You may have read news
stories lately about excessive 401(k) plan fees, but less well-known are the pitfalls
of 403(b) plans -- the retirement
savings vehicles for America's teachers and
people who work in the nonprofit sector.
Because of their similar features,
the 403(b) often is mistaken
for a nonprofit replica of the 401(k).
That's understandable. As is true of both
types of plans, contributions are made with
pretax dollars and earnings grow tax-deferred
until they're withdrawn. Participants can
stash up to $15,500 in 2007 and individuals
age 50 or older can save an additional $5,000.
There's generally, though not always, a 10
percent early withdrawal penalty for those
who take money out before age 59½.
|403(b) plan basics
That's where similarities end
and stark differences emerge. For example,
employers in the private sector often make
contributions into a 401(k) plan
on behalf of their workers, but these so-called
"matching funds" are not common
among 403(b) plans, particularly
those for public school workers. That means
it's up to participants to fund 403(b)s
Management of the plans also
is different. For example, 401(k) participants are steered by their benefits
department toward a single provider -- usually
a mutual fund company -- that's responsible
for running the company's retirement plan.
But in a nonprofit, such as a school, various
providers may be on a list of approved vendors
who are able to run plans for employees. So
it's up to 403(b) participants
to figure out which providers are available,
then pick those with which they want to invest.
Big-name firms -- such as insurance
giants TIAA-CREF and AIG Valic and mutual-fund
giant Fidelity Investments -- together control
about two-thirds of the $652 billion invested
in 403(b)s. Beyond that, there's
a vast universe of companies competing for 403(b) business, too.
not unusual to have 25 choices (of providers) in the public schools," says
Gerry O'Connor, director of Spectrem Group, a Chicago-based research firm that
conducts annual studies of the 403(b) marketplace.
are a lot of people who built nice retirement nest eggs using a 403(b),"
he says. "Could they have made more money using a different kind of structure?
It's quite possible."
universe of choices
Perhaps it's not surprising that individuals
feel overwhelmed and ill-informed.
One recent study by Fidelity
Investments found that 45 percent of individuals in the tax-exempt sector don't
know how many 403(b) providers they can choose from in their retirement
plans. And more than one-quarter of savers didn't know how many sub-accounts (the 403(b)'s equivalent of mutual funds) or other investment options