ABCs of 403(b)s

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A 403(b) plan is a voluntary defined contribution retirement plan for employees of public schools, employees of eligible tax-exempt organizations and some ministers. It’s similar to a 401(k) plan in the private sector.

Participating in a 403(b) plan gives you a valuable opportunity to supplement your CalSTRS or CalPERS defined benefit plan, or pension. With your defined benefit plan, you and your employer contribute a specified amount from your paycheck to the plan.

CalSTRS 2016-2017


  • 2% at 60 – 10.25%*
  • 2% at 62 – 9.205%**

Employer – 12.58% (14.42% for 2017-2018)
State – 8.828%

*CalSTRS 2% at 60: hired on or before Dec 31, 2012
**CalSTRS 2% at 62: hired on or after Jan 1, 2013

The plan makes the investment decisions and assumes the investment risk, and your retirement benefit is based on a formula that takes into account your age, years of service and compensation.

Your defined benefit plan gives you the peace of mind of a regular monthly payment, a guaranteed pension benefit, as long as you are “vested” (eligible for retirement benefits, generally with a minimum of five years of service). However, according to CalSTRS, the average pension benefit replaces 50% to 56% of a member's pre-retirement income, an amount unlikely to be enough to support a comfortable retirement.


You Control a 403(b)

A defined contribution plan such as a 403(b) plan gives you the opportunity to supplement your defined benefit plan with your own savings. (Some employers offer a matching contribution or may contribute to your plan, but that is unlikely for California educators at this time.)

With a 403(b), you (the participant) make contributions to the plan, up to allowable limits, on a pre-tax basis from your paycheck. You choose the investments from among the options offered by your plan, and you assume the investment risk. The amount you accumulate for retirement will depend on the amount you contribute, how long you participate in the plan and the performance of the investment choices you make.

If you leave your job, you can roll over your balance to another employer-sponsored retirement plan, such as another district's 403(b) (as long as it accepts rollovers) or roll it into an individual retirement account (IRA).

A Brief History

403(b) plans had their beginnings more than 60 years ago with a law that permitted tax-sheltered annuities (TSAs) for the employees of certain tax-exempt organizations. In 1958, the modern 403(b) plan was born with the addition of Section 403(b) to the Tax Code.

In 1974, the Employee Retirement Income Security Act (ERISA) first allowed 403(b) assets to be invested not only in TSAs through insurance companies, but also in custodial accounts that hold mutual funds under Section 403(b)(7). These mutual funds can be purchased through a broker/dealer and it is not required to go through an insurance company, as with an annuity.

New legislation effective Jan. 1, 2009, may strengthen 403(b) plans by requiring 403(b) sponsors (school districts and other tax-exempt organizations) to have a written plan called a "Plan Document", which must describe all important terms and conditions for eligibility, benefits, limitations, optional features and distributions, and must establish clear guidelines for managing the plan.

The rules also require additional reporting from 403(b) vendors. As a consequence, you may find that some vendors your district had previously approved may be dropped, and some new vendors may be added. Visit for a list of approved vendors and/or check with your district.

Investment Choices – Old Habits Die Hard

With a 403(b), you can choose from an individual account with an annuity contract provided through an insurance company or a custodial account invested directly in mutual funds. Within the annuity category, you may have a choice of fixed annuities, variable annuities and equity-indexed annuities.

Despite the availability of mutual fund investment options, in 2004 – 30 years after ERISA opened the way for investment in mutual funds – more than 80% of all 403(b) money remains in annuity investments (see chart).* This is due in large part to the strong foothold that 403(b) vendors selling annuities established with school districts across the country before mutual fund investments were permitted.

Investments in annuities may be appropriate for some people, especially those who have maxed out their tax-deferred investment options in employer-sponsored plans and IRAs. But many 403(b) plan participants – those who don’t need all of the features offered by annuities – may pay less in fees by investing directly in mutual funds (see “How Fees Affect Your Returns”).

Your Future Is in Your Hands

It’s likely that another reason for the preponderance of 403(b) money in annuities is that plan participants don’t fully understand the options available to them.

You have the power to change that, by learning more about investing and the investment options available in your plan. That’s one reason CTA has provided this Web site – to give you the tools to make informed decisions that affect your financial future.

In addition, offers information about 403(b) vendors, the approved list of vendors for your district and the products they offer. These tools can help you make the most of your 403(b) plan.

* Source:

Investment of 403(b) Assets (2009)

48% fixed annuities

32% variable annuities

20% mutual funds held in custodial accounts