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Fees take huge toll on 403(b) plans

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Consider as an example the difference in the growth of two investments, one with fees of 2.25 percent and the other with fees of 1.4 percent. Contributions of $250 a month are made for 35 years, and the annualized rate of return is 8 percent in both cases. The account with the higher fees would amount to $336,320 after 35 years, while the one with lower fees would add up to $409,585 -- a difference of more than $73,000.

There are two types of annuities to choose from: fixed and variable. Fixed annuities guarantee individuals a rate of return for a specific length of time. Currently, that's about 6 percent annually, says O'Connor. By comparison, stocks have historically gained 10.4 percent a year, Ibbotson Associates says.

The values of variable annuities, which currently make up about 34 percent of 403(b) holdings, fluctuate because they depend on the performance of underlying investments. These typically include funds invested in stocks, bonds, money market products or some combination of these choices. The total cost of annuities depends on the vendor, but there are several fees to watch out for.

Types of fees
Mortality and expense risk fees: These are fees participants pay each year to the insurer to offset risk of investment loss plus fees involved to pay financial professionals for selling the annuity. So-called "M&E" charges are set as a certain percentage of an account's value -- generally 1.25 percent annually, the Securities and Exchange Commission says. That's $250 per year on a $20,000 account.

Administrative fees: These can be flat fees of, say, $25 a year, or a percentage of someone's account. Typically that's 0.15 percent -- or $30 for a $20,000 account.

Initiation fees: These are one-time start-up fees that may be waived. Prices vary but can run about $60.

Sales loads: These are nothing more than sales commissions that you pay when you buy (front-end load) or sell (back-end load) a fund. For example, a 7 percent front-end load on a $10,000 investment would cost you $700 for what effectively amounts to a sales charge. That money could be invested instead in a no-load fund.

Death benefit charges: These are used to pay for the so-called death benefit, an extra annuity feature that guarantees your heirs will get a certain amount, such as the total account value at a certain date in time or, alternatively, the value of the payments you've made minus any withdrawals. Other fees for special features include guaranteed minimum benefit charges and long-term care insurance benefit fees.

Surrender charges: These apply when you sell an annuity within a certain period of time, know as the surrender period, which can last up to 15 years, says Otter. The charge is a percentage of the amount you withdraw or transfer and depends on how long you've had your money in place. For example, if you have a seven-year surrender period, and you withdraw money early -- say, in the first year -- you might pay a 7 percent surrender charge. The surrender charge typically decreases by 1 percentage point each year until the surrender period finally expires in the seventh year. Some funds allow you to take a certain percentage of your money out -- say, up to 10 percent annually -- during the surrender period without paying the fee.

"Invest in 403(b): lock your money up for good?"
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