When to Say No to a 403(b) Plan

The 403(b) retirement plan, a common offering for educators and non-profit employees, has come under scrutiny due to its potential drawbacks. While these plans offer some benefits, they often come with significant flaws that can negatively impact retirement savings. This article explores when it might be wise to consider alternatives to a 403(b) plan.

Understanding 403(b) Plan Flaws

Many 403(b) plans suffer from several key issues:

High Fees: A study by Aon Hewitt estimated that plan participants collectively paid nearly $10 billion in excessive fees.

Limited Investment Options: Often, these plans offer only high-cost annuities and mutual funds with high expense ratios.

Lack of Oversight: Many plans are not subject to the Employee Retirement Income Security Act (ERISA), which sets standards to protect participants.

Complex Vendor Selection: Participants often face a confusing array of dozens of vendors to choose from.

The Impact of High Fees

High fees can significantly erode investment earnings over time. For example:

  • Over 20 years, a 1.5% fee can reduce an investment's value by 21.5% compared to a 0.25% fee.

  • Over 35 years, with a $250 monthly contribution and 6% return, a variable annuity with 3% in fees would accumulate $185,391, compared to $343,474 from an average index fund with 0.07% in fees.

When to Consider Alternatives

You might want to explore other options if:

  1. All vendor choices in your employer's plan are rated "Red" (avoid) by 403bwise.

  2. Your school district's vendor list has a 403bwise grade of F.

  3. The "financial advisors" visiting your school are commission-based salespeople.

  4. Investment choices are limited to annuities with no mutual funds available.

Advantages of 403(b) Plans

Despite their flaws, 403(b) plans do offer some benefits:

  • High contribution limits ($22,500 in 2023, $30,000 for those 50+)

  • Catch-up contributions for long-term employees

  • Tax advantages for traditional and Roth 403(b) options

Alternative Retirement Savings Options

If your 403(b) plan is suboptimal, consider these alternatives:

  1. Traditional IRA: Tax-deductible contributions (subject to income limits) with tax-deferred growth.

  2. Roth IRA: After-tax contributions with tax-free withdrawals in retirement.

  3. Simplified Employee Pension (SEP): For those with self-employment income.

  4. Taxable Accounts: Offer flexibility and potentially favorable tax treatment on gains.

  5. Health Savings Account (HSA): Triple tax advantage for health expenses, with potential for retirement savings.

Strategies for Better Retirement Savings

  1. Analyze Carefully: Read plan literature thoroughly, as expenses are often hidden in fine print.

  2. Diversify Savings: Consider splitting retirement savings between a 403(b) and other accounts.

  3. Advocate for Change: Work with colleagues to lobby for better 403(b) options.

  4. Save Regardless: Don't let a poor 403(b) plan prevent you from saving for retirement.

  5. Practice Tax Diversification: Use a mix of tax-deferred, tax-free, and taxable investments.

  6. Seek Professional Advice: Consider consulting a fee-only financial planner for personalized guidance.

While 403(b) plans can be flawed, they're not always a poor choice. Evaluate your options carefully, considering fees, investment choices, and your overall financial situation. Remember, the key is to save consistently for retirement, whether through a 403(b) or alternative vehicles.


This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Variable Annuities are suitable for long-term investing, such as retirement investing. Withdrawals prior to age 59 ½ may be subject to tax penalties and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. 

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

Investing includes risks, including fluctuating prices and loss of principal. No strategy assures success or protects against loss.

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A Teacher's Guide to Pensions