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Fees take huge toll on 403(b) plans

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.

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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is true of both types of plans, contributions are made with pretax dollars and earnings grow tax-deferred until they're withdrawn.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 themselves.

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.

"It's 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.

"There 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."

A 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 they own.

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