|
|
403(b) Plans: The Benefit That Sometimes Isn't
Why this plan doesn't measure up to the 401(k)
by Amy Granzin
|
Teachers, nurses, and others in helping professions already feel underpaid and underappreciated. Here's more bad news: They're likely to hold the short end of the stick when it comes to their retirement plans, too.
Women should be particularly concerned about the retirement plan in question, 403(b)s. Organizations offering 403(b) plans predominantly employ women. According to the National Education Association, about 74% of public school teachers are female. Roughly 95% of all registered nurses are women. Finally, women are more likely than men to work for charitable organizations.
Here's how 403(b)s can hinder your retirement-savings efforts and what you can do about it.
The 403(b): Not Quite the 401(k)
Most public school, hospital, and not-for-profit employees are offered a 403(b) plan (sometimes called a tax-deferred annuity, or TDA) instead of a 401(k) plan. The two types of investments are the same in theory. In practice . . . well, that's another matter.
Because of higher fees, fewer and poorer investment options, and employers' unwillingness to match employee contributions or get involved in plan administration, 403(b) plan participants generally retire with far fewer assets than employees with 401(k) plans--Scott Burns of The Dallas Morning News estimates a whopping 23% less! (For more on 403(b) shortfalls, read his article "The Problem with 403(b) Plans".)
Another Problem: Income Gaps
Because women usually earn less than men, they need a strong retirement-savings plan even more than men. Though the exact percentage is in dispute, the typical woman's salary is smaller than the typical man's. National Education Association statistics suggest this is true even in the female-dominated teaching profession: The states that pay the highest teachers' salaries employ the largest percentage of men, and the states that pay teachers the least mainly employ women.
This salary gap makes for not only a smaller paycheck but fewer retirement dollars as well, assuming you contribute the same percentage of your salary to a retirement plan as a man who earns more does.
Take a woman making $40,000 annually (that's the average teacher's salary in the United States) who contributes 10% of her salary to a typical 403(b) plan holding personal annuities and pays 2% of it in management fees. Assuming a moderate 10% annual return, she ends up with about $653,000 in 25 years. A man making $50,000 annually who contributes 10% of his salary to a 401(k) plan with 1% fees, assuming the same rate of return and same time period, retires with approximately $1,200,000. Quite a disparity.
To make matters worse, women often work fewer years than men, taking time out from their careers to care for children or aging parents. As a result, the average woman won't contribute to a retirement-savings plan for as long as a man. Fewer work years means a smaller nest egg, not to mention lower Social Security benefits.
What can you do? Switching to a higher-paying profession isn't a option for a teacher or nurse who loves her work. But you can consider finding a new employer. Relocating might help. There's a large salary discrepancy between states, with Connecticut paying an average teacher's salary of $51,500 compared with South Dakota's $28,500. Moreover, some school districts also offer lower-cost, more flexible 401(k) plans and other retirement alternatives to the traditional 403(b) plan.
Nurses have options, too. Because of a nationwide nurse shortage (which is expected to grow as the population ages), experienced RNs are in great demand. This puts you in an excellent position to demand higher pay and better benefits.
Poor Education
403(b) plan participants often receive little or no information about their investment options, let alone satisfactory investor education. This may be why of the 12 million people eligible to contribute to 403(b)s, only half actually participate.
Even if employees know they are eligible for the plan, the only financial professional some participants come in contact with is a salesperson who gets a cut of every fund or annuity he or she sells. It's to the salesperson's advantage to recommend investments that carry the highest sales fees and commissions.
Commissions aside, sales reps can also be the source of misinformation and poor investment advice. An article on the excellent and informative 403bwise.com Web site recounts the frightening story of a college-age hospital worker who was advised by an investment-company salesperson to put all her 403(b) contributions into a money market fund, when her age obviously warranted a much more aggressive strategy. This is no anomaly. More than half of all 403(b) assets are invested in fixed-income annuities, which over the long term produce much lower returns than equity mutual funds.
That's why it is important for teachers to teach themselves. First, learn about the issues. Start with Morningstar.com's 403(b) Primer, which includes an article that identifies Web resources. Also visit the 403(b) Conversations forum, where participants share their experiences and lessons learned. Finally, broaden your investing knowledge by signing up for Morningstar.com's free Investing Classroom. Short lessons explain how stocks and funds work and will provide you with the knowledge to make your own smart investment decisions.
Activism Required
Despite the drawbacks of 403(b) plans, there's a striking lack of advocacy in this arena. As John Abraham of the American Federation of Teachers explains, "No one--not the employer or the unions--has taken responsibility for [403(b) plans]." Worse, some 403(b) plan decision makers, such as school-board presidents, have been accused of accepting what amounts to bribes from insurance companies for exclusive contacts.
Activism has started to emerge, however. Two California teachers, John and Dan, have become the Motley Fools of the 403(b)-investor set. Their funny and indignant columns on 403bwise.com advocate everything from lower expenses to better investment choices. Other high-profile investing experts have also joined the fray, including personal-finance columnist Jane Bryant Quinn, who has railed against the sales of tax-deferred annuities. And the May/June 2000 issue of American Teacher ran "Shark Attack", a lengthy expose on 403(b)s. The piece includes pointers on how participants can "stop the bleeding" by lobbying their school boards and union representatives and demanding better retirement-savings options.
Because weak 403(b) plans are most likely to effect women, 403(b) reform is also a women's issue. The National Organization for Women has made Social Security benefits one of its major crusades in recent years. Let NOW or the U.S. Department of Labor know that women in traditionally female occupations are facing this obstacle to a secure retirement.
Amy Granzin is an editorial analyst with Morningstar University. She can be reached at digest@morningstar.com.
If you have comments about this article, please e-mail the editor.
|
|
|
|
|
