What You Should Know About 403(b) Retirement Plans​

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.

How much difference do these fees make? Say you’re a 50-year-old teacher putting $250 a month into a 403(b) plan. Buy low-cost index funds, and 15 years later, assuming your investments had a 6 percent annual return, you would be able to draw $327 a month in retirement benefits. If instead you’d chosen an annuity with similar investments — and a typical fee of 3 percent a year — Otter’s organization reckons you’d be able to draw only $259 a month.

Lacking ERISA’s requirement that plan operators put workers first when choosing investment menus, most school system 403(b) plans have dozens of options but fewer good, inexpensive choices than most 401(k) plans. As much as 3 of every 4 dollars invested in a 403(b) plan is in an annuity product, according to Aon.

Making them work

Step one if you have a 403(b) at work is to check out the quality of your plan. The good news is that many plans have added better choices in recent years. Search for your employer on the 403bwise website, which lists grades for plans. (At 403bwise.org, click on Advocacy, then on School District Plan Rating Project in the left-hand column.) If your plan isn’t there, get its documents from your human resources department and dive in. Does the plan offer low-cost index funds and other low-cost funds? You’re likely to do better if you stick to those for your investments.

If your plan lacks good low-fee choices, you have some tough decisions to make. You might pull back from your plan and instead fund a traditional or Roth individual retirement account on your own. (As with a 401(k) plan, though, if your employer matches contributions, put enough into your 403(b) to get the full match; the benefit of that free money far outweighs any investment cost.) You might even find it is worth paying a surrender charge to pull your money out of a bad insurance product and move it to a better, lower-cost investment.

If you’re retiring or already retired, you can directly roll over your 403(b) assets into an IRA at a low-cost mutual fund provider or brokerage firm, such as Fidelity, Schwab or Vanguard.

Finally, you can also learn from your peers. There’s a private 403bwise Facebook group for school employees who are mad as hell and not going to take it anymore. Sign in there to strategize about your retirement savings.