In the last year, we've gone through a hell of a lot. We've all witnessed the special teacher who worked double-time while spending their own money to get their students learning and engaged online, or the nurse who consistently put others' health ahead of their own.
And while it’s often said that no one becomes a teacher or a nurse to get rich, there’s no reason why they shouldn't be able to retire with dignity after years of service to their communities.
The good news is that teachers and nurses who work in the public sector get access to a workplace retirement savings plan called a 403(b), which looks like the 401(k) for private sector employees. Contributions are automatically deducted pre-tax from their pay, and their money grows tax-deferred until it’s taken out in retirement.
But there's a big downside to 403(b) plans...
And it's the investment options. Teachers and nurses often must select from a confusing menu of options, and their choices are often overloaded with insurance products like annuities that have low returns and high fees. Some insurance companies go as far as charging 120 basis points for an S&P 500 index fund offered within the 403(b)!
120 basis points means that for every $1,000 invested, $12 goes to the fund issuer every year. That may not sound so bad (I mean, a sandwich costs you this much!), but bear in mind that the best-known S&P 500 funds in the industry cost only 3 basis points. And remember, investment expenses are cumulative and compounding!
What’s the long-term impact of high expenses? The Securities and Exchange Commission (SEC) released a bulletin reminding investors that a 100 basis-point fee can reduce a $100K portfolio earning 4% a year by almost $30,000 compared to a 25-basis-point fee over a 20-year period.
But that’s not the worst. Some 403(b) plans offer only variable annuities with high “surrender fees," a charge incurred if you sell an annuity within the first six to eight years after purchase.
To add insult to injury, annuity-based 403(b) plans that are not subject to federal protections can also have annual fees as high as 250 basis points. At that cost basis, one should consider alternatives.
So what should you do if you’re stuck with a bad 403(b) plan?
- Choose the lowest-cost investment options you have within the 403(b) plan. If your 403(b) contains annuities and mutual funds, go with the latter, since mutual funds are almost inevitably cheaper than annuities.
- You don’t have to invest all of your retirement money into a 403(b). Invest some of your retirement contributions into an IRA. Within an IRA you can invest in a much wider universe of funds, including low-cost ETFs, instead of only select mutual funds and annuities.
- Lobby your employer benefits department to add more low-cost investment options to the 403(b) plan or to switch to a 401(k) plan. This may be an uphill battle, but one worth fighting for. After all, with so many low-cost options, the fee impact over decades is just too big to ignore!
- Use technology to make smarter investment choices within your retirement plan. Products like blooom help you select the best low-cost funds and set the right allocation among investment choices, so you're optimizing the return for your investment time frame and risk profile.
Want to brush up or learn more about common retirement plans offered at work? Take our bite-sized quiz-based lesson: