When I finished graduate school, I got a job as a business education teacher for middle and high school students. I had already opened a Roth IRA to save for retirement and was maxing it out each year, so as soon as I became eligible to invest in my 403(b) retirement account, I did so. It’s always easier to put money into investments before you start seeing it in your paycheck, so I wanted to make sure that I could make investing a priority before spending that money on things that I didn’t necessarily want or need.
Once I became eligible to open a 403(b), I was contacted by another teacher within the school district to help me set it up. He was registered through the education services company that our district used, but looking back, I don’t think he gave me enough information to decide how to invest my money wisely.
He recommended some investment funds that were aligned with my risk tolerance and length of investing, so I went with his suggestions. But I was unaware of the fees and performance that were associated with these funds. As I became more interested in personal finance and started educating myself more on investments, I started to realize the mistake I’d make.
The mutual fund fees I was paying were excessive
When I left teaching to pursue a career in financial services, I couldn’t believe how high some of the fees were on the mutual funds in my 403(b), and was even more shocked at how high the fees ended up being once you added in management and other annual fees.
Brian Walsh, a financial planner at SoFi, explained to me that 403(b) plans in the K-12 space are historically known for higher fees because they sometimes contain variable annuity options. Sometimes, he said, the fees on these plans can be between 2% and 3% because of the annuities. (By comparison, an “expensive” 401(k) fee is around 2%.)
Although I wasn’t in an annuity plan myself, I now know that many individuals get talked into investing in an annuity without understanding how they operate and what their fee structure looks like. Even without an annuity plan, though, I know the fees I was paying in my 403(b) were considerably higher than the fees I now pay in my self-managed index fund portfolio.
How to make the most of your employer-sponsored retirement plan
Although you have limited choices when it comes to your employer-sponsored retirement plan, it’s still important to do your own research before blindly putting your money into investments chosen by an advisor. This is especially true if that advisor is going to make a commission off of your choices, as that can dictate what investments they recommend to you.
Bobby Glotfelty, an investment advisor representative at Betterment for Business, has the following recommendations for choosing investments and decreasing fees within your 403(b) plan:
1. Look for low-cost funds. He recommends index funds as well as passively managed mutual funds or exchange-traded funds (ETFs).
2. If available in your plan, invest in a target-date fund. These are generally low-cost, allow for proper diversification, and will decrease risk over time as you approach retirement.
3. Avoid actively managed mutual funds and annuities, since these types of investments are generally subject to very high fund fees.
4. Before you join a 403(b) plan, know that costly 403(b) fees can significantly reduce your savings over the course of your career — sometimes by hundreds of thousands of dollars. You should learn what your 403(b) plan fees are, as well as the fund fees of the different investment options you have within the plan.
Glotfelty said, “You generally can’t do much about your 403(b) plan fees, or which investments are available within the plan, but you do have control over which investments to place your money inside of to minimize the fund fees of your overall portfolio.”
Walsh also made a good point to make sure you understand what your account roll-over options are before you choose investments within a 403b. He recommended making sure you understand the restrictions associated with each type of investment choice in terms of what you can access or how you can move your money when you leave your employer. I learned once I started working as an advisor that annuity plans prove to be much more expensive and difficult to roll over than regular mutual fund investments.
If you’re invested in a 403(b), it’s not too late to take the time to learn more about the fees and performance of the funds you have chosen and what your alternate choices are. If, like me, you don’t end up staying with your employer for the entire duration of your career, then you may want to roll your investments into an IRA in which you have more flexibility to choose investments that will reduce fees and increase performance over the long haul.