Attn School Employers: A Simple Change That Has Profound Affects
Reform in the 403(b) public K-12 market is long overdue and yet, it probably isn't coming anytime soon. But there is at least one thing that school employers could do right now that is relatively simple and which could help improve the retirement security of millions of public school employees. What's even better is that it's non-controversial.
Most school employers still have participants fill out their "salary reduction agreements" using a specific dollar amount for the deferral. Almost no 401(k) plans do this. Most 401(k) plans have participants contribute to their defined contribution plan using a percentage of salary. Public school employers should do the same.
I can't tell you why public K-12 still uses flat dollar amounts for contributions, I just know that they continue to do it and it's to the detriment of their employees.
Let me explain.
When a participant elects to contribute say $250 per pay period to their 403(b) the amount will never change unless that participant fills out another agreement. People being who they are, when faced with filling out paperwork or not filling out paperwork tend toward the latter. Ten years after starting contributions the amount going into the 403(b) account each pay period is still $250. But what about if the participant had instead contributed a percentage of salary?
I ran the numbers and if a participant's salary was $55,000 and it rose by 3% annually and that participant contributed the same dollar amount but expressed in a percentage form (5.5% in this case) the participant would be contributing over $1,000 more per year within just ten years. Mind you, the participant never had to adjust their payroll, they didn't have to do anything. A participant would have contributed 47% more after 25 years using the percentage method over the flat dollar method.
Imagine if we layered in auto-increases!
I'm willing to bet that even the NTSA would agree with me on this point.
School district personnel, if you're reading this, let's get this done!
Scott Dauenhauer, CFP, MPAS, AIF
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