Thursday, February 02, 2017

403(b) Hack: Why You Might Want To Leave A Few Dollars In Your 403(b), Even If You're Retired And Don't Want It

When public school employees retire they should think twice before rolling their 403(b) money (or 457(b)) over to an IRA. I'm not talking about the hordes of insurance agents and brokers who are trying to sell you poorly structured products so they can take fancy trips, that's of course a good reason not to rollover, but there is another, potentially powerful reason why you should keep at least some money in a 403(b)/457(b) as long as you are retired.

When the financial crisis hit in 2008, interest rates were pretty high on mostly safe products, but that quickly changed as rates plummeted to nearly zero. Insurance companies who offered 3 and 4% guarantees were caught off guard and quickly shut down product lines and restricted new money. As the years went on, it became more difficult to find a product with a good rate and a high degree of safety. But there were still some products that didn't restrict new money and other companies that came out with new 403(b) products that had higher rates than similar IRA products, in some cases substantially higher. In other words, some 403(b) products offered higher rates than IRA products or had lower fees.

A client of mine had money in an IRA and we wanted to put some of it in a fixed account type product, but rates were terrible. The best we could find was 1.35%. I knew of a 403(b) with no surrender fees and a fixed account that was paying a net rate of 3.5% from a highly rated insurance company (yes, no commissions, no surrender fees, no surrender period), but my client was retired and if you're retired and you don't have an existing 403(b) you cannot open a new one. Then my client showed me an old policy that he had forgotten about. It was a 403(b) with a school district he had worked in years before (like 25 years earlier). It dawned on me, he was still a member of that school district's plan, the fact that he was retired had no bearing, he was still a participant because the vendor was still active and his policy meant he was part of the plan.

Since my client was a participant in the plan and that plan had the 403(b) option that paid the 3.5% rate, I opened a new 403(b) (remember, he is allowed to open it because he is still a participant in the plan due to him still holding that old 403(b)) and moved IRA money into it and started earning that higher rate.

My client earned in excess of 2% more than he could have gotten in an IRA because we didn't settle. We didn't require all his money be kept at one place for ease of accounting, it was a little more work on my part, but it was the right thing to do and made my client significantly more money. It's what a fiduciary does.

The moral here is that even if you find a great IRA to roll your money into, don't roll everything over. Leave some money in your 403(b) or your 457(b) just in case an option later comes along that can't be found anywhere else. Think of it almost as an insurance policy. Yes, it's a pain (another statement, another login an another RMD), but that pain just might pay off in the end like it did for my client.

Scott Dauenhauer, CFP, MPAS, AIF

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