What You Should Know About 403(b) Retirement Plans

Understanding your options — and their fees — can help you save in the long run

cartoon of a cee minus grade on a nest egg

Chris Gash

Linda Stern,

AARP

En español

Published April 21, 2022

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.

Annuities and their fees

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.