Rethinking 403(b) Retirement Plans: Differences From 401(k)s and the Impact on Educators

When planning for retirement, many educators and non-profit employees contribute to 403(b) retirement plans offered by their school districts or organizations. However, a case involving high school science teacher Robert Curtiss highlighted significant differences between 403(b) and 401(k) plans. Curtiss discovered the cost of his 403(b) plan's investments was substantially higher than typical 401(k) plans after the company handling his investments was penalized for misleading investors about fees. The expense-ridden variable annuities he invested in also carried steep surrender charges.

Understanding the Differences

It's a common misconception that 403(b) and 401(k) plans are virtually identical. Unlike 401(k)s—which are usually offered by for-profit entities and subject to strict fiduciary standards—403(b)s are sponsored by schools and other non-profit organizations and often lack similar protections. This can result in plans being filled with high-cost investment options, like variable annuities and expensive mutual funds. A report concerning these costs found that long-term accumulations could diminish significantly due to higher fees.

Seeking Lower-Cost Alternatives

There are tools available to help investors like Curtiss identify lower-cost investment options within available 403(b) plans. Some resources rate vendors on a simple color-coded system and provide guidelines on how to switch funds to more affordable choices.

Actions When Options Are Limited

If a 403(b) plan only offers high-cost investments, employees might look towards other savings vehicles such as Roth IRAs or 457 plans, which could offer more favorable terms. Moreover, it is possible for employees to advocate for better investment options within their existing plans, as exemplified by Curtiss' efforts.

Despite successfully introducing better choices to his school district's 403(b) plan, Curtiss faced substantial surrender charges to move his savings. The financial hit, while significant, seemed a better choice to him than continuing to incur excessive fees.

The fine paid out to affected investors by the investment company was minuscule compared to the losses faced by investors, highlighting the broader issue of transparency and cost in certain retirement plans. Ultimately, these revelations underscore the importance of diligently reviewing, understanding, and sometimes challenging the retirement plan options available to educators and non-profit employees to ensure their financial future is secure.

retirement, investment, education