What To Look Out For When Selecting a 403(b) Plan

In the past, 403(b) plans were more lightly regulated compared to other retirement plans, resulting in some less-than-ideal plans in existence. Learn what to look out for.

Selecting a 403(b) Plan

There are a range of 403(b) plan vendors and options available to plan sponsors, each with strengths and weaknesses to suit a range of circumstances.

Ultimately, whether a plan is “good” or “bad” is going to depend on whether it works for your situation. You should consider cost, how the plan is administered, and its investment options.

Employers may offer a plan with one or multiple vendors. In choosing from multiple vendors, your first consideration is cost. Plans structure their costs differently, so you’ll generally want to look for vendors with the lowest costs.

Alongside cost, you should consider how much control you have over the plan and its investment options. Some vendors only offer a short list of funds in their plan, that they manage themselves. Other vendors allow for open architecture, that is, they include investment options from other companies, too.

You should also look at each vendor’s responsiveness and level of customer service. 403(b) plans are complex: As a plan sponsor, you want to know that you’ll be able to get accurate and timely answers to any questions you have. Consider how attentive to your needs a vendor seems in setting up and maintaining the 403(b) plan from an administrative point of view.

Last, make sure the 403(b) plan meets your needs and those of your employees. A better plan is likely to offer a more diverse portfolio of investments. It bears noting that 403(b) plans are limited to offering only annuities and mutual funds: Therefore, plan sponsors should look for a provider that’s flexible in offering low-cost investment options.

Bad 403(b) Plans

Considering the various options offered by different vendors, you will want to be certain to stay away from “bad plans.”

Among the warning signs of a less-than-ideal vendor is high fees. Some 403(b) plan vendors may charge much higher administrative fees than others. Always compare vendors’ costs. Generally, you should find a vendor with costs that are in line with the industry average. And also make sure that a plan’s fees are worth the service you’re getting.

Outside of high fees, some vendors are known for having more stringent investment rules. Look for a plan that offers you flexibility.

Ultimately, you’re looking for a high-quality vendor who offers good customer service, reasonable fees, and sound investment options. “Bad” 403(b) plans will offer few investment options, with high fees and may be less responsive to employee needs.

403(b) Retirement Plan Fees: The Case of Teachers

You may have read the 2016 New York Times article on 403(b) plans. It describes the case of many teachers’ 403(b) plans, which came with poor investment options and high fees. The article claims that one teacher may even have had 50% more in retirement from a plan with lower fees.

The article links to a study by Aon™ asserting that millions of people who save in 403(b) plans may be losing nearly $10 billion each year in excessive investment fees.

Teachers’ 403(b) plans are the most high-profile examples of “bad” 403(b) plans.

403(b): Worth it?

However, “good” 403(b) plans have many benefits. Like 401(k) plans, 457 plans, and more, a 403(b) plan allows an individual to defer some of their paycheck on a pre-tax basis, effectively reducing their taxable income and lowering their tax burden. This money then grows tax-free until it is withdrawn, at which point it will be taxed as income.

Assuming that the associated administrative fees are reasonable, and the 403(b) plan offers flexible investment options, a 403(b) plan can be just as beneficial as other retirement plans.

403(b) plans also have catch-up provisions that are more advantageous than other plans. If an employee has 15 or more years of service with an eligible employer, they may be able to make additional catch-up contributions of as much as an additional $3,000 a year, up to a limit of $15,000 across their lifetime.

The 403(b) Expense Ratio

Every 403(b) investment option has an expense ratio, which is another way of thinking of “funds fees.” An expense ratio gets assessed for each individual fund in a 403(b) plan, and the fee goes to the company that manages that individual fund.

When people talk about high plan fees in a “bad” 403(b) plan, they are generally talking about the expense ratio. As a plan sponsor, you should make sure to compare expense ratios between providers.

My 403(b) is Losing Money. What Can I Do?

Sometime a plan sponsor may feel its 403(b) plan is underperforming. In that case, the employer may choose to review the plan’s investment options and fees to better serve its employees.

Many plan participants aren’t confident they have the investment knowledge to allocate their assets properly. In that case, a plan sponsor may work with a vendor to make available a financial advisor or consultant to help its employees. Often a retirement-plan vendor makes these advisors available, either in person or remotely.

If you’re a plan sponsor and you’re concerned your vendor is offering poor service or investments, don’t hesitate to consider moving your plan. The right vendor can help you make a smooth transition to a new provider. In short, both you and your employees will benefit when you conduct a proper review of your situation and a plan’s available options.

Conclusion: Is a 403(b) a Good Investment?

If you are satisfied with the 403(b)’s investment options and fees (including surrender charges) the plan can be a good investment for helping employees save and grow money for retirement on a tax-deferred basis.

An employer often only offers its employees one option for retirement savings; So, employees usually must choose between investing in the employer’s plan or in an Individual Retirement Account. In deciding which investment to choose, employees need to consider a plan’s maximum contribution limits, its investment options and, as always, its fees and service.

If you are an employer interested in learning more about MissionSquare’s 403(b) plan, Contact us.