Home > Education > Retirement & Estate Planning > Be Careful Which Investments You Put Into Your 403(b) Plan
Glasses on top of a 403b Plan

Be Careful Which Investments You Put Into Your 403(b) Plan

These types of plans often incur excessive fees.

Does a relative or friend of yours work at a school, college, hospital, charity or other nonprofit organization?

If so, they might end up with far less in savings than they expect — or deserve, victims of excessive fees in their workplace retirement plans.

This is because such organizations typically provide their employees with a 403(b) plan, the cousin to the 401(k) plan that’s available to employees of for-profit businesses.

Higher Fees and Required Investments

Today’s 403(b) plans collectively hold $879 billion in assets, according to Cerulli Associates. But they’re incurring $10 billion in excessive fees every year, says retirement consultant Aon Hewitt.

This happens because 403(b) plans typically require workers to invest in high-cost variable annuities. Those who leave work and seek to transfer their money to lower-cost investments often learn that they can’t easily do so because of hefty surrender fees.

Today’s 403(b) landscape is complex. The 403(b) plan offered to schoolteachers in California, for example, features 220 products offered by 59 companies. Across the nation, agents from Voya, AXA, Lincoln Financial and many others are allowed to wander school and hospital hallways and hang out in teacher and employee lounges, selling their products.

That situation doesn’t exist in the corporate world because 401(k) plans are covered by the Employee Retirement Income Security Act, legislation passed in 1974 that requires 401(k) plans to serve their employees’ best interests. But ERISA doesn’t cover most 403(b) plans, so schoolteachers and hospital and nonprofit workers don’t enjoy its protections.

To understand how the situation evolved, let’s start at the beginning.

The Origins of the 403(b) Plan

The 403(b) was added to the tax code in the 1950s; the 401(k) came along in the late 1970s. So, for many years, 403(b) plans were state-of-the-art. Unfortunately, they have been frozen in time, and thus now lag the rest of the retirement industry.

For sure, schoolteachers, doctors, nurses and nonprofit employees were initially excited about 403(b) plans because they offered an opportunity that private sector employees didn’t have. These employees could put part of their paychecks into retirement accounts administered by their employers and receive a tax deduction for it. The money would grow tax-deferred until the employees reached retirement age. And many of their employers even added money to their accounts — a free bonus!

Those 403(b) accounts were originally invested in insurance products, and that’s why, even today, many 403(b) plans still offer annuity products — sometimes exclusively. Some of the biggest insurance companies in the industry peddle their products through 403(b) plans.

Then 401(k) plans came along, offering mutual funds that are less expensive than insurance products. But 403(b) plans were prohibited from offering mutual funds until Congress amended the tax code to let them do so.

So here’s my message: If someone close to you is being offered a 403(b) at work, encourage him or her to carefully review all options to avoid these costly products.

And if these folks would like our help in deciding which option is best for their situation, invite them to contact us. We’re happy to assist.

Talk with a Financial Advisor

No Cost. No Obligation.

Single Step Form Articles

  • Hidden
  • Hidden
  • Hidden
  • Hidden

By clicking submit you are agreeing to our Terms of Use and Privacy Policy.

Schedule Your Free, No Obligation Consultation

You May Also Like:

  • Businessman studies coronoavirus resources on laptop
    Coronavirus Financial Resources
    Read More
  • man rebalancing portfolio with charts and graphs on desk
    Q&A: How Do You Rebalance Your Portfolio?
    Read More
  • Ric Edelman explains the surprising cost of long term care
    7 Mistakes to Avoid When Buying Life Insurance
    Read More