How to Avoid a Bad 403(b) or 457 Retirement Plan
In this week’s blog, I’m diving into a question from one of my clients regarding the best 403(b) and 457 plan options for teachers.
Whether you’re a teacher yourself, married to one, have a child who’s a teacher, or just know a teacher who could benefit from this information, this blog is for you! Understanding how to improve your retirement savings is essential, and I’m here to guide you through it.
Why Teachers Are Important to Me
Teachers are near and dear to my heart. My mom is a retired kindergarten teacher who spent over 30 years in the classroom, shaping young minds.
Many of us have had a teacher along the way who made a significant impact on us. Teaching is tough, and unfortunately, it doesn’t always come with the best financial compensation, especially when it comes to retirement savings.
In Connecticut, where I live, teachers are fortunate to have pension plans, and many are automatically enrolled in these plans. While this is wonderful, it’s important to recognize that many teachers are still falling short when it comes to boosting their retirement savings.
The Hidden Danger of High-Cost Retirement Plans
Now, here’s where things get tricky. While pension plans are a great start, many teachers are looking to save even more for retirement.
Unfortunately, they’re being misled into signing up for retirement plans that come with hefty fees—often without even realizing it. These high fees are eating into their savings, and most of the time, they’re buried deep in the fine print. This is exactly the concern raised by one of my clients, who shared a recent experience involving his daughter, a new teacher in Connecticut.
The Insurance Company Sales Pitch
Let’s call this client Tony to protect his identity. Tony reached out to me after his daughter attended a presentation at her school by a gentleman from an investment company—more specifically, an insurance company.
The goal of this presentation was to convince teachers to sign up for retirement accounts, but Tony had some concerns. He asked me whether the plan his daughter was being offered was a good one.
Based on the company name, I had a feeling it was an insurance company, and when Tony passed me the business card, sure enough, it was.
Now, I don’t want to bash insurance companies altogether—there are plenty of great products they offer. But when it comes to retirement savings, they’re not always the best option for teachers.
Why? Because many of these insurance-based retirement plans come with high annual fees that can eat away at the money teachers should be saving for the future.
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Understanding 403(b) and 457 Plans
Before we dive deeper, let me explain what 403(b) and 457 plans are.
A 403(b) is a retirement savings plan designed for employees of nonprofit organizations, including teachers. Similar to a 401(k) plan, you can contribute up to $23,000 per year on a pretax basis. If you’re over 50, you can also take advantage of a catch-up contribution, allowing you to contribute an additional $7,500.
The 457 plan, while similar to the 403(b), is slightly different, but we won’t get into the specific differences in this blog.
The key point here is that while these plans can be great, it’s essential to make sure you’re not stuck with a high-cost plan. Some employers—like larger school districts—offer more reasonable plans with lower fees, while others fall short, offering plans with sky-high fees that do a disservice to their employees.
Why Are Some Plans So Expensive?
Unfortunately, many smaller school districts, especially in Connecticut and other states, aren’t doing enough to protect teachers from high fees.
They’re not negotiating for the best 403(b) or 457 plan options. Instead, they’re allowing almost any company to sign up, regardless of the fees charged. The worst offenders tend to be insurance companies and mutual fund companies with high costs.
Some of the companies offering the highest-cost plans include MetLife, Voya, AXA, and ING. These plans, often variable annuities, come with high annual fees—sometimes as much as 3% per year—before you’ve even made a return on your investment.
And that’s not all. Some of these plans also come with surrender charges, meaning if you want to take your money out early, you’ll be hit with a fee. These charges can last for up to 10 years! No other retirement plan comes with this kind of restriction.
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What You Can Do to Avoid High Fees
So, what can you do if your school district offers a high-cost retirement plan? The first step is to do your research. Look at the list of available retirement plan providers at your school district. You can often find this information online or by reaching out to your HR or business office.
When I did this for one of my clients, I found that most of the options were high-cost variable annuity plans.
However, they did offer Vanguard, which is a much better choice.
Vanguard, Fidelity, and Aspire are examples of low-cost providers that offer low annual fees—sometimes as low as 0.04% per year for index funds. This is a far cry from the 3% you might pay with an insurance-based plan.
Steps to Take Control of Your Retirement Savings
Here’s a step-by-step guide to help you take control of your retirement savings:
Research Your Options: Find out which retirement plan providers are available in your school district. If the options are limited to high-cost plans, you can ask your business office to add a lower-cost provider like Vanguard.
Open an Account: Once you’ve found a low-cost provider, reach out to them to open your 403(b) or 457 account. Select your investment options carefully—index funds are often a great choice for low costs and solid performance.
Fill Out the Deferral Form: Complete the salary deferral form with your business office, so they know how much to deduct from your paycheck and where to send it.
Consider Transferring Your Old Account: If you have an existing 403(b) or 457 account with a high-cost provider, consider transferring it to your new account. Just be sure to check for any surrender charges before doing so. If the fees are steep, you might want to wait until they decrease, but if the savings are worth it, go ahead and make the transfer.
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Closing Thoughts
If you’re a teacher (or married to one, or know one), it’s crucial to take charge of your retirement savings.
Don’t let high fees eat away at your future. By choosing low-cost providers like Vanguard or Fidelity, you can save a significant amount over the long run and have a much easier time managing your retirement plan.
Remember, teachers deserve better, and with a little bit of effort, you can make sure that your retirement savings are working for you—keeping more of your hard-earned money for the future.
If you have a question or topic that you’d like to have considered for a future episode/blog post, you can request it by going to www.retirewithryan.com and clicking on ask a question.
As always, have a great day, a better week, and I look forward to talking with you on the next blog post, podcast, YouTube video, or wherever we have the pleasure of connecting!
Written by Ryan Morrissey
Founder & CEO of Morrissey Wealth Management
Host of the Retire with Ryan Podcast