Teachers: Are You Choosing the Right 403(b) Plan?

If you’re a teacher, saving for retirement might feel like one more thing added to your already overflowing plate. But it’s a crucial step to secure your future. Many teachers rely on 403(b) plans to save for retirement, but here’s the problem: Not all 403(b) plans are created equal. In fact, some of them could be costing you big-time without you even knowing it!

Let’s break down what you need to know to choose the right 403(b) vendor and avoid the bad ones.

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Why 403(b) Plans Are Different from 401(k)s

First, let’s talk about why this matters. Many of us are familiar with 401(k) plans, especially if our friends or family members work in the private sector. But teachers and other public employees often have 403(b) plans instead of 401(k)s. The big difference is that 401(k) plans are protected by a law called ERISA (Employee Retirement Income Security Act). ERISA requires employers to act in your best interest and make sure the investment options are solid.

Unfortunately, 403(b) plans aren’t covered by ERISA, which means no one’s looking over your shoulder to make sure you’re getting the best deal. That leaves many teachers at the mercy of the companies selling the plans, many of which are charging high fees and offering subpar investment options.

The Dangers of Bad 403(b) Plans

So, what’s the problem? One big issue is that many insurance companies are offering 403(b) plans that come with hidden fees. These fees can really add up over time, eating away at your hard-earned savings.

For example, some 403(b) plans come with something called a "mortality and expense ratio” that can be as high as 1.25%. This is just one of the sneaky fees tucked into variable annuities, which many insurance companies love to sell. On top of that, you might be paying high expense ratios on the funds they put you in. All of these fees combined can cost you a lot over the life of your retirement account.

How High Fees Can Hurt Your Retirement Savings

You might think, “What’s the big deal? It’s just a couple of percentage points.” But those small percentages make a huge difference over time. Let’s break it down.

Let’s say you’re saving $5,000 a year into your 403(b). If you’re paying 2% in fees, versus just 1%, over 30 years that could mean the difference between tens of thousands of dollars! In fact, a 2% fee can easily cost you over $100,000 in lost savings by the time you retire. Ouch.

Impact of a 2% fee - Post by Intentional Money Life

That’s why it’s so important to choose a low-fee vendor. The less you’re paying in fees, the more of your money stays in your account, working for you.

I am not anti-fee. As a matter of fact, my business depends on fees. But I am absolutely against non-transparent fees and fees that are charged with no value given in return.

What to Look for in a Good 403(b) Vendor

Now that you know the dangers, how can you pick a good vendor? Here are three key things to look for:

1. Low Fees

   You want a vendor that charges low fees. Look for expense ratios under 0.5%, and avoid plans with variable annuities or other complicated products that come with extra charges.

   
   

2. Transparency

   If a company can’t clearly explain their fees, that’s a red flag. You should know exactly what you’re paying for and why.

   
   

3. Fiduciary Responsibility

   A fiduciary is someone who is legally required to act in your best interest. While ERISA doesn’t require fiduciaries for 403(b) plans, some vendors voluntarily follow this standard. It’s worth finding one that does.

   
   

How to Spot a Bad Vendor

Unfortunately, many of the companies offering 403(b) plans to teachers don’t meet these standards. Some red flags to watch for:

• “No Fee” Claims: If someone tells you there are no fees, they’re not being honest. Every investment plan has fees; the question is how much.

  
  

• Free Lunches and Perks: Watch out for companies that lure you in with free lunches or giveaways. These companies often make up for those costs by charging you higher fees. There is no free lunch!

  
  

• High Expense Ratios: If the funds in your 403(b) have expense ratios over 1.0%, you’re overpaying.

  
  

One great resource to help you find a good 403(b) vendor is https://403bwise.org. They provide unbiased information to help teachers make smart choices about their retirement plans.

How to Evaluate Your Current Plan

Maybe you already have a 403(b) plan, and now you’re wondering if it’s a good one. Here’s how to evaluate it:

1. Look at the Fees

   Start by reviewing your plan’s fees. If you’re paying more than 1% in total fees, it might be worth exploring other options.

   
   

2. Compare Apples to Apples

   Remember that different investment strategies can lead to different returns. If your current 403(b) isn’t performing as well as you’d like, it might not be because of the fees. Make sure to compare plans with similar risk levels.

   
   

What to Do If You’re Stuck in a Bad Plan

If you find that your current 403(b) vendor is charging high fees or not offering good options, don’t panic. You have a couple of choices:

• Switch Vendors: Many school districts allow you to change your 403(b) vendor. Reach out to your benefits office to see what other options are available.

  
  

• Talk to a Financial Planner: A fee-only financial planner who specializes in working with teachers can help you evaluate your options and make a plan to improve your retirement savings.

  
  

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Take Control of Your 403(b) Plan

Your 403(b) plan is one of the most important tools you have to save for retirement. Don’t let high fees and bad vendors eat away at your future. By choosing a low-fee, transparent vendor, you can maximize your retirement savings and enjoy the peace of mind that comes with knowing you’re on the right track.

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David Gourley, CSLP® is the Founder and lead Financial Planner at K-12 Planning, an independent financial planning firm specializing in finance for teachers. He served for eight years as a high school mathematics teacher before transitioning into the financial services industry. He started K-12 Planning in 2024 and his passion for serving as a fiduciary for teachers and a student loan planning expert runs deep, as his wife and several other family members have served as educators for years.