A lot has been written recently about the interest the government has in adding annuity choices to the menu of options available to plan participants (see my previous posting regarding recent Department of Labor rule changes). Interestingly enough, it seems that some states are going the opposite direction with 403(b) plans (see linked article below).
403(b) plans have been in place for decades. They cover employees of healthcare and educational institutions. They are often referred to as Tax Sheltered Annuity or TSA plans. In the past, there was no employer match in these plans as the sponsoring organizations usually had a defined benefit pension plan for their employees. However, most healthcare organizations discontinued those plans years ago and more educational institutions are following suit these days.
As the article notes, the traditional provider of 403(b) plans were insurance companies. The funds in an individual’s account could be placed in a traditional fixed annuity with a guaranteed* interest rate or in a series of mutual funds provided by the insurer. Upon retirement, the participant could rollover the account to an IRA invested in whatever the participant chooses.
Evidently, plan sponsors (employers) believe that the employees would be better served if there were different investment options available. Personally, I think it may have more to do with the fees charged the sponsor by the plan administrator. Either way, the new plan administrators are, in all likelihood, going to be investment firms whose previous experience is in the 401(k) world. Given how many 401(k) plans have fared overtime, I’m not sure this is a step in the right direction. While the typical TSA plan in a fixed annuity might have earned only 3 or 4% per year in the past, it never lost money* so it never had to recoup losses. Also, you never had to change investment choices to try to protect the money – it was already protected. Don’t get me wrong; I have no problem with offering both risk and safe options and letting the employee decide. I am just nervous that once the Wall Street firms get their nose in the 403(b) world, the only choices will be risk options with all that those bring. Many a teacher or nurse has lived a financially secure life in retirement due to the savings they accumulated in their TSA plan; they are often in much better “shape” than the 401(k) plan participants I meet.
If you have a 403(b) plan at work and want to second opinion on the choices available to you, let me know and we’ll find a time to meet. If you don’t have a plan available but work for an organization that could sponsor such a plan, I can help your employer implement one. Finally, if you have a plan that isn’t meeting your needs, I can offer a range of both safe and risk alternatives to your employer as an addition to the current plan.