Saving for retirement is important. This is a simple and obvious statement. The challenge involves figuring out how best to save for retirement. And the answer isn’t always simple or obvious.
For example, a 403(b)—the most common retirement plan offered to speech-language pathologists and other communication sciences and disorders professionals by their employers—can be complicated and, in some instances, problematic.
The issue starts with the fact that there are two different types: ERISA and non-ERISA.
The Department of Labor requires ERISA (Employee Retirement Income Security Act of 1974) plans to meet pretty strict standards, including a fiduciary duty from the plan administrator. Most nonprofit health care workplaces and higher learning institutions, such as universities, offer ERISA 403(b) plans. These plans are generally solid and employers might even offer a match.
A note on employer match: If your employer offers one with your 403(b), you should almost assuredly contribute enough to get the full matching amount.
Less reliable options
Professionals at K–12 public schools usually participate in non-ERISA 403(b) plans. These plans rarely include an employer match and are not held to the same standards of ERISA 403(b)s. This ultimately means offerings from your school district can vary widely in terms of quality.
Many companies partnering with school districts to provide plan options focus on selling insurance, as well as investment plans. In fact, in some instances, the company’s primary business is insurance. This results in a proliferation of annuities—policies issued by insurance companies for retirement savings—used to fund 403(b) accounts.
Multiple types of annuities exist with varying complexities and fee structures. I’m not here to dive into the morass of whether they’re good or not. I believe they’re a tool, and like any tool companies can use them for your benefit in the right circumstance or, in the wrong circumstance, they can harm your portfolio.
Here’s the thing—according to the Investment Company Institute, roughly 75 percent of all 403(b) money gets held in annuities. That, to me, indicates this tool is used too often and inappropriately. I compare it to building a house, but 75 percent of the time contractors use only a saw. The house might get built eventually, but the builder could definitely provide more efficient ways to get there.
Improvement but still complicated
I still see the overuse of annuities as an issue. However, I also notice improvement to some degree. Select states and districts started taking a more proactive approach.
Take North Carolina, for example. The Department of State Treasurer set up regulations to ensure the availability of a wider variety of 403(b) plan offerings. Most important, some include no-frill, investment-only style plans.
Improvements like these make me feel better about these plans, but you might still find it challenging to decipher your best choice, especially when you’re dealing with representatives from multiple companies all telling you they can best guide your retirement plans.
So, what should an enterprising audiologist or SLP do? Consider skipping the 403(b) game altogether.
Control your own destiny
You don’t have to participate in a 403(b) program. Your state pension is a completely separate entity and not dependent on your participation in another plan. A better choice might involve establishing your own personal Individual Retirement Account (IRA)—again, assuming you receive no employer match.
Here are the benefits of creating your own IRA:
A personal IRA grants you complete control. You can choose from among literally thousands of companies to set up a plan to best fit your financial profile. If the company you select irritates you, replace it with another at any time. If you move districts or states, you can keep the same account. You can make a withdrawal at your convenience directly from the account. No need to go through the human relations department or try to meet hardship qualifications (although tax penalties might still apply).
With a personal IRA, you can access virtually unlimited investment choices. Whatever you desire—stocks, bonds, ETFs (exchange-traded funds), mutual funds and many more—are all attainable. You aren’t limited to offerings approved by your school district.
Does an annuity still sound appealing to you? Cool. Pick the absolute best one for your needs whether it’s a part of your employer’s 403(b) program or not.
A personal IRA also allows you the ability to set up a Roth. Last year I wrote about the benefits of Roth IRAs and how well they can complement a pension. While it’s more common for 403(b)s to have Roth options these days, it’s still not universal and your only option might involve establishing a Roth IRA.
The many advantages aside, I can share three potential drawbacks to setting up an IRA:
You can contribute only $5,500 ($6,500 if age 50 or older) per year. The IRS imposes lower limits on IRAs than they do 403(b)s, which allow contributions up to $18,500 plus another $6,000 at age 50 and above. This is a non-issue for many people who won’t contribute more than the IRA limits. If you’re a rock star and want to save more than the IRA limit, great. You can possibly max out the IRA first and apply additional savings to your 403(b).
Contributions aren’t made through payroll. With control comes responsibility! You must make your own contributions to an IRA each paycheck. Now, it’s really easy to schedule an automatic transfer every two weeks or once a month, so you don’t have to think about contributing. Some people still struggle with saving money once it hits their checking account and benefit from getting the contribution amount deducted before they can access it. I know you’re out there. If this is you, be honest with yourself and figure out what works best.
The IRS does limit high-income households from deducting IRA contributions. These limits do not apply to 403(b)s. If you’ll be close to the limits, reach out to a tax professional.
Meet me in Boston! I’ll be presenting at ASHA18 on student loans and how to repay them.
Jacob W. Parish, a certified financial planner™ professional, focuses on helping audiologists, SLPs and other young health care professionals navigate financial planning issues. Visit his website, Schooner NextGen or follow @SLP_Finance. Securities and Advisory services offered through Geneos Wealth Management, Inc. Member FINRA/SIPC