Do You UnderstandYour 403(b) Options?
If you work for a public school system, you may be able to invest in a 403(b) plan to supplement your retirement. A 403(b) plan is similar to a 401(k) plan that is offered to corporate workers. The nation's 401(K) plans are regulated by the Employee Retirement Income Security Act (ERISA) of 1974. This federal law sets some minimum standard for the governance of the plan and allows employees to bring legal action against the plan sponsor. Most 403(b) plans are not regulated under ERISA.
A recent study by AON Hewitt showed that about 76% of the assets in the 403(b) market are held in fixed and variable annuities. Mutual funds make up the remainder of the assets. In comparison, less than 10% of 401(k) plans even offer an annuity option to their participants. Annuities tend to charge higher fees, and sometimes involve surrender charges if you decide to exit out of your plan.
Insurance providers are very typical among 403(b) plans, but many times, these are not the best choice. Insurance company plans can be up to three times more expensive and the choices may be very limited. The AON Hewitt study showed that the fees charged on variable annuities averaged 2.25%, fixed annuities averaged 1.15% and mutual funds average .97%. I recently worked with a client who is a teacher who was offered a Vanguard mutual fund in her 403(b) plan. The expense ratio on her fund was .73% higher than what it would have been in a traditional 401(k) plan. This results in a much lower return on investment over time. If you are offered a choice of investment providers in your 403(b) plan, it is important to compare the expense ratios on the fund choices. It can make a big difference in your expected returns.
Investing in a 403(b) plan is a good idea for people without access to a 401(k) account since the money grows on a tax deferred basis over time, but it is important to really compare your available options to make sure you are making the best choices.
About the Author
Patti Hughes is a Chicago Fee-Only Financial Planner. Lake Life Wealth Advisory Group provides comprehensive and objective financial planning, retirement planning, and investment management to help clients organize, grow and protect their assets through life’s transitions. She is a fiduciary, and does not sell products or earn commissions, so she truly acts in the best interests of her client