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What Should I Do With My Old 403(b)? 5 Options to Consider

What Should I Do With My Old 403(b)? 5 Options to Consider

You may have recently changed jobs and are wondering, “What should I do with my retirement account that was established through my former employer’s retirement plan?”

If you work for a university, public school, or a 501(c)(3) tax-exempt organization (more commonly referred to as a charitable organization or nonprofit), you may have participated in a 403(b) plan. A 403(b) is similar to a 401(k) in many ways. It is a defined-contribution plan that offers an opportunity for an employee to save and invest for retirement in a tax-deferred manner. Some 403(b) plans offer a Roth feature, as well. Roth contributions are taxed in the year of the contribution with the promise of tax-free withdrawals (assuming the withdrawal is considered a qualified distribution).

Five Options For the 403(b) From Your Previous Employer

So let’s get to the reason why you’re probably here – options for the 403(b) from your previous employer. You have several options on what can be done with your old 403(b):

  1. Do nothing
  2. “Roll” the 403(b) into an IRA
  3. “Roll” the 403(b) into your new employer’s retirement plan
  4. Cash it out
  5. A hybrid of these options

1. Do nothing

You can keep the account where it’s at. It will continue to stay invested in the mutual funds or the annuity contract within the 403(b) plan. You won’t be actively contributing to the account anymore, but the account value will still fluctuate (and hopefully grow over the long haul). Balances in the tax-deferred bucket will continue to be tax-deferred and balances in the Roth bucket will continue to be treated as Roth funds. In some cases when the account balances are very low, the plan may force the former employee to take the funds out of the 403(b) plan. If that is the case, there usually is a way to roll the funds into an IRA (see bullet point 2 below) at the same custodian where the 403(b) is held.

2. “Roll” the 403(b) into an IRA

Tax-deferred balances can be rolled into a Traditional/Rollover IRA. If done correctly, there is no taxable event when rolling the funds from the 403(b) to the IRA. Be aware of an “indirect rollover” which is required to withhold 20% upon sending the 403(b) funds out of the account (also known as a 60-day rollover). This is where unwelcome tax surprises can occur. Similarly, Roth balances can be rolled into a Roth IRA. Again, if done correctly there is no taxable event when rolling the Roth funds from your old 403(b) to the Roth IRA.

3. “Roll” the 403(b) into your new employer’s retirement plan

The IRS allows you to roll your old 403(b) into your new employer’s plan, whether it be another 403(b) or another qualified plan like a 401(k). However, just because the IRS allows it doesn’t mean that your new employer’s plan allows it. In other words, when your new employer creates a retirement plan, they are not required to have the plan allow incoming rollover contributions. That said, many plans allow rollover contributions. Both tax-deferred and Roth funds can be rolled into your new employer’s plan and will continue their respective tax treatment (i.e. tax-deferred stays tax-deferred, Roth stays Roth).

4. Cash it out

Generally, this isn’t recommended! However, it is an option. Unless there is a severe need for cash we do not recommend this when it comes to your long-term retirement goals. Generally speaking, the funds distributed will be taxed and penalized. There are additional variables that come into play here (hardship withdrawals, age of the employee, tax-deferred vs. Roth funds, basis vs. earnings, etc.) but that is beyond the scope of this blog post.

5. A hybrid of these options

You can rollover some funds and also perform a Roth Conversion of some of the funds, if you’d like (a Roth Conversion will be a taxable event). A Roth Conversion can be part of a complex planning strategy; make sure you talk to your professional advisors when considering this approach. You could also rollover some of the funds and take some of the funds in cash (taking the cash will be a taxable event). Again, taking a cash distribution before retiring generally isn’t recommended.

Where to from here?

Some of the scenarios above are pretty straightforward; others are not! Things to consider before making any changes include investment options available, fees, plan design (in the case of a qualified retirement plan), and consolidation needs. Chat with your financial advisor and your tax professional to determine what makes the most sense for your retirement plan and your individual situation. Please reach out if we can be valuable to you when it comes to your financial planning needs.

Mitch DeWitt, Certified Financial Planner™, MBA

Our Opinion on the UW System 403(b) TSA Options

Our Opinion on the UW System 403(b) TSA Options

Our Opinion on the UW System 403(b) TSA Options

One of the decisions that UW System employees have is what provider(s) to choose in their 403(b) plan. Much like 401(k) plans, 403(b) plans offer the ability for employees to save for retirement by investing some of their compensation into the plan. The main difference between a more typical 401(k) and a 403(b) is that there is only one investment provider in a 401(k) plan, where in the 403(b) arena there are multiple investment providers that are offered. It is up to the employee to do the due diligence on these providers and self select their investment company or companies that they want to use. Financial advisors may also offer their preferred solutions inside the plan, but there may also be conflicts of interest that arise in these situations. If you choose to use an advisor, we strongly recommend that you use a fee-only financial advisor that will act in your best interests as a fiduciary.

Here we offer our opinion on current 403(b) providers inside of the UW System. Keep in mind that although we are providing our take on some of these options, every situation is different and this is not meant to replace individualized investment advice.

TIAA

The good:

TIAA has low-cost funds, offering the ability to utilize index funds. This technically is built on an annuity chassis, though the regular trappings of annuities (high fees and income rider complexity) are not present here. There is a good mix of index funds and actively managed funds. After putting resources into the website, the navigation is much improved.

Index funds offered by the company are fairly low cost as well. Their S&P 500 fund’s expense ratio is 0.05%. Their lifecycle funds are a bit more expensive since they generally use their actively managed funds. For example, their 2040 fund is 0.44%. Despite this higher expense the ratings from Morningstar, a fund ranking service, is still equal to or greater than the Fidelity 2040 index-based option below.

For financial advisors, TIAA is great to work with. They have the ability to grant limited power of attorney to allow advisors to trade accounts. The data feeds also work well in most portfolio management software, allowing us to track performance easily. As a result of these benefits, TIAA is our #1 choice for us in working with our clients.

The bad:

The TIAA “Traditional” account offers a high interest rate, but the small print is often underdisclosed in our opinion – in many accounts there is a mandate that only 10% of the account may be transferred out annually. This ten-year rule can pose significant hurdles when distributing assets.

Because of the annuity chassis that TIAA uses, it has a confusing bifurcation of investment options. Some of the older investment options have “CREF” at the beginning of the fund name. The CREF Equity Index is an index fund that focuses on large company stocks but carries a 0.22% expense ratio, which is on the high side. Most of the CREF funds, as a result, should be avoided, and frankly, TIAA should either significantly drop these expenses to match their other funds or merge them into existing funds.

While TIAA has the reputation for being a progressive, educator friendly company, its socially responsible (or “ESG”) fund offerings are very limited. Service center wait times can sometimes be a challenge.

Fidelity

The good:

Fidelity has a massive list of investment options. They offer index funds, sector funds, actively managed funds, and target-date funds. Cost on these vary, but generally, Fidelity is a good citizen here. The Fidelity 500 Index (their version of the S&P 500) has a minuscule 0.015% expense ratio. Diversified “target date” retirement funds that are prepackaged diversified solutions are also very reasonable for expenses, as the 2040 fund is at 0.12%.

For those investors that desire investment choice and to do it yourself, Fidelity offers a wide range of funds at a reasonable cost. For this reason, we would rank Fidelity as the #1 choice for investors that would like to self-direct their options.

Some advisors may have access to Fidelity, depending on where they custody their assets. This could give them the ability to trade client accounts.

The bad:

If you’re looking to really overwhelm yourself with investment options, here is a great place to do it. For all of those people out there clamoring for the ability to invest in a chemicals oriented portfolio, you have come to the right place.

Fidelity finally rolled out a sustainable equity and bond index for ESG investors, but the track record is short. We would like to see greater choice for investors that desire to be more socially conscious.

T. Rowe Price

The good:

A robust (but not totally overwhelming) list of investment options. T. Rowe Price is known for being an actively managed mutual fund company, meaning that their bread and butter is hiring managers that seek to outperform their benchmarks. Despite the difficulties of consistently outperforming index funds due to higher costs, T. Rowe Price has been solid. According to their website, “Over 75% of our mutual funds with a 10-year track record have outperformed their 10-year Lipper average as of 9/30/19”.

Their target-date series has a long track record with excellent success. Their 2040 fund is ranked five stars for every time period and its inception was 2002.

For investors who are all in on active management, this is a good choice.

The bad:

Their index funds are expensive. For example, their S&P 500 fund is 0.21%, which is our opinion is absurdly high. If you are like many investors and seek to blend actively managed funds with index funds, there are better choices out there.

The target-date funds are also expensive. For example, the 2040 fund is 0.70% annually.

There is little to no choice for socially conscious investors.

The website for the UW System participants leaves something to be desired. (No links to any investment options to do research??)

Ameriprise

The good:

These are based on annuity contracts that are signed with the participant. These contracts have fixed accounts attached to them, which pay a guaranteed interest rate. Older contracts may have higher guaranteed amounts, so investors will want to make themselves aware of what the rate is before transferring to another investment provider or rolling the funds out.

Ameriprise will have financial representatives attached to most contracts. They will have knowledge of their investment choices and may be able to assist in the selection of asset allocation. Investment choices include multiple fund managers across a variety of asset classes and are broad.

The bad:

The current contract, Riversource Retirement Group Annuity II, has a 0.95% M&E expense on the contract. This means that there is an annual fee on the contract to cover “mortality and expense”, which covers commissions for the advisor and a fee for Ameriprise.

Additional expenses also apply to the funds selected. Here’s the rub – finding the expenses is really difficult. In the current prospectus (if you’re looking for an easy website area to find it, think again) they list the expenses on the funds from 0.41% – 2.76%. In an older prospectus, we were able to more conveniently locate an expense table on page 7. There are very few index funds in the lineup, and in looking at the old prospectus and comparing it to the new one, we believe an S&P 500 index fund is 0.41%. That is significantly higher than the mutual fund companies and TIAA.

The “financial advisor” on these plans have significant incentives to recommend their products rather than other companies inside the plan. Furthermore, they are not true fiduciaries because they receive commissions.

Lincoln

The good:

Like Ameriprise, Lincoln is contract-based, meaning that each participant signs up in a variable annuity and is subject to those provisions. For old contracts, the fixed account rate may be fairly high relative to other fixed and bond options.

You also get assigned a Lincoln representative to assist you in selecting funds, which contain multiple fund managers and a variety of choices.

The bad:

Good luck finding information on the plan. There is no UW 403(b) specific page, nor is it apparent what the current contract is.  In doing some digging we found a list of investment providers and it appears that the Lincoln Multi-Fund Select is the current contract. In viewing what we think is the current prospectus, the fund fees range from 0.49%-1.77%. Assuming that the S&P 500 fund is likely the 0.49% expense ratio, this places the Lincoln offering as the most expensive.

We will say the same caveat on the representative of the plan that they have incentives to select their own contract and you are not getting fiduciary advice.

Our note:

Part of our role as financial advisors that are fiduciaries is to help our clients navigate through the options and select what is right for them. We have an experienced team of advisors that is here to help you. Click here to schedule a no-cost, no-obligation meeting to see if we are a mutual fit for your financial situation.

Disclosure:

The expense ratios are subject to change and we are relying on the information on outside sites, which may or may not have completely correct information. You should consult a financial professional and perform your own due diligence on these providers before you make any changes to your own investments. We are not affiliated with the UW System or any of the 403(b) providers.