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Grade Your 403(b)

No one deserves to be exploited, least of all the overworked and underpaid. Of course, we're talking about teachers and others who work for non-profit organizations. For many of these folks, their employer-sponsored retirement plan is known as the 403(b).

A 403(b), named after a section in the tax code, is often called a tax-sheltered annuity (TSA), because until 1974, annuities were the only options available. Though 403(b) participants can now choose mutual funds, the majority of 403(b) assets are still with annuities. This is not good. Annuities are expensive, mediocre investment products often pushed too heavily by brokers and insurance agents looking for hefty commissions. As discussed in a recent BusinessWeek article, the fees in a 403(b) plan can be twice as high as those associated with a 401(k).

Luckily, things have gotten much better for 403(b) participants, in the way of new laws and more education. As for the latter, one of the best places to go for the latest developments is 403bwise, a site operated by two teachers, John Moore and Dan Otter. As the new school year begins, now's a great time for teachers to grade their retirement plans. Otter (an occasional Fool contributor) suggests keeping the following points in mind:

  1. A 403(b) is a great way to save for retirement: Contributions reduce taxable income, and the money grows tax-deferred.

  2. You have choices: You can do it yourself through a company like TIAA-CREF or Vanguard (among others), or go through an agent.

  3. Fees matter: Some agents provide often valuable service, but at a cost. Also, make sure you understand all the fees and surrender charges before investing any money.

  4. The 403(b) is a long-term investment vehicle: Have a plan, and stick to it through thick and thin. Long term is not one year.

For a rundown of the latest changes in the 403(b), check out 403(b) Changes for 2002. And for a concise but thorough explanation of 403(b)s, check out The 403(b) Wise Guide.

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