I’d like to think that the terrible 403(b) choices at most public institutions are the result of HR managers not knowing better and not due to poor negotiating skills, or, worse yet, malfeasance.
Either way, something nefarious (or at least negligent) seems to be going on. HR departments should see it as their duty to make sure that the 403(bastards) are not taking advantage of their employees, most of whom are not money savvy. The employees shouldn’t be thrown to the jaws of the 403(bastards). Some institutions have seen the light and at least offer plans that are 403(bad ass). But that seems to be unusual.
A tale of one city
Mrs FRA and I both work at public institutions of higher learning – she at a community college, I at a university. Almost across the board, my options (insurance, retirement vehicles, etc.) are better.
I’ve been in a 457(b) since the day I arrived there six years ago; Mrs FRA was invested only in a 403(b), because the 457(b) fees with VOYA were too high at the time (we didn’t shop around – we were young and un-savvy).
When her VOYA rep left the business (because they were screwing him over), I figured it was time to reassess – as it turns out, we were getting screwed, too. We were paying 1.75% in total fees to her 403(bastards). We switched to TIAA-CREF and now we’re down to 0.53% in fees in a 457(barely-ok) and 403(barely-ok). Yes, that’s high, but that’s the best we can get. And did I mention that TIAA-CREF wouldn’t let us open this account without speaking on the phone/meeting in person with the local rep?
My experience is completely different. My university has a couple of crappy 403(b) providers on their list, but it wasn’t difficult to find the 403(bad-ass) when I needed to set up a 403(b) to capture a bonus (I’ve been in a fairly low cost 457(b) from day one). I narrowed down to TIAA-CREF and Fidelity. Fidelity beat them by a percentage point and a half – 0.025% fees for a total stock market index fund vs 0.04% for TIAA-CREF. Plus, I had it set up in 15 minutes online, and didn’t have to talk to a human.
So just in case you missed that, let me make this clear – the lowest fee I could find at the community college was 0.53%. The same company offered fees of 0.04% just a twenty minute drive away. AND I found a better deal than that.
And don’t get me started about my days as a high school teacher. I think my total fees were over 2% when I left the profession in 2012 and promptly moved everything to low cost vanguard ETFs through TD Ameritrade.
What’s going on here?
A couple of things.
First, insurance companies (VOYA, AXA, Lincoln Financial Group, MetLife, VALIC, anything with “life” or “insurance) have dominated 403(b)s for a long time. They like to sell 403(b) annuities, which are basically insurance policies wrapped around investments. The instruments can get complex, but most annuities at least guarantee that you’ll never get paid out less than what you paid in. And you’re paying a fortune for an eventuality that will most likely never happen. Usually they will charge 1-1.5% ON TOP OF the inflated fund fees. (Or higher. Sometimes between 2-3%).
So look for investment companies, such as Fidelity, TIAA-CREF, Lincoln Investment Planning, T. Rowe Price, etc. They usually offer more investment options and lower fees (but you can find plenty of expensive, under-performing actively managed funds here, too – watch out). Check out this article for a more in depth look: https://financeforteachers.com/how-to-choose-a-403b-vendor/
But why does the university (at least my university?) have better fees than the community college and public school districts? That’s a damn good question, and I don’t know the answer. If you have some insight, share it in the comments section.
So what should I do?
Start local. First: check the fees that you’re paying on your 403(b) and/or 457(b). You may be in an old plan with higher fees.
After you realize you’re getting ripped off by the 403(bastards), head on over to your HR website and (if you’re lucky) you’ll be able to find a list of funds and fees, or at least links to them. Don’t be shocked if you have to email someone to get the info. Start with the investment companies, and also check on the insurance companies just in case they have low fees (ha!). Check and double check that they disclose any maintenance fees in addition to the fund fees. Also, verify that the funds do not have any loads (up front fees you pay on investing in the funds) or surrender fees.
Once you’ve found the fund of your dreams (or at least one that doesn’t give you nightmares), call up the 403(bastards) and ask if you have any surrender fees that you would need to pay if you switch 403(b) providers. No surrender fees? You’re in luck. The paperwork to switch will still likely to be a hassle (VOYA, five months after moving our money, STILL hasn’t sent TIAA-CREF all requested paperwork), but you won’t have extra fees. If there are surrender fees, you may need to do some math and decide if it make sense to move some (or all) of your money now and pay fees, or wait until the account matures and the surrender fees go down or expire. If the surrender fees are too high, you may need to put off moving all or some of your 403(b).
What if my options still suck?
You might just need to take the best of the worst (avoid companies that have surrender fees and loads, if possible).
Have a match and high fees? Contribute just enough to get the match.
Next (or first, if your employer doesn’t provide a match), you should max out your IRA and Roth IRA with a low cost provider. I’m firmly ensconced in the TD Ameritrade ecosystem and am reasonably happy with their choice of low-fee ETFs, but if I had to do it again I’d probably go with Fidelity. There are other great providers out there; do your homework.
Then start to max out the 457(b). Always fill this up before the 403(b), because it it the best f-u money vehicle: You can take money out of the 457(b), paying no penalty before age 59 ½ as long as you no longer work for the employer under whom you contributed the 457(b) money (you will pay appropriate taxes, of course, unless you have that rare Roth 457(b) unicorn).
Also, move the 403(b) to a low-fee provider as soon as you leave your employer.
Have good options?
Max out the 457(b) first (f-u money!), then 403(b). Save the IRA for last (you can always contribute extra to the IRA from January 1st through April 15th of the following tax year, but you can’t do that with the 403(b)). The only reason to contribute to the IRA first is if the fees are ridiculously high on 403(b)/457(b).
If your options are terrible, agitate with your HR. Ask for at least one investment company that offers low fees. Offer to sit on the committee that selects 403(b) companies. Show them how high fees eat into retirement savings.
You may think that trying to change your HR will be like tilting at windmills. Maybe it will. But if you can move into lower cost 403(b)s like we did with Mrs FRA, the additional money in the account at retirement could be significant (we expect an extra $250,000). Let’s say it take you 20 hours of work to get them to offer a low cost provider. Twenty into $250,000 is a cool $12,500 per hour. Great work if you can get it.
So what’s your game plan? Go dump those 403(bastards) and find a 403(bad ass) plan now.
Do you have a 403(bastards) horror story? Have you had success getting your HR to adopt better funds? Let me know!
Also, be sure to check out The Millionaire Educator. Gerry came up with the 403(b) day idea in the first place.