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The 403(b) Basics

403(b) Fact Sheet

The 403(b) was established in 1958. Originally participants could only invest in annuity products. Paragraph 7 was added to the plan in 1974 permitting investment in mutual funds through a 403(b)(7) custodial account.

ERISA 403(b) vs. Non-ERISA 403(b) Plans

Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets standards of protection for individuals in most voluntarily established, private-sector retirement plans. ERISA requires plans to provide participants with plan information, including important facts about plan features and funding; sets minimum standards for participation, vesting, benefit accrual and funding; provides fiduciary responsibilities for those who manage and control plan assets; requires plans to establish a claims and appeals process for participants to get benefits from their plans; gives participants the right to sue for benefits and breaches of fiduciary duty; and, if a defined benefit plan is terminated, guarantees payment of certain benefits through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation (IRS).

• ERISA 403(b) plans include: private not-for-proift K-12 schools, not-for-profit hospitals, and not-for-profit universities
• Non-ERISA 403(b) plans include public K-12 schools

Note: Lack of ERISA oversight is considered a factor in the long vendor lists, individual contracts, and higher fee structures common in public K-12 403(b) plans. 

READ: Failing Teachers about how ERISA came about and why it doesn't apply to the K-12 403(b). 

Eligibility

• Employees of tax-exempt organizations established under section 501(c)(3). 
• Employees of public school systems who are involved in the day-to-day operations of a school.
• Employees of cooperative hospital service organizations.
• Civilian faculty and staff of the Uniformed Services University of the Health Sciences.
• Employees of public school systems organized by Indian tribal governments.
• Certain ministers (IRS)

Annual Contribution Limit

• $20,500 in regular contributions
• $6,500 in age 50 catch up
• For those with employer matches or other employer contributions, the limit is $61,000 or 100% of compensation (whichever is less). This limit rises to $67,500 if age 50 or over. The participant is still limited to the employee elective deferral limit ($20,500 for 2022). An employer can add up to another $40,500. (IRS)

Plan Assets

Overview: The not-for-profit (NFP)/governmental defined contribution (DC) segment represents approximately 8% of the total U.S. retirement market. This sector includes the Federal Thrift Savings Plan (TSP), 403(b), 457, and 401(a) markets. Total NFP/governmental DC plan assets are expected to grow at a compound annual growth rate (CAGR) of 7% to reach $2.4 trillion by 2020 (Cerulli Associates, 2016)

403(b) Plan Assets as of 2014 (higher education, public K-12, healthcare, private k-12, and “other.”). 

• Mutual Funds $260 billion (24%)
• Variable Annuities $351 billion (33%)
• Fixed Annuities $464 billion (43%)

(AON Hewitt Investment Consulting, Inc., 2016, p. 3)

Key K-12 403(b) Issues

• K-12 403(b) multi vendor environment leads to higher investment fees, and higher plan maintenance costs (AON Hewitt Investment Consulting, Inc., 2016)
• Lack of teacher knowlege about the 403(b)

California K-12 403(b) Issues

• 1970 insurance code (770.3) prevents K-12 districts from putting plan out to bid
• Annual fees for 403(b) products range from 0.56% to 4.58%
• The average cost of all 403(b) products is 1.78%
• More than 60% of products charge a surrender fee
• 70% of products include sales commissions

(Blair, 2018 and 403bcompare.com)

K-12 403(b) Recommendations

• Eliminate inidividual contracts
• Put plans out to bid. According to AON Hewitt (2016), "the benefits of consolidating 403(b) record keepers to a single or reduced number of providers include lower administrative costs, improved regulatory compliance, and a more effective plan governance structure. Effective plan governance and oversight have the potential over time to increase participant satisfaction and improve retirement readiness for participants."
• Educate teachers about the 403(b) before they enter the classroom
• Ensure that at least one quality, low-cost option is available. Companies known for offering quality investments at a reasonable cost include: Aspire, CalSTRS Pension 2 (California only), Fidelity Investments, MissionSquare (formerly ICMA-RC), TIAA, T. Rowe Price and Vanguard. 

Resources

403bcompare.com
IRC 403(b) Tax-Sheltered Annuity Plans
IRS Publication 571

Key Media Stories on the K-12 403(b) 

• An Annuity for the Teacher — and the Broker
• Answers to Questions About 403(b) Plans
• Even Math Teachers Are at a Loss to Understand Annuities
• How to Fix a Retirement Plan at a School or Nonprofit
• Think Your Retirement Plan Is Bad? Talk to a Teacher
• Teachers Are Getting Schooled on Retirement
   

 

 
Updated 6/23/20