Nota Bene: This is a post that I wrote for Dan Otter at 403bwise.com back in 2013. Dan has led the charge in the area of 403b / 457 reform at the K-12 level. His site is a must for all teachers; check out our podcast interview below. Other 403b reformers meriting a visit are: Scott Dauenhauer and Steve Schullo.
How I Escaped My 403b by Quitting My Job
Greetings to all 403bwise readers. Let me start by expressing my gratitude to Dan Otter and the other 403b reformers who frequent this site. Because of your invaluable 403b and 457 information, you guys have certainly saved me a lot of heartache and money over the years. From reading your articles I learned how high fees and surrender charges made 403b plans a “heads-I-lose-tails-you-win” proposition for most investors.
In 2002 I jumped into the 403b reform movement when I successfully petitioned my employer, Troup County School System, to add Tiaa-Cref to its 403b provider list. Later in 2006, I also lead a successful push to get Vanguard added to that list. Knowing that I helped to bring two cost-effective 403b plans to the school district made me feel great. Of course, my wife and I also benefited by having access to these cost-effective plans. Since 2003 we have saved over $300,000 in our 403b plans and over $230,000 in our 457 plans.
In 2008 I was asked to be on a committee to prepare for the upcoming IRS 403b regulations taking effect in 2010. Since the district’s CFO was a helpful and likable guy, I did not hesitate to participate. After a few meetings, it became clear that the district needed to restrict its 403b offerings in order to be in compliance with the new regulations. Instead of a “Wild West,” free-for-all 403b provider list, we were going have a district plan approved by the committee. Eventually the committee (with the help of a retirement plan consultant) decided to offer a 403b plan administered by Valic using a mutual fund platform.
Overall, the new plan was better than most of the previous 403b offerings. There were no surrender charges and lower fees due to the use of mutual funds instead of annuities. However, I believed that the plan was a step down for individuals using either Tiaa-Cref or Vanguard due to its relatively higher fees. For example, the new plan had an annual consultant’s fee of .20% on assets; this fee alone was already more than my Vanguard Target Retirement fund of .18%. My work on the 403b reform committee left me with mixed feelings. I was pleased that we had replaced the high-cost annuity plans on the provider list with one decent 403b plan. There were also things that I did not like: MY increased fees, the loss of Vanguard and Tiaa-Cref, and the lack of lifecycle retirement funds. In the end, my experience on the 403b committee made me realize that I would never be satisfied with 99% of 403b plans.
Instead, I, and I alone, would have to take charge of my 403b and 457 accounts. In May of 2009, I decided to use the only option available to me…I decided to quit my job. Now, I realize that “quitting” is a dirty word in America since we all know that “quitting is for losers.” However, I realized that I needed to quit my job because, according to 403b regulations, “severance from employment” is a triggering event. In other words, by quitting I was free to move my 403b money to a rollover IRA at Vanguard. After talking with my wife, we decided to quit our jobs and take new ones in Echols County, Georgia. While we hated leaving our school of seven years, we both were ready for a change of scenery and the chance to liberate our money.
Quitting our jobs provided us with two main benefits. First, it allowed us to transfer our 403b money to rollover IRAs at Vanguard. These rollovers were completed by simply filling out the necessary paperwork. Second, by quitting our jobs we were able to begin taking withdrawals from our 457 accounts without any tax penalties*. In September of 2009 our 457 balances were over $90,000, so we decided to use the funds for living expenses as needed. For three years, we used our 457 accounts to cover living expenses while we used our salaries to fully fund every retirement account available to us. In three short years, we saved $250,000 in our 403b, 457, IRA and district pension plans. Had we not quit our previous jobs, we would have never been able to save so aggressively…quitting sure paid off!
In May of 2012, my wife and I decided to quit our jobs again in order to move OUR money. This time quitting was not as easy because our jobs in Echols County were really great jobs. Nevertheless, we found ourselves with $220,000 parked in fixed accounts within a variable annuity platform, so we agreed that it was time to move our money to Vanguard. Once again we left our jobs, completed the proper paperwork, and rolled our 403b balances to Vanguard. We did not move our 457 balances, and we currently use the funds today to cover our living expenses.
As a teacher, coach, and former D-1 basketball player, I initially found it difficult to embrace quitting. Because quitting is usually associated with losing in our culture, it is highly discouraged. However, when faced with a fee-bloated 403b plan, quitting your job can be a rational choice. In our case, quitting our jobs enabled us to take control of our retirement money, retire early, and increase our overall happiness. If you think you might be able to “win by quitting,” I suggest you try it. Quitting, it’s not just for losers anymore!
403b & 457 Lessons Learned Over the Years
- Because of their high fees, most 403b and 457 plans are best used for saving money, not investing. When we are in the savings phase of a job, we invest our money in fixed accounts where it usually earns around 2%. All of our 403b money is eventually sent to our Vanguard rollover IRAs where it can be invested in a cost-effective manner (.05% to 20%)**. I realize that 2% fixed account investing loses to 3% inflation, but I refuse to subject my money to stock market uncertainty coupled with annuity fee certainty. Our 457 accounts are basically used as a savings and emergency account; 457 withdrawals are taken only after leaving a job.
- All financial advisors are “great guys” who would make great drinking buddies and workout partners. They’re knowledgeable, personable and polished. I have NEVER met one of them that I did not like. BUT, never forget the following: they represent their companies first and foremost, they are not subject to a fiduciary standard but rather a suitability standard, and they almost never mention their products’ fees and expenses. Caveat investor!
- If your 403b options are substandard, do not despair. As long as you have a 403b option that has neither sales loads nor surrender charges, you can use the plan by investing in a fixed account. Later, when you separate service from your employer, you can roll your funds to a more cost-effective retirement option***. Just remember that at some point you will actually have to quit your job to move your money. As they say, “when life gives you lemons, make lemonade.”
* However, 457 withdrawals are taxable as regular income.
** For example, Vanguard Admiral shares have expense ratios as low as .05% while their Target Retirement funds charge from .16% to .18%.
*** My cost-effective option of choice is a Vanguard rollover IRA. I do not work for Vanguard; I simply prefer their index funds and target retirement funds offered at rock-bottom prices. If you can find a financial institution that offers solid mutual funds with lower fees, go for it!
Ed Mills is a selfishly-employed teacher who blogs infrequently at www.millionaireeducator.com.
|Health Savings Account: We use Elements Financial to access commission-free, low-cost Vanguard ETFs at TD Ameritrade.