Primer: How private retirement plans are different than state pensions

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Most Orleans Parish charter schools favor 403(b) retirement plans over the state’s public pension plan.

Here’s the difference between the two.

Like a 401(k), a 403(b) is a private, defined-contribution plan. An employee contributes pre-tax income and chooses how to invest the money. What she gets back depends on how well those investments perform. An employer may match a percentage of your investment, or it may leave it all to the employee.

There’s a finite amount of money in each investment account, and when it’s gone, it’s gone.

A state pension plan, on the other hand, is a defined-benefit plan. The employee puts a certain amount into the system, as does the employer. The pension system guarantees that retirees will receive a monthly check, based on their years of service, as long as they live. Even if the pension system miscalculates how much money it will need to write those checks, or if its investments underperform, it’s still on the hook for what it promised.

In Louisiana, teachers who transfer investments from the state plan to a 403(b) are only permitted to move their own contributions, not their employer’s contributions or any investment gains. That  means it’s usually not in a teacher’s best interest to pull out, according to local financial planner Jude Boudreaux.

“The payouts are reduced so substantially that it’s not worth it,” he said.

Teachers can also elect to keep their contributions in, and be considered inactive members.

Teachers contribute 8 percent of pay to the state system, and schools pay in 24.5 percent of their TRSL-eligible payroll.

This story is part of our report about New Orleans charter schools dropping out of the state pension system.

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