Twelve 403(b) Plan New Year's Resolutions
January 10, 2023
By Barbara O'Neill, CFP®, AFC®
At the start of each new year, there is a lot of media coverage about New Year’s resolutions related to health, finances, relationships, and time management. Thus, January is a great time to assess your personal finances and take action to improve your financial well-being. Personal finance tasks that are ripe for review and improvement include spending, budgeting, credit, and retirement savings.
403(b) plans need regular reviews. They are not “set it and forget it” (autopilot) investments. People’s lives change (e.g., marriage, divorce, widowhood) as do tax and retirement-related laws (e.g., SECURE 2.0 Act passed at the end of 2022) and IRS inflation indexing (e.g., income ranges for marginal tax brackets and maximum contributions for 403(b) plans).
Not sure how to get started? This post describes twelve 403(b) plan New Year’s resolutions to consider. They address a wide range of positive actions including increased savings and portfolio rebalancing.
Research results, three “need to know” facts, and six take-away action steps conclude this discussion.
Resolution Suggestions
1) Check Your 403(b) — A 403(b) review includes the amount of pay deducted for 403(b) deposits, how much more could be contributed as a result of inflation indexing, and the current account balance and asset allocation (i.e., percentage of 403(b) in stocks, bonds, and other asset classes) as a result of recent market performance. In 2022, the U.S. stock market had its worst year since 2008. Therefore, 403(b) plan participants’ investment mix is likely much different in January 2023 than it was in 2021. Now is also a good time to organize 403(b) records including quarterly statements, annual reports, and prospectuses.
2) Review Vendor Choices — As a result of 403bwise advocacy and employee activism at the grassroots level, some school districts and other non-profit employers now offer better vendor options (read: lower expense investments) for their 403(b) plans than they did previously. Participants need to keep up with vendor changes and prepare to switch by exiting a bad 403(b) plan, if necessary. 403bwise has detailed a 15-step process to do this and also offers personalized support through its Facebook group and one-hour Office Hours videoconference sessions.
3) Reassess Risk Tolerance — A sharp market downturn like that experienced in 2022 is a good prompt to reassess investment risk tolerance and, perhaps, adjust 403(b) investments accordingly. Risk tolerance is an investor’s capacity to handle the uncertainty that accompanies specific investment products. The University of Missouri Investment Risk Tolerance Assessment online survey includes 13 questions and provides users with feedback about their capacity to handle investment risk. The higher the total score, the higher (i.e., more aggressive) someone’s investment risk tolerance.
4) Calculate Retirement Savings — Research indicates that using a retirement calculator is associated with increased savings. When people see how much they need to save, in dollars and cents, they are often motivated to save more money. Putting a date and price on financial goals makes them “real” and, thus, harder to delay and ignore. A helpful resource for making retirement savings estimates is the FINRA Retirement Calculator, with inputs about users’ current savings, current age, retirement age, projected expenses, annual income need, and other variables.
5) Rebalance Your Investments — As stock market prices and interest rates go up and down, the value of investments and their weightings in a 403(b) account will change. If asset class weights have shifted substantially during the past year, consider rebalancing to the original target asset allocation percentages. For example, 50% stock, 40% fixed income investments, and 10% cash equivalent assets. Some 403(b) plan providers provide automatic account rebalancing services on a specified date such as the start of a calendar year or on a participant’s birthday.
6) Save More Money — As Dan Otter noted in a recent post, 403(b) participants can save more money in 2023. As a result of high inflation rates in 2022, the largest ever increase in retirement plan contribution limits took effect in 2023. The maximum contribution for tax-deferred employer retirement savings plans, such as 403(b)s, is $22,500 with a $7,500 catch-up contribution for workers age 50+. The two best times to increase 403(b) deposits are when income increases (e.g., after a contract settlement) or certain household expenses (e.g., childcare) end.
7) Review Beneficiaries — A beneficiary is a person named in a 403(b) contract to inherit the remaining balance of a deceased plan participant’s account. Beneficiary designations can be found on 403(b)s, individual retirement accounts (IRAs), life insurance policies, and annuities. Beneficiary changes may need to be made for a variety of reasons including death of a beneficiary, marriage, divorce, employer retirement plan changes, and a change in employment. To record all of your beneficiary designations in one place, complete this worksheet.
8) Play Catch-Up — Some 403(b) participants get a late start and need to save as much as possible late in their careers. Like all older workers, those age 50+ can contribute up to $30,000 to a 403(b) in 2023 (or the amount of earned income, whichever is less). There is also an additional catch-up contribution just for 403(b) plan participants. Those who work for the same employer for at least 15 years can contribute up to $3,000 more per year, up to a total of $15,000, if their plan permits.
9) Practice Tax Diversification — Different types of investments are taxed differently. Specifically, taxable investments (e.g., a regular brokerage account) where earnings are taxed in the year they are received, tax-deferred investments (e.g., traditional IRAs and 403(b)s) where earnings are taxed at a future date, and tax-free investments where taxes are not due on earnings (e.g., Roth IRAs). If all of your retirement savings is in a traditional 403(b), consider saving in a Roth and/or taxable account.
10) Review Tax Withholding — A lot can happen in a year to affect a 403(b) participant’s taxes including increased or decreased savings deposits, marriage, divorce, birth of a child, “side hustle” income and, for older adults, required minimum distributions (RMDs). It is smart to use the IRS Tax Withholding Estimator annually to make sure withholding and/or estimated payments are adequate. Also double-check tax withholding against the safe harbor rules: withhold 100% (110% with an adjusted gross income more than $150,000) of tax owed for the previous year (i.e., 2022) or 90% of current year (2023) tax liability.
11) Stay Informed — Financial knowledge is power. For example, knowledge of investment principles can prevent costly errors such as panic selling during stock market downturns. Places to learn about 403(b) plans and investing include the 403bwise website and podcasts, personal finance publications (e.g., The Wall Street Journal), workplace seminars by 403(b) vendors (beware of sales pitches disguised as education!), adult education courses, blogs, books, investment clubs, and social media. Never consider your financial education finished!
12) Get Help When Needed — 403(b) plan investing involves a myriad of decisions and process steps. Places to get information and assistance with 403(b) questions include prospectuses for investment products, 403bwise (website, Office Hours, blog, podcasts), salaried employees of high-quality vendors, and fiduciary fee-only financial advisors who put the interests of their clients first. Employer HR staff can assist with enrollment steps and paperwork.
Research Results
According to the 2023 Fidelity Investments Financial Resolutions Study, with 3,020 respondents, the top three financial resolutions are saving more money (39%), paying down debt (32%), and spending less money (28%). Inflation’s impact on day-to-day expenses and saving was the top financial concern (43%) followed by economic uncertainty/recession (39%) and unexpected expenses (38%). The main reasons people kept financial resolutions last year were passion to reach a goal (27%), the goal was realistic and easy to maintain (26%), the goal was clear and specific (25%), and it felt good to make progress (24%).
Three (More) Things
- The easiest way to complete resolutions to save money in a 403(b)- or anywhere- is to pay yourself first automatically. 403(b) participants do this through payroll deduction.
- Savings resolutions can start small and scale up over time. Compound interest is very powerful, especially in investments with low expense ratios.
- Resolutions involve changing behavior. The best way to do this is to focus on habits and routines (e.g., increase savings by 1% a year and rebalance investments annually).
Six Smart Strategies
No. 1: Be Patient-Think Long Term — Investment results are best evaluated over 5+ years, not a few weeks or months. Ignore temporary market fluctuations and don’t try to time the markets. Over the long term, sound investments will increase in value.
No. 2: Practice “Habit Stacking” — “Habit Stacking” is incorporating a desired behavior into something you already do. Example: if you already review quarterly 403(b) statements or do a net worth calculation, determine if rebalancing is necessary.
No. 3: Maintain Adequate Emergency Reserves — An emergency fund of 3-6 months of essential living expenses can help prevent unexpected expenses from derailing 403 (b) plan resolutions. It is okay to save for retirement and emergencies at the same time.
No. 4: Build in Rewards — Rewards are a key part of making resolutions. They provide motivation to choose saving over spending or to take the time to review documents or make financial calculations. Choose something pleasurable.
No. 5: Start When You Are Ready — 403(b) resolutions can start anytime- not just on New Year’s day. Set a realistic start date that allows time for research and advice-seeking, preparation, paperwork, addressing obstacles, and other factors.
No. 6: Move On After Relapses — “Life happens” and sometimes people have to quit or scale back their resolutions (e.g., reduce 403(b) savings). That’s okay. View relapses as learning opportunities and take steps to get back on track.
In Summary
Improved personal finances is a common New Year’s resolution. As you consider financial resolutions for 2023, don’t forget your 403(b)! Resolve to review account documents, save more (if possible), consider present and future tax consequences, and keep learning about 403(b)s, investing, and personal finance.
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.