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

Like many educators, high school science teacher Robert Curtis of Dearborn, Michigan, thought he was doing the right thing by investing in his school district’s 403(b) retirement plan. Federal regulators then accused Curtiss’ investment management company of fraud.

In July 2022, the Securities and Exchange Commission said that Equitable Financial Life Insurance Co. has misled investors — mostly public school employees — about the value of their investments. 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, Curtis learned that his retirement investments were costing him two to three times what a typical 401(k) investor would have paid. Taking his money out would cost even more: The investments, known as variable annuities, had return fees of 5% to 6%.

“I felt so disappointed,” says Curtis. “If I had known earlier, I would never have put my money there.”

NOT ALL PENSION PLANS ARE CREATED EQUAL

Like 401(k)s, 403(b)s are employer-provided retirement plans that allow workers to make pre-tax contributions through payroll deductions. But 401(k)s are typically offered by private sector employers, while 403(b)s are sponsored by schools, universities, religious organizations and some 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 teacher 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 the best interests of their employees. As a result, 401(k)s typically offer a diversified mix of investments at a reasonable cost. Employers typically choose an investment company, known as a custodian, to manage the plan and keep records.

Fiduciary rules generally don’t apply to public school 403(b) plans, Vidra says. School districts can contract with dozens of companies to offer pension investments while refusing to provide employees with any guidance or advice, he says. Then insurance companies step in, trading expensive investments, including variable annuities and expensive mutual funds.

“Guess who’s emailing teachers? Guess who goes into school districts and offers free lunch? It’s the expensive companies that do that,” explains Otter.

And costs make a huge difference in how much an investor can accumulate. For example, someone who contributes $500 per month and pays 1% annual fees could accumulate about $1 million after 40 years, assuming a 7% average annual return. An investor paying 2% annual fees could end up with $230,000 less.

A LOWER PRICED OPTION IS OFTEN AVAILABLE

Otter’s site rates public school 403(b) plans by rating each provider according to a system of lights: green for low-cost providers, yellow for those with at least one low-cost option, and red for high-cost providers that must are avoided.

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

The site and its associated Facebook group offer step-by-step instructions on how to transfer money from one option to another.

MAKING THE BEST OF BAD OPTIONS

Unfortunately, there are still some 403(b)s with nothing but expensive investments, Otter says. In this case, employees could consider self-funding a Roth IRA. Contributions are tax-deductible, but retirement withdrawals are tax-free. Another option might 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 can also lobby their districts to add better options — something Curtiss successfully did late last year.

Moving his $90,000 egg came at a painful price, though: Curtis says he paid more than $4,500 in transfer fees. Curtis had the option of moving the money more slowly, waiting for the transfer fees to expire, but chose to “rip off the band-aid” rather than face years of paying Equitable’s higher fees.

Curtis says he received a check for his share of the Equitable fine. It was for $33.93.

Liz Weston is a NerdWallet columnist, certified financial planner, and author of Your Credit Score. Email: [email protected]. Twitter: @lizweston.

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