Below is a compilation of frequently asked questions regarding retirement plans, annuities, fees, and taxes.


403(b) Plan Details

What is a 403(b) plan?

Most retirement plans correspond to an IRS code section. The 400 section deals with retirement plans. For example, section 403(b) defines plans for the use of public schools and not-for-profit educational, research, or charitable groups organized under section 501(c)(3). A 457 plan refers to a deferred compensation plan available to public service employees including teachers, a 408 is an IRA, and a 401(k) plan is for for-profit businesses.


How does a 403(b) differ from a 401(k)?

As mentioned above, code sections define the plan available to each employer. A 401(k) plan is a form of profit sharing plan designed for for-profit corporations. The rules are similar, but not the same. For example, in the case of public school plans you rarely see a matching employer contribution because districts already have a pension plan in the form of PERS or STRS to which they must contribute on behalf of employees.

What is my maximum contribution for 2019?

For 2019, the regular limit is $19,000. For those over 50 years of age, an additional $6000 can be sheltered for a total of $25,000.


Is there such a thing as a Roth 403(b)?

Definitely, but this feature is an “opt-in” for the basic plan document completed by the employer and TPA. Very few public schools have opted for this feature — perhaps because of additional fees or in the belief that employees aren’t interested. If this is a feature you want, speak up!


Role Players Involved – Who does what?

What is 403(b) Compare?

403(b) Compare is a website, sponsored by CalSTRS. It is an excellent resource for public school teachers in determining what program choices are available in their district, how to get started with forms, and how to contact the local TPA. It is by no means always accurate or definitive, but represents a great starting point. It also makes no value judgments as to the quality, efficiency, or fee structure of a given program.

Why are there so many choices available?

Historically, if a teacher wanted to send money to a company, as long as that company would hold the employer harmless in the event of a problem, then the district would often simply add that company to a long list. Now that districts are being held to a greater fiduciary standard a certain amount of due diligence is being performed. It’s not perfect, but hopefully it will improve with time as districts come to understand their responsibilities go beyond billing and collecting payroll deductions.

Why did my plan change in the last few years?

The Department of Labor (DOL) decided some years ago that unlike 401(k) plans, there was really no one “minding the store” in public school plans. For the most part, school districts were simply disinterested “check writers” remitting payroll deductions to as many as 100 or more different TSA companies. They implemented significant regulations to “police” this perceived lack of oversight.

What's a fiduciary?

The basic definition is someone who stands in a special relationship of trust, confidence, and/or legal responsibility.

What is a TPA and what do they do?

In response to the above concerns, and of course to stay in compliance with the new rules, school districts hired TPAs, third party administrators, — to file annual forms, monitor plan offerings, and to develop and administer the plan. In some cases this has worked well, but in far too many it has resulted in significant erosion of investment alternatives and individual client service.

Annuity facts

Why do they call them tax sheltered annuities?

This term goes back to the early ’60s when the only types of funding vehicles permitted were life insurance annuity policies. A complete breakdown of the rules can be found in IRS publication 571.

What does it mean to annuitize?

Simply, annuitizing means that you have sold your accumulation in exchange for a monthly income, for a specified period. That period could be as short as 13 months or as a long as a lifetime. The key is that you’ve given up control of your funds for the guarantee of an income stream. Be sure you carefully consider all your options, before deciding how to start receiving your accumulated savings. Annuitization is NOT the same thing as making partial cash withdrawals at a time and amount of your choosing.

What is a two tier annuity?

A classic two tier account provides a different benefit amount depending on how the money will be used; quite often the cash surrender value entails a sizable surrender charge. A wise consumer needs to understand the difference between their cash surrender value and their accumulation value. If the accumulation has to be paid out in a series of monthly payments, it’s critical that the annuity factors be thoroughly understood, ideally before investing one’s money. There is a significant difference between a two tier annuity and one offering a lifetime income option with no requirement to annuitize.

What is the difference between an annuity separate account and a mutual fund account?

The simplest difference is that a separate account is quite often nothing more than a mutual fund run by an insurance company inside an annuity framework. Because there may be multiple versions of this account based on product features and insurance company variations, it is quite often the case that specific details regarding pricing, fees, and other details are simply not as transparent as those of a mutual fund. Often, it will have the same managers but an altogether different fee structure.

Fees and associated costs to be considered

How does my financial professional get paid?

They could be paid as a broker, in the form of a commission, which means the investment itself carries a sales charge, 12b-1 fee, or some other kind of internal compensation. Or, they could be paid as an investment advisor, in which case the fee should be disclosed and agreed to ahead of time and deducted from the account value on a regular basis. In either circumstance, a certain amount of clarity is desirable. There should be some understanding of what they do and how they’re paid.



What is a no load fund?

“No load” simply means a mutual fund that is sold without a commission or a sales charge to the planner or broker, which is not the same as no management fees at all. Every fund has fees of one kind or another. It’s important to weigh those fees and a host of other factors when making investment decisions.



Why are fees and load charges important?

Think of fees and loads as weight – the more fees an investment carries, the slower the investment can run. Some fees are critical; for example, even the skinniest index fund or ETF has management expenses, administrative, and trading fees.



What does bundled and unbundled mean?

This is more of a plan administrator question. Bundled simply means all the fees and expenses are carried within the product. Unbundled is a little like ordering a la carte at a restaurant – it’s more transparent, but not necessarily cheaper.



Tax Considerations

How are my taxes affected?

Contributions to 403(b) accounts are most often done on a pre-tax basis. Because the funds are deducted at a payroll level, tax withholdings are calculated based on the net figure, resulting in an immediate tax benefit.



How will my withholding allowances change if I start a 403(b) contribution?

The short answer is that if your taxes were squared away before contributing to a TSA, they’ll still be squared away afterward. If you had a refund or amount due before the TSA, all things being equal, it will happen again. Bear in mind that the TSA is not so much deductible as “not-includible”. The deduction happens at the employer level, net of most employer deductions, but before state and federal withholding taxes. Because the reduction and tax withholding is always proportional, contribution levels are not the place to fiddle with tax withholding issues.



Investors should carefully consider the investment objectives, risks, fees and expenses before investing. For this and other important information please obtain the investment company fund prospectus and disclosure documents from your Rep/Advisor. Read this information carefully before investing. The investment return and principal value will fluctuate so that an investor’s shares, when sold, may be worth more or less than their original cost.

Copyright © 2023
Todd L Freeman