Investing for Retirement: Why You Might Want to Reconsider That 403(b)

Liz Weston, CFP®
By Liz Weston, CFP® 
Edited by Courtney Neidel

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Like many other educators, high school science teacher Robert Curtiss of Dearborn, Michigan, thought he was doing the right thing by investing in his school district’s 403(b) retirement plan. Then federal regulators charged the company handling Curtiss’ investments with fraud.

In July 2022, the Securities and Exchange Commission said Equitable Financial Life Insurance Co. had misled investors — mostly public school employees — about what their investments cost. Equitable often issued quarterly statements showing $0 in fees, when in reality the expenses were much higher, according to the SEC. Equitable agreed to pay a $50 million civil penalty to harmed investors.

After hearing about the fine, Curtiss learned that his retirement investments were costing him two to three times what a typical 401(k) investor would pay. Getting his money out would cost even more: the investments, known as variable annuities, had surrender charges of 5% to 6%.

“I felt so frustrated,” Curtiss says. “If I would have known sooner, I would have never put my money there in the first place.”

Not all retirement plans are created equal

Like 401(k)s, 403(b)s are employer-provided retirement plans that allow workers to make pretax contributions through payroll deduction. But 401(k)s are typically offered by private sector employers, while 403(b)s are sponsored by schools, universities, religious organizations and certain other charities. The type of 403(b) available to public school employees often has fewer consumer protections than private sector 401(k)s, says Dan Otter, a former schoolteacher and co-founder of 403bwise, a nonprofit education and advocacy site.

Employers providing 401(k)s are held to a fiduciary standard, which means they must act in their employees’ best interests. As a result, 401(k)s typically offer a diversified mix of investments at reasonable cost. Employers typically choose a single investment company, known as a custodian, to manage the plan and keep records.

Fiduciary rules typically don’t apply to public school 403(b) plans, Otter says. School districts may contract with dozens of companies to offer retirement investments while refusing to provide employees with any guidance or advice, he says. That’s when insurance companies peddling expensive investments, including variable annuities and high-cost mutual funds, step in.

“Guess who is emailing teachers? Guess who is going to the school districts and offering free lunch? It's the high-cost companies doing this,” Otter explains.

And costs make a huge difference in how much an investor is able to accumulate. For example, someone who contributes $500 a month and pays 1% annually in fees could amass about $1 million after 40 years, assuming 7% average annual returns. The investor who pays 2% in annual fees could end up with $230,000 less.

Often, a lower-cost option is available

Otter’s site evaluates public school 403(b) plans, rating each vendor according to a stoplight system: green for low-cost investment providers, yellow for those that have at least one low-cost option and red for high-cost providers to avoid.

In addition, the site provides letter grades and full lists of 403(b) plan vendors for more than 4,800 school districts representing about half the country’s public school teachers, Otter says. Employees in these districts can use the site to check out their plans and spot lower-cost investment options. Those in other districts should request a list of vendors from their school district and look for green-rated providers, Otter says. If none are available, the low-cost option offered by a yellow-rated provider may be the next-best choice.

The site, and its affiliated Facebook group, offer step-by-step instructions for how to move money from one option to another.

Making the best of bad options

Unfortunately, there are still some 403(b)s with nothing but high-cost investments, Otter says. In that case, employees could consider funding a Roth IRA on their own instead. Contributions aren’t tax-deductible, but withdrawals in retirement are tax-free. Another option could be a 457 plan. These tax-deferred accounts are often offered to government employees and may have more oversight and better investment choices, Otter says.

Employees also can lobby their districts to add better options — something that Curtiss successfully did late last year.

Moving his $90,000 nest egg, however, came at a painful cost: Curtiss says he paid more than $4,500 in surrender charges. Curtiss had the option of moving the money more slowly, waiting for the surrender charges to expire, but chose to “rip off the Band-Aid” rather than face years of paying Equitable’s higher fees.

Curtiss says he did get a check for his share of the Equitable fine. It was for $33.93.

This article was written by NerdWallet and was originally published by The Associated Press.