(b) invested in annuities or mutual funds?
• Do I currently pay a fee for the Mortality and Expense (M&E) Charge (aka death benefit)?
• How much am I paying in total fees and can some of these be avoided?
• Is my current 403(b) vendor competitive with the other options available at your school district?

If you need help finding answers to the questions, please contact us. One phone call could have big impact on how you save for your future!

¹ “Can Annuities Pass Muster?.” The Free Library. 2000 A.M. Best Company, Inc. 20 Apr. 2018
² Morningstar M&E Risk, 2018

Investing involves risk including loss of principal.

Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of
the issuing company. Withdrawals made prior to age 59 are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

All illustrations are hypothetical and are not representative of any specific situation. Your results will vary.

Warwick Valley Financial Advisors and LPL Financial are not affiliated with any of the other referenced entities.

November 10, 2017

Teachers 5-Step 403b Retirement Shopping Guide

Savvy Shopping – The New Past-time for Teachers

Download and print the guide:

When you begin working as a teaching professional, your school district will likely offer you an opportunity to save for retirement, known as a 403b Retirement Plan.

What you might not know is that you can shop around for your plan, just like any other shopping trip. Think of it this way: A little retail therapy can improve mood, boost confidence, and relieve stress, so shopping for a 403b retirement plan shouldn’t be different. You may be surprised at the release of endorphins you get when you ultimately choose a low-fee, tax deferred retirement plan! However, before you begin your shopping experience, get to know the options on the shelf; there are a lot of choices, some with missing price tags and others with confusing language and offers. It can be overwhelming, and you may opt for a word-of-mouth recommendation without knowing the facts, that ends up reducing your nest egg in the future. But by making an informed choice, you can get the satisfaction from the sale, and take control of your financial future.

So, grab your bag, and let’s explore the 403(b) marketplace. Read on for super shopper tips that could potentially set you on track for higher returns and higher security in later years. If you get overwhelmed, don’t just close your eyes and grab the same product your friend chooses. Always seek out professional guidance and do your homework in comparing the products, because here, it’s the savvy shopper that earns the deal!

Shopper Tip #1: Find your TPA

If OMNI is your TPA, visit www.omni403b.com:
• Click on the ‘Participants’ button.
• In the bottom left corner find where it says Employer Plan Info and then select your state.
• Type in your employer name and select it.
• Click submit. BOOM! You just found your menu of participating providers!

Step #1 – Finding Your TPA ( 403b Marketplace )

Where to start? Imagine the TPA as your mall with a map of all the shops—or providers—that your district has made available to you.

A TPA (Third Party Administrator) aggregates the 403b plan provider choices for the district clients, much like a mall that has a variety of stores for you to shop in.

OMNI is one of the largest TPAs that organizes 403(b) options for teaching professionals. It provides a site in which to manage the initial designations you’ll make when you sign up for an account. New York and some other states use OMNI. As a client, you will go to the OMNI site to set up your account.

Step #2 – Compare Providers

Once you find your TPA (403b marketplace) you can look at the list of participating providers your district has made available to you.

Shopper Tip #2: Take your Time
Take your time determining which providers are insurance companies offering insurance products (called annuities), and which providers are custodial retirement accounts offering mutual funds. Note that some are hybrids.

Which store to hit first?

Neither your school district, nor TPA, can tell you which provider to use. You must comparison shop on your own. Just as a mall contains stores, but doesn’t tell you which to go into, OMNI does the same. OMNI is a TPA that prides itself on the variety of providers it offers and can have over twenty in one district.

There are names you might recognize from ads or from friends who’ve invested, and some you don’t. These are some of the companies you may see on the list: AXA, Voya, Metlife, Vanguard, FTJ Fundchoice, Aspire Financial and Fidelity.

Do bigger brands or recognizable names mean better quality products? Not necessarily. You may be surprised to know that many of the recognizable names might be the ones with the least amount of savings.

The important thing to takeaway here is there are two main types of providers –

Insurance companies offering annuities.
Custodial retirement accounts offering mutual funds.

Now let’s talk products!

Step #3 – Compare Products

Shopper Tip #3 – Don’t Be Pressured
Do not just choose a product because the salesman bought you lunch at the teacher’s lounge. As with any purchase, be wary of relentless sales pitches that pressure you into buying a product quickly or a deal that seems too good to be true.

After you have perused the menu of providers, you should brush up on what kind of products they offer. Putting in the research and work now will reap better rewards in the years to come. Remember, like anything else, the product choices are NOT equal, and this is not one size fits all. If you aren’t sure, consider consulting an independent financial professional —aka “personal shopper” to help you weed through the racks.

There are two main types of 403(b) products available for you to consider.

MUTUAL FUNDS (also called a 403(b)(7) custodial account): This type of product allows participants to invest their contributions in mutual funds. The account is not an annuity or a life insurance product. Returns on contributions depend on the performance of the mutual funds selected.
ANNUITIES:
An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. You buy an annuity either with a single payment or a series of payments called premiums.Annuities are often marketed as tax-deferred savings products and come with a variety of fees and expenses, such as surrender charges, mortality and expense risk charges and administrative fees. Annuities also can have high commissions, reaching seven percent or more. These are the three common annuity products:

Variable Annuity Product
A variable annuity is a contract with an insurance company under which you contribute into a tax–deferred account. In return, the insurer agrees to make periodic payments at retirement or some future date. You can choose to invest contributions in a range of investment options, which are typically mutual funds. The value of the account in a variable annuity will vary, depending on the performance of the investment options chosen. In this sense, it is similar to a mutual fund product except it is offered as a life insurance product and involves a contractual agreement.

Fixed Annuity Product
A fixed annuity is a contract with an insurance company that guarantees a minimum rate of return during the time that your account is growing. The insurance company also guarantees that the periodic payments in retirement are guaranteed for an established amount of time. Details of the minimum rate of return and payout schedule are established when the contract is signed. In some instances, the insurance company will charge additional fees for features and guarantees.

Equity Indexed Annuity Product
A specific type of fixed annuity contract between you and the insurance company. During the period of time where you make contributions, the insurance company credits a return that is based on changes in an equity index, such as the S&P 500 index. The insurance company sometimes also guarantees a minimum rate of return. In retirement or on a future date, the insurance company will make periodic payments to you under the terms of your contract. In some instances, insurance companies will charge additional fees for features and guarantees.

Before you commit to a product, ask yourself some of these general questions:

What is the difference between investing in an annuity versus a mutual fund?
Are you aware of all the fees or commission involved, including all costs of mutual funds or variable annuity sub accounts?
Do you know how you your financial advisor and the investment company you’re working with are being compensated?
Does your financial advisor accept fiduciary responsibility?
Are my investments being monitored by my financial advisor or someone else?
How do I know if my account is properly balanced?

Step #4 – Compare Fees

Shopper Tip #4: Find the Price Tags

There are potentially three layers of fees and charges that participants should be aware of.
• 403(b) product fees (vendor fees)
• Investment fees
• Employer/third-party administrator fees

You are so close — but wait, did you take a closer look at the price tag? Before you hit the register, you must determine what it will cost to invest in your future. And it’s not always easy uncover what your future costs will be, especially when fees can be hard to find.

You can’t escape investment fees. The average mutual fund fees and expense ratio is 1.02% a year, according to the Investment Company Institute. On the other hand, the annual fees on variable annuities usually start at 2% and vary up to 3%, according to FINRA. And that’s in addition to the fees that are charged by that product’s mutual funds that make up your sub-accounts.

If you can’t picture that in terms of how much the fees are costing you, consider this example: Jane Smart decides to invest in a variable annuity with a 2.25% fee cost. She contributes $250 steadily for over 35 years, with an 8% average of annual return. Upon retirement, Jane has built a nest egg of $336,320. Jane is happy. But look at the numbers closer — had Jane shopped around and done her research at the time of purchase, she would have found lower cost plans that would have lower fees. If Jane had chosen a 1.40% fee plan with the same average of annual return, she would have $73,265 more in her savings. The moral of this story? Do your homework!

Get out your magnifying glass and ask to see the prospectus or contract. All mutual funds and variable annuities are required to produce a document called a prospectus, which details specific information about investment cost, objective, risk, performance, and operating rules. Fixed-annuity products do not have a prospectus. Instead, they have a contract that details operation of the annuity. If you can’t make heads or tails of it then ask an independent financial professional before you sign on the dotted line.

It is important to understand all fees associated with your plan before you begin contributing to any 403(b) investments. Additionally, some investments impose surrender charges or restrictions on withdrawals.

To learn more about fees and what they mean for you, check out these websites which compare the different plans: http://403bwise.com/k12/content/61
https://www.403bcompare.com/Fundamentals403bAnd457b#Fees

Step #5 – Contribute Paycheck %

Shopping tip #5: Buyers Remorse?
Did you already choose a plan but now have buyer’s remorse? Don’t worry, just like shopping, there is the possibility to exchange a product. You will need to determine if there are any surrender charges or fees before doing so.

Ask a Question

Once you have done your research, selected a provider, and shopped a plan—the smart way—you can begin contributing a part of your paycheck to start your nest egg. You can access a Salary Reduction Agreement through your TPA. No amount is too small, and the fact is, you are doing something great for your future by making savings a priority.

Because the income funneled into your account is tax-deferred, the IRS does set a capped amount for 403b contributions each year. There are other options for increased savings though, based on age and employment. If you can, go ahead, and max out your savings! What you do now will have higher payoff in the future.

If Shopping Isn’t Your Thing, Don’t Go It Alone!

Everyone knows, shopping is much better with a friend! Going alone can be time-consuming, sometimes confusing, and what’s more, the mistakes can be costly. Working with a financial advisor (aka personal shopper) is an option to consider carefully. If you have any questions, we are here to help.

Download our printer-friendly 403b Shopping Guide >>

Investing involves risk including loss of principal.

Investing in mutual funds involves risk, including possible loss of principal.

Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. They are not suitable for all investors. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value. Equity Indexed Annuities permit investors to participate in only a stated percentage of an increase in an index (participation rate) and may impose a maximum annual account value percentage increase. EIAs typically do not allow for participation in dividends accumulated on the securities represented by the index.

Warwick Valley Financial Advisors and LPL Financial are not affiliated with any of the other referenced entities.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice.

October 23, 2017

Retirement Pearls of Wisdom for Teachers

Ask Questions, Save Money When It Comes to Your 403(b)

Let’s be honest. Life is busy. Sometimes even knowing what types of retirement options are available to you—or even which ones you have–is difficult enough, without allocating the time to really understand each. Perhaps all too often, things are left to auto-pilot when it comes to paycheck designations – you opt-in because you can. But in the case of teacher’s 403(b) retirement plans, brushing up on the specifics of yours may be well worth your effort. In fact, it can potentially gain you thousands more in the long run – and really takes little more than just some smart homework. So…. let’s start with the very basics, and get you on track to maximize the money you’re striving to sock away for later, or at the very least, to become aware of the power you hold toward such noble pursuits in the future.

Retirement 101:

403(b) Vocab Terms for Teachers:

Tax-Deferred

Money that comes out of your paycheck and which is automatically invested into an account which is not reportable as income now, but will be when paid out during retirement.

Annuity

A contracted account offered by an insurance company where a lump sum of money is deposited for the purpose of being paid out at a later date, in either equal installments or in proportion to how well it accumulates with investment strategies applied over time.

Provider

Either an insurance company, an investment firm or a retirement account custodian that offers 403(b) plan options to employers. These vendors choose portfolios to invest the money in to hopefully increasing its principal value over time and setting plan rules, regulations and annual fees.

403b Plan Products

Accounts set up by Providers that are meant to take in money now from clients and pay it back out to them later in installments as a means of seeking to establish a retirement “income,” after it has been invested toward growth over time in such things as stocks and mutual funds, etc. Examples include annuities, mutual fund retirement accounts, and combination programs.

What IS a 403(b) plan?
A 403(b) is a retirement savings program much like a 401k, but has special allowances tailored specifically to the teaching profession and a few others (because they have certain exemptions as public educational institutions, not-for-profits or as certain types of churches). When you work as a teacher, it is likely your school district employer will offer you the opportunity to contribute to a 403(b), helping you save for retirement, reducing your taxable income, potentially matching your funds (if you’re lucky enough to have an employer choosing to offer this) and in many cases, allowing you to decide your amount of contribution up to a maximum set by the IRS. What makes a 403(b) special is that you do not need to pay taxes on the money contributed into the account now (it’s tax-deferred). When the money begins to produce regular pay outs in the future, assumably at the time of retirement, you will then be taxed on it as regular income–but as a retiree and typically at a lower rate.

Do I have one?
If you work as a teacher, chances are you have had the opportunity to enroll in your district’s plan, or one of the plans they offer if multiple. But just because your employer has chosen a plan for you and you’ve opted in with reductions from your paychecks, it doesn’t necessarily mean these work best for you as is. In fact, it may not, as employers choose plans for a variety of reasons supporting their best interests—and these may not necessarily mesh with yours. This doesn’t always mean you’re locked into their default settings; sometimes switching to another “provider” for your plan (plans are set up for employers by different vendors) is allowed–and can help you to pursue optimal dollars for the future, once able to properly compare alternatives and their different offerings. Similarly, sometimes you can change some of the options within your plan. You’re already doing the hard work daily. Why not reap the most reward that is in essence, your earned cash?

What are some common types of 403(b)’s?
403(b) plans can either place your pre-tax investment dollars into annuities or mutual funds so they hopefully will grow over time. Such investments are chosen and managed by the vendor which provides your employer’s plan, and which manages the portfolio therein; diversifying investments based on what they feel will serve best for their clients, ensuring, in theory, good growth over time and reasonably low risk, and the benefit of relatively safe, low-maintenance investing.

Who are some 403(b) Providers?
Simply put, providers can be institutions like insurance companies, investment firms that run mutual funds or retirement account custodians that set up diversified 403(b) plan products and offer them to employers. These providers set up rules for the plan including minimum contributions, possible commissions for their investing services, time before payout is available without penalty, annual and other fees, if there might be a Roth 403b feature (look out for our future post explaining this type of offering), etc., and they pick investment portfolios in which to hopefully grow your money while it “sits.” Examples are financially savvy companies like Fidelity, Vanguard, FTJ Fundchoice and Aspire Financial.

BUT, while 403(b) individual terms and conditions are necessary, and important components of a plan…. these are factors you should ALWAYS check into! Here’s why:

Providers are not equal.
Although your employer chooses a provider for your 403(b) as previously mentioned, ranging from insurance companies offering annuities to financial institutions managing mutual funds to combination accounts, some districts allow you to override this choice and pick your own; some do not. Finding out what your specific circumstance is can be accomplished by asking a simple question of HR, and then doing some minimal research on the benefits of each of the alternative providers and what they offer, if you’re allowed a choice. Everyone has different investment strategies and goals, so it is important to make sure you are reasonably informed about where your money is going and why. We’ve found that many teachers that come to us have typically been invested in annuities and don’t have any idea about how much has been vested in these to date, or how their money is being managed within the constructs of their plan. It is a good idea to check into how experienced the investors running your plan’s portfolio are, and what their reputation is.

“Often times, clients come to us with 403(b) accounts that are annuities. These may contain fees for features you may not even need or want – depleting your future nest egg as they add up over years. Sometimes, it takes little more than some polite inquiring to identify these and potentially do something about them.”

403b plans and specifically, annuities, often have hidden fees written in.
This is certainly not uncommon. It takes but a simple but carefully-worded letter (see our post Do You Know How Much You Are Paying in Retirement Fees?) to identify if and what extraneous fees exist in your plan, if they are warranted for your goals and circumstances or should they be unnecessary for you – and believe it or not, this is often the case! Of further note, different providers have different operating rules and investment objectives which can vary greatly among product vendors and across investments. Some accounts impose surrender charges or restrictions on early withdrawals. It can be very useful to know what yours are now, should you feel they are not in line with what your needs or desires might be in the future. Additionally, some vendors impose commission fees on investment earnings, and some do not or have lower ones. Imagine! You could spend years contributing to a plan that may not serve you in the long run, or paying portions of your earnings for things that don’t apply to you or that you really don’t need–and which you can very simply, opt out of, or not be charged for in a different plan. These things add up and detract from the money you get when you retire, compounded monthly… over years into what can be quite a large sum of money by the time you reach withdrawal age! This is why it is important you find out as much as you can about the specific 403(b) you have and make a few smart decisions now. Examples include, discerning and choosing between different types of annuities that may carry varying degrees of risk, or, changing from a plan that owns multiple mutual funds requiring additional fees – to one that avoids these in its portfolio if preferable.

“It is possible to be invested in a minimally advantageous 403(b) plan, with among potential negatives exorbitant fees, unreasonable commissions that are being charged on your gains, penalties for making changes, or even fund investments that the vendor is being paid to make over others. In fact, sometimes a Provider might push its lead product to districts over its best product because it will benefit their own bottom line.”

It’s worth the effort.
Studying up on different types of providers can be an annoyance, but is also relatively easy and can be followed up by educating yourself on what questions to ask while you compare potential plans. Look for
future posts here, like What Questions to Ask When You Compare 403b Providers and What to Do if You’re Unhappy with Your 403b Provider. Should you need help weeding through that jungle, or if you simply would rather have someone do the work for you, we are here to help and are already familiar with the different common area providers and their plans.

403(b)s can be self-directed investing.
While most people are happy to let their provider manage their money and investments once contributed to the 403(b), it is important to understand that in some cases, you can as well take a more active role in choosing exactly what mutual funds your money goes in to. If one is more comfortable with high risk, or has a good grasp of the market and investments, this might be something to consider if an available option for you. Either way, understanding that 403(b)s can be self-directed is an important fact to keep in mind over the term of your investing.

Don’t Settle for Less–Pursue That Potentially Higher Return on Investment!

Don’t let ignorance or a busy lifestyle stand in the way of protecting your future. You know what they say – an ounce of prevention is worth a pound of cure! Now that you’ve read up on 403(b)’s, it’s time to take some action and do a little hand raising yourself! Once you’ve garnered some basic information about what type of account you have, and what type of fees you might be paying, you can take steps to better secure your financial situation should it be warranted. And we are here to help.

Don’t Want to Go It Alone or Need Some Help? We’re Here.

Please know that if you have any questions along your journey or if you’d like some advice or expert assistance, or even for us to do the hard work for you, we’re available to assist. Give a call to our office at (845) 981-7300 today or continue consulting our blog and future posts on this important topic, and empower yourself to take actions in your best interest toward the future you deserve. Good luck!

Investing involves risks, including the loss of principal.

Fixed and variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

October 1, 2017

The Roth 403(b)

Some employers offer 403(b) plan participants the opportunity to make Roth 403(b) contributions. If you’re lucky enough to work for an employer that offers this option, Roth contributions could play an important role in maximizing your retirement income.

What is a Roth 403(b)?

A Roth 403(b) is simply a traditional 403(b) plan that accepts Roth 403(b) contributions. Roth 403(b) contributions are made on an after-tax basis, just like Roth IRA contributions. This means there’s no up-front tax benefit, but if certain conditions are met, your Roth 403(b) contributions and all accumulated investment earnings on those contributions are free from federal income tax when distributed from the plan. (401(k) and 457(b) plans can also allow Roth contributions.)

Who can contribute?

Once you’re eligible to participate in a 403(b) plan, you can make Roth contributions regardless of your salary level. (This is in contrast to a Roth IRA where your contributions may be reduced, or you may not be eligible to contribute at all, if your income exceeds certain amounts.)

How much can I contribute?

There’s an overall cap on your combined pretax and Roth 403(b) contributions. In 2017, you can contribute up to $18,000 of your pay ($24,000 if you’re age 50 or older)¹to a 403(b) plan. You can split your contributions any way you wish. For example, you can make $10,000 of Roth contributions and $8,000 of pretax 403(b) contributions. It’s up to you.

But keep in mind that if you also contribute to a 401(k), SIMPLE, SAR-SEP, or another 403(b) plan, your total contributions to all of these plans–both pretax and Roth–can’t exceed $18,000 (plus catch-up contributions) in 2017. It’s up to you to make sure you don’t exceed these limits if you contribute to plans of more than one employer.

If you also participate in a Section 457(b) plan, any pretax contributions you make to the 457(b) plan are in addition to your 403(b) contributions. This means you can contribute up to $18,000 of pay, Roth or pretax, to the 403(b) plan and an additional $18,000 pretax to the 457(b) plan in 2017 (plus catch-up contributions)–a significant savings opportunity.

Can I also contribute to a Roth IRA?

Yes. Your participation in a Roth 403(b) plan has no impact on your ability to contribute to a Roth IRA. You can contribute to both if you wish (assuming you meet the Roth IRA income limits). You can contribute up to $5,500 to a Roth IRA in 2017, $6,500 if you’re age 50 or older (or, if less, 100% of your taxable compensation).²

Should I make pretax or Roth 403(b) contributions?

When you make pretax 403(b) contributions, you don’t pay current income taxes on those dollars. But your contributions and investment earnings are fully taxable when you receive a distribution from the plan. In contrast, Roth 403(b) contributions are subject to income taxes up front, but qualified distributions of your contributions and earnings are entirely free from federal income tax.

Roth contributions could play an important role in maximizing your retirement income.
¹ Special Section 403(b) catch-up rules may also apply.
² If you have both a traditional IRA and a Roth IRA, your combined contributions to both cannot exceed $5,500 ($6,500 if age 50 or older) in 2017.
³ You can avoid tax on the non-Roth portion of your distribution (any pretax contributions, employer contributions, and investment earnings on these contributions) by rolling that portion over to a traditional

The better option depends on your personal situation. If you think you’ll be in a similar or higher tax bracket when you retire, Roth 403(b) contributions may be more appealing, since you’ll effectively lock in today’s lower tax rates. However, if you think you’ll be in a lower tax bracket when you retire, pretax 403(b) contributions may be more appropriate. Your investment horizon and projected investment results are also important factors. A financial professional can help you determine which course is best for you.

Are distributions really tax free?

Because your Roth 403(b) contributions are made on an after-tax basis, they’re always free from federal income tax when distributed from the plan. But the investment earnings on your Roth contributions are tax free only if you meet the requirements for a “qualified distribution.”

In general, a distribution is qualified only if it satisfies both of the following requirements:

It’s made after the end of a five-year waiting period
The payment is made after you turn 59½, become disabled, or die

The five-year waiting period for qualified distributions starts with the year you make your first Roth contribution to the 403(b) plan. For example, if you make your first Roth contribution to your employer’s 403(b) plan in December 2017, then the first year of your five-year waiting period is 2017, and your waiting period ends on December 31, 2021.

But if you change employers and roll over your Roth 403(b) account from your prior employer’s plan to your new employer’s plan (assuming the new plan accepts Roth rollovers), the five-year waiting period starts instead with the year you made your first contribution to the earlier plan.

If your distribution isn’t qualified (for example, you receive a payout before the five-year waiting period has elapsed or because you terminate employment), the portion of your distribution that represents investment earnings on your Roth contributions will be taxable and subject to a 10% early distribution penalty unless you’re 59½ or another exception applies.

You can generally avoid taxation by rolling your distribution over to a Roth IRA or to another employer’s Roth 401(k), 403(b), or 457(b) plan, if that plan accepts Roth rollovers. (State income tax treatment of Roth 403(b) contributions may differ from the federal rules.)³

What about employer contributions?

Your employer can match your Roth contributions, your pretax contributions, or both. But your employer contributions are always made on a pretax basis, even if they match your Roth contributions. That is, your employer’s contributions, and investment earnings on those contributions, are not taxed until you receive a distribution from the plan.

What else do I need to know?

Like pretax 403(b) contributions, your Roth 403(b) contributions and investment earnings can be paid from the plan only after you terminate employment, incur a financial hardship, attain age 59½, become disabled, or die.

You must begin taking distributions from a Roth 403(b) plan after you reach age 70½ (or after you retire if later). But this isn’t as significant as it might seem, since you can generally roll over your Roth 403(b) dollars (other than RMDs themselves) to a Roth IRA if you don’t need or want the lifetime distributions.

Employers aren’t required to make Roth contributions available in their 403(b) plans. So be sure to ask your employer if it is considering adding this exciting feature to your 403(b) plan.

	Roth 403(b)	Roth IRA
Maximum contribution (2017)	Lesser of $18,000 or 100% of compensation	Lesser of $5,500 or 100% of compensation
Age 50 catch-up (2017)*	$6,000	$1,000
Who can contribute?	Any eligible employee	Only if under income limit
Age 70½ required distributions?	Yes	No
Potential matching contributions?	Yes	No
Potential loans?	Yes	No
Tax-free qualified distributions?	Yes, 5-year waiting period plus either 59½, disability, or death	Same, plus first-time homebuyer expenses (up to $10,000 lifetime)
Investment choices	Limited to plan options	Virtually unlimited
Bankruptcy protection	Unlimited	At least $1,245,475 (total of all IRAs)

*Special Section 403(b) catch-up rules may also apply.

October 1, 2015

403(b) Plan Basics

This 403b plan basics article will help you make informed decisions about whether this plan is suitable for your retirement goals.

What is a 403(b) plan?

A 403(b) plan is an employer-sponsored retirement plan for certain employees of public schools, tax-exempt (501(c)(3)) organizations, and churches. The employer can purchase annuity contracts for eligible employees, or establish custodial accounts to be invested in mutual funds or other investments. In the case of annuity contracts, a 403(b) plan is sometimes referred to as a tax-sheltered annuity (TSA) plan. (Church plans are subject to several special rules not covered here.)

How does a 403(b) plan work?

Depending on the specific type of 403(b) plan, contributions may be made by the employee, the employer, or both the employee and employer. Many 403(b) plans are similar to 401(k) plans: you elect either to receive cash payments (wages) from your employer immediately, or to defer receipt of all or part of that income to your 403(b) account. The amount you defer (called an “elective deferral”) can be either pretax or, if your plan permits, after-tax Roth contributions.

Employer contributions, if made, may be a fixed percentage of your compensation, or may match a specified percentage of your contribution, or may be discretionary on the part of the employer. One unique characteristic of 403(b) plans is that your employer is allowed to make contributions to your account for up to five years after you terminate employment.

Who can participate in a 403b plan?

In general, if any employee is eligible to make elective deferrals, then all employees must be allowed to do so. This is called the “universal availability rule.” However, your employer can exclude certain groups of employees from participation (for example, employees who normally work less than 20 hours per week, or who are eligible under another deferral plan–for example, a 401(k) plan–of the employer). Your employer may also require that you attain age 21 and/or complete up to two years of service before you’re eligible for employer contributions.

Some 403(b) plans provide for automatic enrollment once you’ve satisfied the plan’s eligibility requirements. For example, the plan might provide that you’ll be automatically enrolled at a 3% pretax contribution rate (or some other percentage) unless you elect a different deferral percentage, or choose not to participate at all. If you’ve been automatically enrolled in your 403(b) plan, make sure that your assigned contribution rate and investments are appropriate for your circumstances.

What are the 403b plan contribution limits?

You can defer up to $18,000 of your pay to a 403(b) plan in 2017. If your plan allows Roth contributions, you can split your contribution between pretax and Roth contributions any way you wish. Unlike 401(k) plans, employee elective deferrals to 403(b) plans aren’t subject to discrimination testing (which in 401(k) plans can often significantly limit the amount higher-paid employees can defer).

If your plan permits, you may also be able to make “catch-up” contributions to your account. You can contribute up to an additional $6,000 in 2017 if you’ll be age 50 or older by the end of the year. If you have 15 years of service with your employer (even if you haven’t attained age 50) a special Section 403(b) rule may also allow you to make annual catch-up contributions of $3,000, up to $15,000 lifetime. If you’re eligible for both rules, then any catch-up contributions you make count first against your 15-year $15,000 lifetime limit.

If you also contribute to a 401(k), 403(b), SIMPLE, or SARSEP plan maintained by the same or a different employer, then your total elective deferrals to all of these plans–both pretax and Roth–can’t exceed $18,000 in 2017, plus catch-up contributions. It’s up to you to make sure you don’t exceed the limits if you contribute to plans of more than one employer. Total contributions to your 403(b) account–both yours and your employer’s–can’t exceed $53,000 in 2017 (or 100% of your compensation, if less). Age 50 catch-up contributions are not included in this limit, but special Section 403(b) catch-up contributions are. (Aggregation rules may apply if you also participate in a qualified retirement plan.)

Can I also contribute to an IRA?

Yes. Your participation in a 403(b) plan has no impact on your ability to contribute to an IRA. You can contribute up to $5,500 to an IRA in 2017, $6,500 if you’ll be age 50 or older by the end of the year (or, if less, 100% of your taxable compensation). However, depending on your income level, your ability to make deductible contributions to a traditional IRA may be limited if you contribute to a 403(b) plan. (Your income level and tax filing status may also impact your ability to contribute to a Roth IRA.) 1

403b Plan Income tax considerations

When you make pretax 403(b) contributions, you don’t pay current income taxes on those dollars (which means more take-home pay compared to an after-tax contribution of the same amount). But your contributions and investment earnings are fully taxable when you receive a distribution from the plan.

In contrast, your after-tax Roth 403(b) contributions are subject to income taxes up front, but are tax free when distributed to you from the plan. And, if your distribution is qualified, then any earnings are also tax free.

In general, a distribution from your Roth 403(b) account is qualified only if it’s made after the end of a five-year waiting period, and the payment is made after you turn 591/2, become disabled, or die. If your distribution is nonqualified, then you’re deemed to receive a pro-rata portion of your tax-free Roth contributions and your taxable earnings.

Your employer’s contributions are always made on a pretax basis, even if they match your Roth contributions. That is, your employer’s contributions, and any investment earnings on those contributions, are always taxable to you when you receive a distribution from the plan.

If you receive a payment from your 403(b) account before you turn 59 1/2 (55 in certain cases), the taxable portion may also be subject to a 10% early distribution penalty, unless an exception applies.

When can I access my 403b money?

In general, you can’t withdraw your elective deferrals from your 403(b) until you reach age 59 1/2, become disabled, or terminate employment (deferrals to annuity contracts prior to 1989 aren’t subject to these restrictions). Some plans allow you to make a withdrawal if you have an immediate and heavy financial need (“hardship”), but this should be a last resort–not only is a hardship distribution a taxable event, but you may be suspended from plan participation for six months or more. If your plan allows after-tax (non-Roth) contributions, your plan can let you withdraw these dollars at any time. Employer contributions to 403(b) custodial accounts are subject to similar withdrawal restrictions. But employer contributions and pre-1989 deferrals to 403(b) annuity contracts are subject to somewhat more lenient distribution rules. Check with your plan administrator for your plan’s specific rules. If your plan permits loans, you may be able to borrow up to one-half of your vested 403(b) account balance (to a maximum of $50,000) if you need the money.

What happens when I terminate employment?

Generally, you forfeit all employer contributions that haven’t vested. “Vesting” means that you own the contributions. Your plan may require up to six years of service before you’re fully vested in employer contributions, although some plans have much faster vesting schedules. (Your own contributions are always 100% vested.) You can generally leave your money in your 403(b) account, transfer it to a new 403(b) account, roll your dollars over to an IRA or to another employer’s retirement plan, or take a distribution. (2)

What else do I need to know about 403b plans?

You must begin taking distributions (“required minimum distributions,” or RMDs) from your 403(b) account after you reach age 70 1/2 (or after you terminate employment, if later). (The RMD rules don’t apply to contributions made prior to 1987.)
If your employer offers 403(b)s from various vendors, you may be able to transfer your assets from one contract to another while you’re still employed. This can be helpful if you’re dissatisfied with a particular vendor’s investment offerings.
Your 403(b) account is fully protected from creditors under federal law in the event of your bankruptcy. If your plan is covered by ERISA, then your account is generally protected from all of your creditors’ claims.

(1) If you have both a traditional IRA and a Roth IRA, your combined contributions to both cannot exceed $5,500 ($6,500 if age 50 or older) in 2017.

(2) When considering a rollover, to either an IRA or to another employer’s retirement plan, you should consider carefully the investment options, fees and expenses, services, ability to make penalty-free withdrawals, degree of creditor protection, and distribution requirements associated with each option.

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