The mutual fund industry has set its sales sights on the employees of nonprofit organizations. These employees, such as teachers, charity and hospital workers and employees of religious organizations, are eligible for a major deduction from their income taxes to save for their retirement. Thus the industry views them as one of the largest untapped markets for mutual funds left. Through what is terms a 403(b) plan, these individuals can deduct up to 20 percent of their annual income to put into a mutual fund or insurance company plan, thus sheltering the income from taxes.
Furthermore, according to Olivia Adler of the investment Company institute, the insurance industry has only reached 10 percent of the potential market, leaving a major percentage of the individuals available to invest in mutual funds.
According to Joseph Chadwick, vice-president of T. Rowe Price Associates, a no-load mutual fund located in Baltimore, MD., some 7.4 million individuals were eligible for 403(b) plans in 1977, or about 10 percent of the US workforce. Included in this figure are some 3.5 million teachers, 2.9 million hospital workers, 250,000 library employees, 750,000 people who work for churches, and 7, 000 archivists and museum employees.
Although there are no current figures available as to how much money has been invested in such plans since Congress allowed them to exist in 1974, Mr. Chadwick says that as of 1977, some $5.5 billion had been invested in them compared with $10 billion of Keogh accounts and $13 billion in IRA accounts. One of the main reasons for their lack of popularity, he states, is the general dearth of knowledge about such plans.
William Thompson, president of the No-Load Mutual Fund Association, says another reason individuals have not been busy signing up for such plans is because it can require a considerable amount of work, including having a school system set up a payroll deduction plan. And often the final decision on where a 403(b) plan is invested is in the hands of a school administrator who may not trust a mutual fund but feels safer with an insurance company.
Heidi Brine, manager of retail marketing for Fidelity Management & Research Company, a Boston-based mutual fund that offers a comprehensive 403(b) plan, says a lot of people are becoming disenchanted with the annuities offered by insurance companies because the rates of return are so low. Often an insurance company will guarantee a 4 to 8 percent rate of return when an individual could invest in a money market fund during a time of rising interest rates and receive as much as 20 percent on a tax-free basis.
By far the largest 403(b) plan is run by the Teachers Insurance & Annuity Association, located in New York. With assets of over $6 billion, the fund, called CREF, for College Retirement Equity Fund invests solely in the stock market.
Mutual-fund officials are particularly keen to attack investors to their funds because the sums of money involved can be higher than those invested under IRA or Keogh plans. "You are dealing with a different class of eligible people, " states Mr. Thompson, "such as professionals who are in higher tax brackets." These individuals, points out Mrs. Brine, can invest money from more than one job in their 403(b) plans as long as the income is from a nonprofit organization. Thus, a doctor could invest funds from both a hospital and from a teaching job.
The tax savings involved with a 403(b) plan can be considerable. According to a table put out by Fidelity, the tax benefits of investing in such plan are:
If Your Taxable A 15 percent 403(b) A 20 percent 403(b) Income Is contribution will contribution will reduce your taxes by reduce your taxes by
Without such a plan to shelter income, it would take $156.25 in earnings to be able to save $100. With such a plan, for every $100 earned, you can invest $ 100. And, as Mr. Thompson notes, "Since the return is tax free, until distribution, you can accumulate a large amount of money in a short period of time."