Aside from the Teacher Retirement System pension fund, how can educators save for retirement?
Investing in a 403(b) plan can supplement the benefits an educator accrues from the Teacher Retirement System of Texas pension fund. The most popular option 403(b) is a tax deferred retirement plan available for certain employees of public schools and employees of certain tax-exempt organizations.
What is a 403(b) plan?
The 403(b) is a tax-deferred retirement plan like a 401(k), only for educators, non-profit employees, and certain ministers. It is a defined contribution plan, which means the participant makes contributions and investment decisions. The TRS pension is a defined benefit plan: the eventual benefit is based on a member’s salary and years of service, not how much the participant has contributed.
In a 403(b) plan, employees set aside money for retirement on a pre-tax basis through a salary reduction agreement with their employer. Contributions and earnings on investments grow tax deferred until the time of retirement, when withdrawals are taxed as ordinary income.
For a complete explanation of 403(b) plans and regulations, please visit the Frequently Asked Questions section of the 403(b)Wise web site.
What are the investment choices?
403(b) money can be invested in a fixed annuity, a variable annuity, or a mutual fund – or any combination of the three.
How do you invest in a 403(b) in Texas?
You invest through your employer. 403(b) investment options in Texas are registered with the Teacher Retirement System of Texas. For more information, visit the TRS' 403(b) site.
According to the TRS, a school district or open enrollment charter school may enter into a 403(b) plan salary reduction agreement with its employee only if the 403(b) investment product is offered by a company that is certified to the TRS Board of Trustees. The exception is if a contract between an employee and a company was entered into before June 1, 2002.
What does registration mean?
Registration only means that an investment or insurance company has paid a fee to the Teacher Retirement System and agreed to cap fees and other charges at certain levels. It should not be construed as the state’s endorsement of the product as one that will help you meet your investment goals. Some investments on the TRS list impose high fees and other charges.
Why are annuities so prevalent on the list of certified products?
The presence of so many annuity products on the TRS list is rooted in the history of 403(b) plans. When Congress created the 403(b) program in 1958, the only products allowed were annuities sold by insurance companies. In 1974 Congress allowed mutual funds to be sold to 403(b) participants, but the perception has remained that the program is designed for annuities. That is not true – even though they are relatively small in number, there are mutual funds on the list, including some low-cost index funds.
For more information, see Why Annuities Rarely Make Sense in a 403(b) from 403(b)wise. A detailed analysis of annuities generally is available from the Texas Department of Insurance's Understanding Annuities.
Does a public school employee have to use a 403(b) to supplement his or her pension savings?
No. You can establish an IRA, or Roth IRA, on your own with a brokerage. Individual retirement accounts, however, have lower contribution limits than 403(b) plans. Internal Revenue Service information about 403(b) plans, including contribution limits and other questions, is available on the IRS' 403(b) page.