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."
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