Fees take huge toll on 403(b) plans
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"Unlike the corporate environment, where plan sponsors (retirement plan providers) choose one record keeper to serve all of their participants, in the tax-exempt market there are many vendors participating in a plan," says John Begley, executive vice president with Fidelity Employer Services Co. "Often the plan sponsor doesn't have all the information about those providers in an easily accessible way. So someone can be overwhelmed by their choices."

Moreover, employees in the private sector may frequently have access to various kinds of investing assistance, including access to free advice from their 401(k) providers, automatic enrollment and the ability to invest in a variety of equity-based funds, including life-cycle or target-date funds tailored to help them meet retirement savings goals.

By comparison, when it comes to picking 403(b) providers, tax-exempt employees tend to be given a slew of sales brochures and other documents from various companies that are permitted by a school or other institution to run 403(b) plans for their employees.

Besides the confusion with basic information, participants mostly have insurance products to choose from, which generally are much more expensive than mutual fund offerings from investment management firms. "The plans were started in 1958, and until 1974 they could only be invested in annuity products, so the insurance industry got the head start with them," says Dan Otter, a former teacher and author of "Teach and Retire Rich."  

Pricey pitfalls: fees and charges
Today, the insurance roots of the plans continue to run deep. Of the $652 billion currently invested in 403(b) plans, a beefy 79 percent of assets are invested in variable or fixed annuities, the Spectrem Group reports.

Because annuities generally come with higher fees and additional charges, they can take a huge bite out of retirement savings, says Otter, who also founded the Web site 403bwise.com, which is dedicated to educating individuals about these retirement plans.

"It doesn't take a math teacher to realize that paying 0.5 percent in fees for a mutual fund versus paying 2.25 percent for a variable annuity can mean tens of thousands -- even hundreds of thousands -- more dollars in retirement," says Otter. "After choosing to participate in a 403(b) and selecting a vendor and investments, a participant can control exactly one thing: how much they pay for investments. I urge people to choose carefully."

How fees impact return

Value after 35 years, assuming $250 contributed monthly with an 8 percent average annual return.