Why It Pays to Know Your 403(b) Options Part 2

Vincent Scarsella

Are you in full control of your retirement?

If you are reading this and are a teacher, you know that for a long time, state-run pensions have provided a significant portion of your retirement income. Compared to other states, New York has one of the better-funded plans. However, to be fully in control of your retirement, it is beneficial to have additional sources of retirement income. The most common option for teachers to save for retirement is through a 403(b). If you already have one, you are well on your way to retirement freedom in the future. Or are you? 403(b) plans are great as long as you understand all your options and avoid additional fees and unnecessary charges.

The crucial step in starting a 403(b)

Odds are, when you picked a provider to start your 403(b), you either asked a friend which one you should go to or chose a name you thought seemed friendly or have heard of before. The next step is perhaps the most crucial. When you came in to meet with a financial advisor to open your 403(b), hopefully the advisor explained all of the fees associated with the account and what you are investing in. Some advisors may pitch insurance based solutions such as annuities. Although annuities can be the right product for certain situations, they might not work for everyone.

Know your fees

Depending on your 403(b) plan, you may have different investment options. The most common options are mutual funds, variable annuities and fixed annuities. Mutual fund fees are usually cheaper than an annuity but can vary in cost based on share class and type of investment strategy (active vs passive). Typically, one of the biggest advantages of annuities is that they offer tax deferred growth. This is a key benefit if you are working with after tax money. The problem is that 403(b)’s are already tax deferred thus using an annuity to gain tax deferral is redundant. Secondly, variable annuities can be very expensive, as much as $2.30 per year for every $100 invested in one annuity option. This may not seem like a lot, but over the long run these fees will eat into your returns which can make it harder to reach your goals. Lastly, both fixed and variable annuities typically carry surrender charges that can be as long as 7-10 years. What this means is if you do want to move your money to another financial institution, you may be faced with a choice of paying significant charges or having to leave your money where it is.

Annuities & surrender charges

As mentioned above, certain situations require the need for an annuity. We see very few of those type of situations but when we do it’s important to have the understanding of what costs are involved as well as the timetable needed to hold the investments to eliminate any penalties. We feel the best way to maximize your retirement savings is to utilize mutual funds. Using mutual funds instead of annuities will reduce the expenses on the account by at least 25%. The less fees you pay the more your account grows. Lastly, you can rest assured that your financial advisor has a fiduciary responsibility to you and will always go over all of the fees associated with the account. There are no surrender charges, as we believe you should have the freedom to switch if you do decide Sgroi is not the right fit for you.
For more information on what Sgroi Financial offers to teachers, check out our teacher page: www.sgroifinancial.com/teacher-benefits


Sgroi Financial is a full service, independent financial planning firm proudly serving the Western New York area since 1971. We offer services that will help you achieve your financial goals including retirement planning, investment management, estate planning, college planning and insurance. We help individuals, families, retirees, working adults, young adults and business owners.

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