The standard workplace retirement plan, if you work for a commercial enterprise, is a 401(k) plan. If you’re a public-school teacher or work for a nonprofit charitable organization, it’s a 403(b). The names are similar, as are the plans. But they’re not the same — in ways that, if you have a 403(b), can be costly.
The disturbing truth is that the retirement plans offered to more than 8 million public-school employees and many more nonprofit workers typically fall short of their private-sector counterparts. They lack many of the basic protections that 401(k) plans have accumulated over the years. And they are stuffed with expensive investments that may be costing participants as much as $10 billion a year in excess fees, according to benefits consultant Aon.
“The K-12 403(b) is broken,” says Dan Otter, a former teacher who started 403bwise, an advocacy organization aimed at helping school employees deal with subpar plans.
To be clear, many 403(b) plans are excellent tools for retirement savings. People who work for nongovernment and nonreligious nonprofits usually have 403(b) plans that are protected by a key pension law known as ERISA, the Employee Retirement Income Security Act, which governs 401(k) plans as well. Some of ERISA’s protections: Operators have to be prudent about selecting investments and service providers for the plan. They also have to ensure that fees and expenses are reasonable and that investments are diversified.
Is your employer affiliated with a governmental body or a religious organization? Here’s what you need to know about your 403(b).
Annuities and their fees
Annuities are insurance products designed to provide people with lifetime income, and they can be a valuable part of a retirement plan. But the types found in educators’ 403(b)s often have high fees when compared with mutual funds, and high surrender charges that make it difficult to change your mind and get out after you’ve bought one.