Uncovering Secrets: The Self-Directed K-12 403(b)
As someone who has been specializing in working with Educators since 2016, I continue to learn new things every day that can assist them with their finances. One area where I often provide guidance is pensions, 403(b) plans, and retirement planning. Throughout this learning journey, one of the significant revelations I have come across, along with others in the field, is the disparity in fees within the 403(b) marketplace. School districts provide lists of vendors that teachers can choose from to open a 403(b) and save for retirement. However, these lists often lack crucial information, mainly because districts are legally prohibited from providing more details. What teachers do not realize is that there are two types of 403(b) plans available: annuities and investment accounts. While they may appear similar, annuities can be more expensive without offering significant additional value (to avoid these, steer clear of companies with "insurance" in their name). In many cases, annuities even underperform investment 403(b) plans without compensating for the higher costs. I, along with other advocates, have been working to spread awareness about these differences for a long time.
However, there is another option gaining prominence in the K-12 marketplace: the self-directed 403(b). This option is only available through a few vendors such as Fidelity, Aspire, IPX and Vanguard where applicable. With a self-directed 403(b), you are not assigned a representative to manage your investments. This is crucial because the majority of the costs associated with 403(b) plans arise from hiring someone to maintain your investments, which can amount to an annual cost of 0.75-1.5% of your account balance, depending on the 403(b) company you choose. By opting for a self-directed 403(b), you can bring down the overall cost to below 0.5% per year, including investment expense ratios.
So, how does this account work?
To take advantage of this option, you need to have confidence in your ability to choose suitable investments, complete some basic paperwork, and commit to reviewing your account on a regular schedule (e.g., every 6 or 12 months). Let us consider an example where you decide to open a 403(b) with Fidelity, which is an approved vendor in your district:
Visit the Fidelity 403(b) website and locate the application to open a 403(b).
Ensure you know the plan number that Fidelity has with your district to ensure a smooth application process.
Complete the necessary forms to ensure your retirement contributions are deducted by your payroll department and directed to your 403(b).
Gain online access to your account and design an asset allocation for your contributions.
If you prefer a less detailed approach, using a Target Date Retirement fund would be sufficient.
Periodically, go online to make trades and rebalance your investments to maintain the original investment objective.
Is it worth it?
That depends on your priorities. If you are comfortable paying someone to manage your account and would like to focus your time on other things, then the self-directed option might not be the best fit for you. However, if you feel capable of managing an investment account and want to save on fees, it can be an excellent way to accumulate substantial savings over an extended period. It's important to note that, aside from the time required to complete the account opening forms, managing this account appropriately shouldn't take more than a few hours per year.
Additionally, there is the added benefit that you can add a financial advisor to your account (for Fidelity and Vanguard) to manage it on your behalf. This is helpful if you already work with an advisor for other investments or if you have one assisting you with your overall financial plan. By doing this, you can avoid having two people manage funds for the same purpose and instead have someone who customizes your investment portfolio specifically for your retirement plan.
It is important to recognize that the self-directed option may not be suitable for individuals who lack the necessary knowledge or desire to manage an investment account. However, for those who are capable and willing, the potential financial savings over a career can be substantial.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. Fidelity, Aspire, IPX, Vanguard, K-12 Financial Advisors, Private Advisor Group and LPL Financial are separate entities.