10 reasons to review your 403(b)

If you work for a 501(c)(3) nonprofit organization or a public school, college, or university, you may have had a 403(b) plan for years (they’ve been around since 1958). If so, don’t worry: The new regulations issued by the U.S. Treasury Department and the Internal Revenue Service in July 2007 have had plan administrators scrambling to get all their paperwork in order, but there’s a good chance that the important parts of your plan are continuing pretty much as before. Still, this is a good time to do a little checking and find out more about it. Why?

10 reasons to review your 403(b)
  1. Because you can
  2. To find out what legal protections apply
  3. To join the plan as soon as you’re eligible
  4. To know your investment options
  5. To make sure you’re maximizing your savings
  6. To be aware of your vesting schedule
  7. To decide to change your mind
  8. To be ready for an emergency
  9. So you’ll know your options when you leave
  10. To be sure of when you can withdraw your money

1. Because you can

One of the most significant new requirements is that every employer with a 403(b) now must have written documents explaining the provisions of the plan. For the most part, employers were expected to have these documents finalized by Jan. 1, 2009.

If you want to understand the basics, ask your plan administrator (most likely, that’s someone in your human resources department) for a copy of the summary plan description. According to the Department of Labor, the summary plan description is a “document provided by the plan administrator that includes a plain language description of important features of the plan, e.g., when employees begin to participate in the plan, how service and benefits are calculated, when benefits become vested, when payment is received and in what form, and how to file a claim for benefits.”

2. To find out what legal protections apply

In the past, one of the main differences between your plan and a plan with a for-profit company has been that 401(k) plans are nearly always subject to ERISA, or the Employee Retirement Income Security Act of 1974, while 403(b) plans usually were not. Under the new rules, more 403(b) plans are gaining ERISA protection. Although your plan may be doing fine without it, it’s good to know whether ERISA applies to you.

3. To join the plan as soon as you’re eligible

Even in this economy, when it sometimes seems that retirement savings are shrinking faster than you can add to them, it still makes sense to start saving as much as you can as early as you can, especially when you’re talking about tax-deferred savings.

If your employer offers a 403(b) plan at all, the “universal availability” rule requires that most employees are eligible to participate, at least through their own salary deferrals. Still, the employer may, at its discretion, exclude you if:

  • You are a nonresident alien.
  • You want to contribute less than $200 a year.
  • You participate in another employer-sponsored plan.
  • You normally work fewer than 20 hours per week.

Employers have a little more control over who can participate in the matching funds they may provide, although they generally have to include at least everyone who:

  • Is 21 years old or older.
  • Works 1,000 hours or more per year.

4. To know your investment options

ERISA requires a fiduciary duty of plan administrators. According to the Department of Labor, that duty includes acting prudently and diversifying the plan’s investments in order to minimize the risk of large losses. In practice, this means your plan must offer a variety of funds for you to choose from.

If you’re nervous about stock market volatility, you can choose a fund with a guaranteed rate of return. If you’re young or you like risk, or if you’re convinced we’re at the bottom of the cycle, you can buy into stock funds. Note, however, that this does not necessarily mean you will be offered a variety of investment companies. Your firm may have all its retirement funds at Vanguard, or TIAA-CREF, for example, but each of those institutions will make a variety of investment options available.

5. To make sure you’re maximizing your savings

For 2009, the maximum you can contribute to your 403(b) plan, or a 401(k) through elective deferrals from your paycheck is $16,500, plus an extra $5,500 per year if you’re 50 or older. The maximum total that can be contributed to your plan for 2009, from you and your employer combined, is $49,000.

(There is one additional catch-up provision just for 403(b)s that applies only to public school systems and certain health-related and religious organizations. If you have 15 years of service with one of those organizations, see IRS Publication 571 or ask your plan administrator for more information about the 15-year rule.)

6. To be aware of your vesting schedule

By law, you are always 100 percent vested in your own salary deferrals. And at many places, employer contributions vest immediately as well. When it comes to those, however, some discretion is allowed, so this is an important item to check in your plan document.

Under ERISA, there are two options for employers who want to use retirement contributions as an incentive to stay with the company. They can use three-year “cliff” vesting, which means you don’t own any of the money they contribute for you until you have completed three years of service. Or they can apply a six-year, gradual schedule under which you’re entitled to 20 percent of the employer contributions after two years, and an additional 20 percent each year for the next four years.

7. To decide to change your mind

You can always decide to stop contributing to your 403(b), but some employers limit the number of times you can change the amount.

8. To be ready for an emergency

Many 403(b) plans allow you to take out a loan. This way you can use your retirement savings for an emergency, or a major purchase, such as a home, without suffering the taxes and penalties that are triggered by a premature withdrawal. This is another area where plans vary, though. Either your employer or one or more of the mutual funds in which your money is invested may prohibit, or impose restrictions on, loans.

Some 403(b) plans allow you to access your money (with some penalties) in the case of “hardships,” which can include medical expenses, eviction or foreclosure on your primary residence, and a few other things. Employers have discretion over whether a plan allows for hardship withdrawals though, and they also have the authority to pass judgment on whether or not your particular hardship qualifies. If you have an idea in the back of your head that you might need this money someday to cover expenses, make sure you understand all these restrictions beforehand.

9. So you’ll know your options when you leave

Generally, if you leave a company before retirement age, you have several options regarding the money in your 403(b). You can often leave it where it is, roll it over into a new employer’s 403(b) or 401(k), or roll it into an IRA. Restrictions may exist with regard to any of those options, though, so it’s good to ask for specifics about how it works at your company.

10. To be sure of when you can withdraw your money

The IRS still gets to decide when you can take your money out of a retirement plan without incurring penalties, and the simplest answer is: when you turn 59½. But it doesn’t hurt to check your plan and see if it includes any more specifics.

More From Bankrate