How to Take Control and Make the Most of Your 403(b)

Retirement savings don’t have to be confusing.

make the most of your 403(b)

Many teachers who have opted to use a 403(b) are very happy with their decision. It’s a great choice when your household income means you are phased out from using a Roth product of if you want to have your investing done automatically and directly linked to your paycheck. While this option makes the process seamless, you can make the most of your 403(b) by doing a bit more due diligence.

Here are some tips to help you monitor the investments and progress in your account to make the most of your 403(b).

Remember, only you know your complete financial situation.

When a representative opens up your 403(b), do you sit with them for an hour and explain everything happening with your life? Do they ask you when you intend to retire and what you want to do? Do they ask if you have aversions to certain investments? Are they asking about other people in your household and how a 403(b) goes into a family investment plan? Some reps will, many won’t.

Your 403(b) representative is an expert in the product, but not an expert in you. Staying involved with and on top of your investments means you can make the most of your 403(b) for your individual lifestyle needs.

It’s also important to keep in mind that many 403(b)’s have mutual funds from their own company as options and may be incentivized to use these funds. Or they may have an array of mutual funds, but also options called “Conservative,” “Moderate,” and “Aggressive.” To save time and the hassle of building a portfolio, they may put you in one of these allocations.

There may be a legitimate reason for using these risk-based funds (such as a low initial investment balance and you can’t access other funds until you have more money), but I have seen teachers with a 7-year-old 403(b) or large six-figure balances still in the “Moderate” allocation. Be sure to check in at regular intervals with your representative so you’re on the same page about where you are and situated to make the most of your 403(b).

Ask what “index funds” are available.

When you use a fund that is “actively managed” it can cost more than one percent of your money to just be able to use the fund. This percentage is the “expense ratio” and pays for a management team to pick an investment strategy, choose investments for the mutual fund, and even try to time the market. When you select an index fund instead, it can be as cheap as 0.1 percent. Yep, 10 times less. In addition, an index fund will track what a specific market is doing and avoid anything fancy like trying to time when the market is going up or down. Most times, they make a better option to use when investing.

Elect to rebalance the account on your own.

Many 403(b) vendors will give you the option of rebalancing the account automatically, which may cost an additional fee of around 0.1 to 0.7 percent. Instead, suggest that you send your representatives what you want your account to look like at regular intervals. You’ll do this by writing down the initial investments and percentages you use and sending that allocation when needed. Doing this twice a year will save a lot of money over your career.

Understand what allocation is best for you.

As well as understanding your risk profile (how aggressive of investments you can tolerate), you will want to understand how your partner or spouse is investing. Build an allocation by looking at all of your investments and taking into consideration all of your options. If you decide that you want your retirement accounts to be more aggressive because you have more time for them to “bounce around,” while being more conservative on other accounts, then make that decision. It also works the other way around.

Generally speaking, if you are under 35, you can make the most of your 403(b) with a more aggressive allocation in equities that becomes more conservative as you get nearer your retirement goal. But you might want to think about different options.

Take ownership.

Most of the time, problems arise when teachers aren’t paying attention to their accounts and investments. This is your money, and no one wants it to grow more than you do—take control.

Set aside time to call your rep once a year to get their opinion on your account and investing in general. If they don’t respond or you don’t like their service or answers, you can move your 403(b) to another vendor in your district.

To make the most of your 403(b) you should also compare your 403(b) to others on the available to you and take time to look at the funds you’re investing in.

Some of this may sound daunting, but once you have learned the basics, the maintenance of your account can be completed in a couple of hours per year. By putting in the work when you start investing, you’ll stand to have more money at retirement and spend less time worrying about it.

 

Dave Grant

Posted by Dave Grant

I am a financial planner and have been providing fee-only financial advice to clients since 2007. In 2013, I launched Finance for Teachers, Inc. with the purpose of serving K-12 educators in Illinois, as being married to a teacher made me very familiar with the finances of a teacher. Finance for Teachers is now a leading resource for assisting teachers with their personal finances, with its website being visited by over 70,000 educators each year.