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Barbara O'Neill: The 403(b) Lifecycle 403(b) Plans Aren't Just For Teachers

September 20, 2022

Information about 403(b) plans often refers exclusively to teachers as participants. In reality, a much wider swath of the U.S. labor force, including public school non-teaching staff, is eligible. Nevertheless, according to a 2020 study, participation rates in 403(b) plans nationally are only 27.13%, or about one in four eligible participants. This is very low compared to participation in 401(k) plans offered by for-profit companies.

Multiple studies have found the key factors that drive participation in defined contribution retirement savings plans include income, occupation, and investment knowledge, with income explaining the most variation. The average teacher salary nationwide in 2022 is $64,524, but it varies significantly by state (e.g., New Jersey vs. Florida). The average annual salary for a school janitor is $30,266 and, for a school secretary, $36,744. Average pay for employees of non-profit organizations is $51,171 and hospital staff, $53,237.

This post describes who is eligible to participate in 403(b) plans, IRS universal availability rules, financial challenges of non-teachers, steps to get started with- and educated about- 403(b)s, emergency withdrawal options, and success stories of wealthy 403(b) non-teacher participants. Research results, three “need to know” facts, and six take-away action steps conclude this discussion.

Who Can Participate?

According to IRS regulations, 403(b) plans can generally be set up by public schools, tax-exempt organizations, and churches. More specifically, eligible participants include teachers and public school administrators and staff (e.g., janitors, cafeteria workers, bus drivers, bus mechanics, secretaries), employees of public and private colleges and universities and Native American tribal government schools, and ministers and other employees of IRS code 501(c)(3) organizations, including certain hospitals with tax-exempt status.

Universal Availability

The term “universal availability” means that, if employers allow one employee to make elective deposits to a 403(b) plan via salary reduction arrangements, they must extend this option to all employees with certain designated exceptions (e.g., less than 20 hours of work per week and non-resident aliens). Related to this, the “effective opportunity” rule states that employers must notify employees at least annually of the opportunity to make or change an elective deferral election up to the dollar limit currently in effect.

Financial Challenges of Non-Teacher Plan Participants

Lower Pay

As noted above, income is a key determinant of retirement savings plan participation, and the average salary of school staff and non-profit organization employees is lower than that of teachers. This makes it more challenging to make 403(b) payroll deposits and still cover household expenses with remaining net income.

Lack of Savings Role Models

Education is another determinant of wealth building and most teachers (2022 teacher shortage workarounds, notwithstanding) have at least a bachelor’s degree. Teachers may also have had more exposure to a “savings culture” (e.g., saving for college) while growing up than eligible non-teacher 403(b) plan participants.

Lack of a Defined Benefit Pension

Unlike teachers, many eligible non-teacher 403(b) participants do not have defined-benefit pensions that provide a stream of monthly income for life. This makes low 403(b) plan participation even more troubling because it means that Social Security, alone, will probably be their primary source of income in later life.

Getting Started

Enrollment begins at a workplace HR (benefits) office. Request print information (or website links) about 403(b) action steps and available vendors. Next, review the Find a Good Vendor webpage from 403bwise. Search to see if an employer offers low expense Aspire and Vanguard products. Other vendors with low-cost investments include Fidelity, T. Rowe Price, TIAA, and CalSTRS Pension 2 (in California only).

Also check the 403bwise rating of your 403(b) plan if you are a K-12 school district employee. If you need more help making decisions about enrollment, vendors, and the selection of investment products, attend an upcoming 403bwise Office Hours session and bring your questions.

Getting Educated

403bwise has a plethora of videos, podcasts, and blog posts on its website, as well as a Facebook group, to teach people about 403(b)s.  Especially eye-opening is the five-part podcast series Learned by Being Burned: Teachers and the K-12 403(b) which describes high-cost, commission-based products and vendors to avoid.

Another useful resource is the 403(b) Savings Calculator from Bankrate which indicates what someone can accumulate with regular savings deposits. There is also a similar calculator from 360 Degrees of Financial Literacy. To learn about investments, review the FINRA Learn to Invest webpage.

403(b) Withdrawal Methods

A common fear of would-be 403(b) participants is “locking up their money” and then needing it later for an emergency expense. This is especially true given high surrender charges on many 403(b) investments and when emergency savings is limited, as is often the case in households with low or moderate incomes. In addition, early distributions before age 59 ½ typically incur a 10% tax penalty. Certain exceptions apply.

There are several “escape routes,” however. First, hardship distributions for serious financial needs (e.g., to prevent eviction and medical bills). The amount withdrawn is taxed and not paid back to a plan participant’s account. A second strategy is to borrow from a 403(b) account. The loan must be repaid within five years. If not, it is treated as a taxable distribution and may also be subject to the 10% early distribution tax.

Wealthy Janitors

There is nothing as inspirational as great stories where success is achieved by people from whom it is not expected. In recent years, stories have emerged about wealthy janitors like Jeff York, working and nearing $1 million in savings, and Ronald Reed, who died at 92 and left most of his $8 million fortune to charity.

How do people in non-profit and school staff positions accumulate wealth? The slow and steady way like most self-made millionaires: frugal living below their means, regular savings deposits, decades of compound interest, and investing in stocks (including stock index funds and exchange-traded funds) for the long term.

Research Results

Grable and Lytton studied determinants of retirement savings plan participation and found that income and investment knowledge were two key determinants common to both 403(b)s and IRAs. Income explained the most participation variation in both plans. Implications of this study are: 1. The best way to increase 403(b) participation is to increase employee incomes, 2. A second way is to increase employee knowledge of investments, and 3. 403(b) plan materials should be non-intimidating and applicable for lower income workers with minimal investment knowledge who are most at risk for not participating.

Three More Things

  • Mindset is critical. What people think about, they often bring about…because they take positive action to reach their goals. School staff and non-profit organization employees have the ability to build wealth.
  • If 403(b) plan options are poor (i.e., high-expense vendor products), retirement savings may be done in 457(b) plans, Roth or traditional individual retirement accounts (IRAs), and/or taxable accounts.
  • Multiple financial goals can be funded concurrently. For example, retirement savings in a 403(b) + building an adequate emergency fund + savings for a home and/or car.

Six Smart Strategies

No. 1: Think Positively — Any 403(b) savings is better than none. Picture yourself gradually accumulating wealth over time. As with many things in life, when there is a will, there is a way.

No. 2: Live Below Your Means — Spending “leaks” hemorrhage money that might otherwise be invested for retirement. Take steps to identify them and reallocate money from spending to saving.

No. 3: Increase Emergency Savings — The last thing 403(b) participants want to do is withdraw savings to pay for an emergency expense. Aim to save at least three months expenses, even if it takes some time to do this.

No. 4: Learn to Earn — Ben Franklin once said, “An investment in knowledge pays the best interest.” Start a new habit to learn one new thing about personal finance every day from podcasts, blogs, news reports, and other sources.

No. 5: Seek Assistance — Websites, books, and podcasts are nice, but nothing beats face-to-face assistance when you have questions. Reach out for help from 403bwise Office Hours, adult education classes, and/or a fiduciary financial advisor.

No. 6: Pay It Forward — The most interesting part of the “Wealthy Custodian” story is not the wealth accumulation, but the fact that he is motivating others to save for retirement. Help others with 403(b) questions when you are able to do so.

In Summary

Every worker who is eligible to participate in a 403(b) plan, by virtue of the nature of their employment setting, can do so regardless of pay grade, job title, and other job-specific factors. A school bus driver is as welcome as a principal. Participation is advised unless the 403(b) has only high-cost vendors to choose from.

Compound interest needs time- preferably several decades- to work its magic. If you are not already a 403(b) plan participant, the best time to get enrolled is today.

This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

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Dr. O'Neill is the owner/CEO of Money Talk: Financial Planning Seminars and Publications where she writes, speaks, and reviews content about personal finance. She is a Distinguished Professor Emeritus at Rutgers University and a long-time 403(b) plan participant.