403(b)s Come in Various Flavors -- Some Can Leave a Bad Taste

Many teachers in independent school districts around the country are disadvantaged in their 403(b) retirement savings plans compared to private sector plans. In the July 10, 2000 issue of U.S. News and World Report Paul J. Lim remarks:

Their (teacher's) self-directed, tax sheltered annuitites (TSA), also known as a 403(b) for that section of the federal tax code, is often burdened with higher commissions and expenses than those paid by 401(k) contributors. In part, this is because 85 percent of the $520 billion in 403(b)'s sits in fixed and variable annuities, rather than no-load mutual funds -- with no sales charges.

Mr. Lim suggests that this is partially due to the fact that until 1974, 403(b) participants were allowed to invest only in insurance annuities. John Abraham of the American Federation of Teachers also suggests that the problem stems from the fact that unlike company sponsored 401(k) plans, neither school districts or unions has taken any responsibility for them.

The higher cost associated with these insurance products may seem minor. But compounded over the course of a career, they can easily add up to tens, if not hundreds, of thousands of dollars. According to Bolton Offut Donovan, a consulting firm based in Baltimore, "paying an additional 1.25% a year for the 'mortality and expense' fees on an insurance variable annuity can lop $180,000 off a retirement account over 30 years, assuming average annual returns of 12 percent."