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403(b) changes may make saving easier

Teachers and employees of nonprofit organizations may be getting a much-needed boost to their retirement savings accounts. A recent legal overhaul of 403(b) plans will bring much-needed improvements and make it far easier to save for retirement.

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But with new changes come restrictions, too. Notably, new regulations to the plan permanently slam the door on what's known as the 90-24 transfer, which allowed workers to transfer retirement savings out of employer-sponsored 403(b) plans and into private accounts of their choice.

That's the consensus of experts who note that the regulations, which were passed by the Internal Revenue Service over the summer of 2007, are the first major changes to 403(b) plans in 43 years.

"The IRS knew regulations were long overdue," says Ginny Boggs, a senior compliance consultant with Milliman, an employee benefits consulting firm that is based in Seattle. "It felt very strongly that there shouldn't be much difference between the rules that govern 401(k) plans and 403(b) plans."

How 403(b) plans differ from 401(k) plans
A 403(b) plan allows employees to stash up to $15,500 in pretax earnings for retirement in 2007; after that, the contribution limits may be inflation-adjusted in $500 increments. Individuals over age 50 can save an extra $5,000. These limits are the same as for 401(k) plans. But traditionally, the two types of accounts have been very different.

For example, employers rarely make matching contributions on behalf of employees to 403(b) plans. That's not the case with 401(k) accounts. And critics say 403(b) plans have been too confusing and costly for individuals who participate in them.

The biggest complaint about 403(b) plans is that they're overwhelmingly invested in high-cost, low-performing insurance products. In fact, 79 percent of assets in 403(b) plans are invested in variable or fixed annuities, according to a study by Spectrem Group.

Changes afoot
Most of the changes don't take effect until January 2009, but experts say they will ultimately result in larger nest eggs for teachers and employees of nonprofits.
403(b) plans to resemble 401(k)s
1. How 403(b) plans differ from 401(k) plans
2. Fees can make a huge difference
3. Employers will oversee accounts
4. Changes bode well for employees
5. One drawback: end of 90-24 transfers

Fees can make a huge difference
Consider that the average variable annuity -- a mainstay among many 403(b) plans -- has fees of 2.27 percent. If someone saved $250 a month and their account grew by 8 percent annually, that would leave them with $334,787 after 35 years. But put that money into an index fund with fees of 0.29 percent, and savings would mushroom to $534,231.

Depending on their 403(b) provider, individuals can find themselves with a host of extra charges and fees. These include so-called mortality and expense fees, or M&E fees, are used to offset investment losses, plus fees to pay financial pros who sell annuities in a 403(b) plan. In general, M&E fees cost 1.25 percent a year, according to the Securities and Exchange Commission. That amounts to roughly $250 a year on an account worth $20,000.

Other fees are far higher. For example, if you try to withdraw money from your 403(b) plan within a certain time frame established by the provider, you may trigger a surrender charge. This charge is a percentage of the amount you transfer and depends on how long your money has been in your account. For example, if you take out funds within the first year of opening an account, you could pay as much as 7 percent. These fees generally diminish over time, but some providers have established time frames that stretch out over 15 years.

 
 
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