Notre Dame’s 403(b) benefit is fantastic! For many, it will eventually represent the largest investment account in their household, so it’s important to understand the plan. In this quick post, we’ll cover some highlights of ND's plan.
I won’t get into all of the ins and outs of a 403(b) plan, but I’ll touch on the must-know information. 403(b) plans are workplace retirement plans that are generally established by not-for-profits. Employees make contributions either through payroll deferral as a percentage or by a dollar figure per paycheck, the percentage option being the most common.
Most employers will match either a percentage of the employee's contribution or will contribute a flat percentage of the employee's pay. Examples would be an employer matching 100% of an employee's contributions up to 4%. For the flat percentage, this could be something like 6-10% of the employee's pay. A 403(b) is a fantastic way to build long-term wealth, especially when an employer offers to supplement your contributions.
Notre Dame’s 403(b) Plan
In Notre Dame’s plan, you can elect to have your contributions occur as pre-tax or post-tax Roth contributions. Pre-tax reduces your gross income dollar for dollar in the year of contributions. You don't owe taxes until taking distributions. Roth contributions don’t benefit you in the year of contribution via any immediate tax benefit but they grow tax-deferred and can be accessed tax-free down the line. In my opinion, you shouldn’t use a rule of thumb to choose which option is best. There are many variables to consider, and a strong financial plan will uncover the best strategy for your family.
As with other 403(b) plans, Notre Dame offers an employer contribution benefit, and it is particularly generous. You are required to put in 5% of your annual salary as a pre-tax benefit (any additional voluntary contributions can be pre or post-tax) and then ND will contribute 10% of your annual salary on your behalf. You won't find too many employers offering that level of contribution. The Certified Financial Planner curriculum teaches that 10-12% of a savings ratio of your gross income is a great place to start in terms of investing for retirement. With ND supplementing your wealth-building, you can reach 15% while only contributing 5% of your salary! This is a huge opportunity to build substantial wealth rapidly.
Notre Dame offers just over a dozen unique investment options within its plan. However, if you’d like to keep things simple or don’t care to build a custom portfolio, they also have many target-date funds available. Target-date funds are well-diversified investments made of a mixture of funds that can take the guesswork out of building a portfolio. The idea is that you choose the fund that has a year attached to it that is the best guess for the year in which you'll retire. As that year gets nearer, the target-date fund will automatically shift underlying investments to a more conservative approach so that you aren’t overly aggressive as you get closer to your target date.
The last option is what is known as a Brokerage Link. This provides you access to a much broader range of investments for anyone that wishes to build a customized portfolio. This can be a good option for sophisticated investors or those working in conjunction with a professional to help build out a custom mix of assets. It is particularly useful to gain access to asset classes not readily available in the core investment lineup.
As is the case with most retirement plans, the core investments offered have some limitations. Plan investments can change periodically, so I believe it is important to meet with a professional to understand the limitations and what you can do to address those gaps within your household’s investment strategy.
Conclusion: Understanding Notre Dame’s 403(b) Plan
Anyone that has access to Notre Dame’s 403(b) plan should be grateful. There aren't many plans that offer a better opportunity to build wealth so quickly. It’s also important to remember that workplace retirement plans are just one piece to your overall retirement puzzle. Having a plan that marries 403(b) assets with future goals and other household assets is paramount. If you’d like to chat with an independent financial planner, on a complimentary basis, you can easily do so by using this link.
Written by: Nick Vail, CFP®