Nonprofit workers face retirement-plan deadline
Are you a teacher with a high-cost savings plan? New IRS rules this month will limit your ability to switch to a better one.
NEW YORK (Money) -- For the seven million teachers and other nonprofit employees with 403(b) retirement plans, time is getting short. If you aren't happy with your investment options, you have little more than a week to arrange a transfer of your assets to the 403(b) provider of your choice without a tax penalty.
Most employers currently allow such switches, but after Sept. 24, as part of a new batch of IRS rules, your ability to make these transfers will be limited. You will only be allowed to make a transfer to a provider that has a written information-sharing agreement with your employer. (Your future contributions, as before, will be restricted to your employer's 403(b) menu.)
Since investment providers need several days to process the paperwork, many financial advisers urge 403(b) participants to have their transfer forms in the mail by Sept. 17.
"You can't waste any time," says financial planner Scott Dauenhauer of Meridian Wealth Management in Laguna Hills, Calif. "If you start the transfer late, there's a risk that it won't be completed on time, and your distribution would be considered a taxable event." One caveat: before making a switch, check to see if your investment levies any surrender charges.
Chances are, you should make the move while you can. The typical 403(b), which is offered by governmental and tax-exempt groups, such as schools, hospitals, and churches, tends to be saddled with high-fee, low-performing investment choices. The reason: most 403(b) sponsors don't manage these plans - they simply direct the employee contributions to the designated investment providers.
By contrast, 401(k) providers have a fiduciary responsibility for their plans, which means they must make sure the plan is managed in the best interest their employees.
But until now, if you had a high-cost 403(b), you could switch money to an investment firm that wasn't part of your employers' plan, a move called a 90-24 transfer after the IRS rule that allowed it. A smart strategy was to contribute only to the least expensive option, such as a money market fund, then periodically transfer the balance to a low-cost investment manager, such as a no-load fund company.
When the new IRS rule takes effect, however, you will only be able to switch money to another plan if both 403(b) plans have written documents that permit the transfer and have agreed to periodically share information about the employee's status.
Watch what you invest in
With the transfer window closed, 403(b) participants will need to be on their guard. Because of the loose rules governing these plans, many employers allow different investment providers to send in commissioned salespeople to market their offerings directly to employees, which can lead to confusion. The problem is worst among the K-12 school districts, according to Dan Otter, who runs 403(b)wise.com, a Web site aimed at educating teachers about investing.
"Many districts have dozens of vendors selling hundreds of investments, and the teachers aren't aware of the costs of their plans," said Otter. "But most school districts, especially the small ones, have their hands full trying to deliver education. They just don't have the time or resources to focus on 403(b)s."
Overwhelmed by the choices, many employees don't even contribute to their 403(b)s - the average participation rate is just 30 percent, versus 63 percent for workers with 401(k)s.
And according to Spectrem Group, more than 40 percent of the $652 billion stashed in 403(b) plans is invested in fixed annuities, which are not designed to provide inflation-beating growth over the long run.
Still, other new IRS rules may lead to improvements in these plans. Starting in 2009 all 403(b)s must have a written document listing every available investment option, and employers will be required to take more fiduciary responsibility for their plans. As a result, according to a recent study by consulting firm Cerulli Associates, 403(b)s may eventually look more like 401(k)s, with more guidance for participants, and a smaller but more diversified investment line-up, including a low-cost fund provider.
But those changes aren't likely to happen quickly. In the meantime, if you're in a subpar plan now, take advantage of the opportunity to move money to a better 403(b) provider. Your best choices, says Dauenhauer, are low-cost, no-load fund companies, such as T. Rowe Price or Vanguard.