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How to avoid 403(b) pitfalls

New federal regulations that take effect January 2009 should make it easier for individuals to wisely invest in 403(b) retirement plans.

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The Internal Revenue Service over the summer passed the new regulations that will require employers to keep documentation about the 403(b) plans they offer and, for the first time ever, oversee the providers who run them.

One, it should make it easier for employees to obtain information about their investment options and the companies and insurers that offer them.

Two, this new administrative burden on employers will most likely compel them to reduce the number of vendors running their 403(b) plans from as many as a couple dozen to a handful.

"So it might become easier for people to manage and choose if there are just three or four choices," says Gerry O'Connor, director of Spectrem Group.

What you can do now
What can you do to maximize your 403(b) today? Your first duty: Read the fine print. When a 403(b) provider makes a pitch, look at the prospectus and ask questions. Make a list of the fees charged, review performance history and compare these with your other choices.

If you have access to no-load funds that don't charge commissions, favor them over funds that do.

A Web site run by the state of California for its teachers,, can help make research easier. It lists vendors managing 403(b) plans in that state's education system and provides details about the investments each company offers, including the fees charged.

"Because the state (California) is so big, a teacher in Connecticut or somewhere else will probably find the product on the site," says Dan Otter, a former teacher and author of "Teach and Retire Rich." 

Invest independently
If you don't like the vendors in your 403(b) plan, consider opening an IRA instead. You can't invest as much: up to $4,000 -- or $5,000 for someone 50 or older -- for the 2007 tax year. In 2008 those limits each increase by an extra $1,000. However, if you open a Roth IRA with after-tax dollars, you'll never owe the IRS again because earnings grow tax-free forever. If you make too much money to open a Roth, consider a non-deductible IRA. In 2010, the conversion restrictions will be lifted and anyone -- regardless of income -- will be allowed to transfer traditional IRA assets into a Roth, says Ed Slott, founder and editor of

That's a route Stephen Schullo, an elementary school teacher in Los Angeles, advises fellow teachers to take if they don't have access to good, low-cost 403(b) providers. "The consensus is if you're paying more than 1.5 percent a year in fees, it isn't worth going with the tax-deferred route [of a 403(b)]. Plus, with a Roth you have tax-free growth and you can go with any company you want. You aren't restricted."'s corrections policy
-- Updated: Nov. 20, 2007
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