Index Funds in 403(b) Plans
August 29, 2026
By Barbara O'Neill, CFP®, AFC®
Non-ERISA 403(b) plans are sponsored by K-12 public school systems, state universities, and churches. ERISA is the Employee Retirement Income Security Act of 1974, a federal law that protects participants in private-sector employee benefit plans. Index funds are a passive investment that tracks market benchmarks.
Whether a non-ERISA 403(b) includes an index fund investment option depends on the approved vendor(s) chosen by an employer. Unlike 401(k)s, 403(b) plans often use multiple approved vendors, often dominated by those that sell high-fee annuity contracts. Sadly, some plan participants lack access to index funds at work.
This post provides a overview of index funds including advantages and disadvantages, index types, 403(b) plan index fund access, and access to index funds in taxable accounts. It concludes with a research study about 403(b) investment options and fees, three “need to know” facts, and six take-away action steps.
What is an Index Fund?
An index is an unmanaged collection of securities used to monitor market performance. An example is the Dow Jones Industrial Average, which tracks 30 large companies. Index funds are mutual funds that track a stock or bond index. They buy all the securities in an index, or a representative sample of it, and provide performance similar to the index they are tracking, minus fund expenses. If stock prices rise, index fund performance (i.e., the value of index fund shares) will rise accordingly. The opposite is true, however, if stock prices plummet.
Index funds are 50 years old this month! They have been in existence since August,1976 when the index fund known today as the Vanguard 500 Index Fund (VFIAX/VFINX) was launched by John C. Bogle and The Vanguard Group. In 2026, index funds comprise about 55% of total U.S. fund assets.
In both bull (rising) and bear (declining) markets, index fund returns beat those of most actively managed (non-index) funds. Index funds have relatively low turnover, which helps keep taxable capital gain distributions and trading costs low. Turnover is the frequency with which stocks and bonds are traded in a mutual fund portfolio.
Pros and Cons
Index Fund Advantages
Broad Diversification — Index funds typically hold hundreds or thousands of securities, depending on the index they track. This means less volatility due to changes in the value of any individual security.
Low Expenses — Since index funds replicate a target index and have low turnover, management and transaction costs are low. Equity index fund expense ratios average 0.05% vs. 0.65% for actively managed mutual funds.
Management Consistency — An index fund contains the same stocks and bonds whether its manager comes or goes so there is continuity with changes in management.
Tax Benefits — Index funds typically realize and distribute modest capital gains- if any- to investors, especially during bull markets when shares do not have to be sold to meet redemption requests.
Index Fund Disadvantages
“Double Whammy” Potential — Like all mutual funds, it is possible for index funds to generate both taxable capital gains and negative returns in a tax year, typically during bear markets.
Boredom Factor — Investing in an index fund means you will not outperform financial markets. Period. Full stop. Some people want excitement and the possibility of larger gains in an actively-managed fund.
No Downside Protection — Unlike actively managed funds that often “seek cover” in cash or other assets during a market downturn, index fund share prices often fall when prices of investments within an index drop.
Where to Find 403(b) Index Funds
As noted above, index fund access in 403(b) plans depends on vendor selection and a vendor’s investment options. Job #1 is to compare companies on an employer’s vendor list with how these companies are listed in the 403(b)wise rating system. Note the Green-rated vendors, especially low-cost providers like Fidelity, T. Rowe Price, and Vanguard, which include index funds in their 403(b) product lineup.
For example, Vanguard includes four index funds on its 403(b) mutual fund list: Total Bond Market Index, Total Stock Market Index, Total International Bond Index, and Total International Stock Index.
Another way to access index funds in a 403(b) plan, indirectly, is through Yellow-rated NEA Invest Myself®, which charges an annual recordkeeping fee of 0.30% of assets and a $35 administrative fee for balances under $50,000. As a result, this option will always have a lower accumulated value than investments that do not charge an additional fee on top of underlying mutual fund expense ratios.
Frequently Used Index Fund Indices
Below are five indices that are used as benchmarks for index funds contained within 403(b) plans:
Standard and Poor’s (S&P) 500 — The S&P 500 measures the performance of 500 large publicly-traded U.S. companies. The size of a company in the S&P determines its relative weighting in the index; i.e., it is market capitalization-weighted.
CRSP US Total Market Index — Used by the Vanguard Total Stock Index Fund, the CRSP is a broad, market capitalization-weighted index designed to measure performance of nearly the entire U.S. equity market. It contains 3,500 to 4,000 securities.
The Dow Jones U.S. Total Stock Market Index — Used by many total stock market index funds, including Schwab and Fidelity, this is another broad stock market index designed to measure the performance of nearly all publicly traded U.S. companies.
Russell 3000 Index — The Russell 3000 is a market capitalization-weighted stock index that measures performance of approximately 3,000 of the largest publicly traded U.S. companies including large-, mid-, and small-cap stocks.
MSCI EAFE Index — The MSCI EAFE measures performance of large- and mid-cap companies in developed countries outside the U.S. and Canada. EAFE stands for Europe, Australasia, and Far East, which are regions included in the index.
The Low-Expense Advantage
There is, perhaps, no better way to illustrate the power of index investing and the “drag” of high-fee investments over time than this hypothetical illustration, below, from 403bwise. Note the $158,083 difference between a 0.07% fee index fund and a 3% variable annuity after 35 years!
Some index funds found in 403(b) plans charge even less. The Vanguard fund VTSAX, championed by author JL Collins (The Simple Path to Wealth, 2016), charges a 0.04% expense ratio. This means that, for every $10,000 invested, $4 is paid in fees ($10,000 x .0004). By comparison, the fee per $10,000 invested in an actively-managed fund with a 1.0% expense ratio is $100 ($10,000 x 0.01). Over time, this difference adds up!
Beware: Other Indexed Investments
Low-expense index funds are not the only financial product with the word “index” in them so it is easy for new investors to become confused. Some indexed products have high fees and should be avoided. An example is equity-indexed annuities that tie their return to a portion of the growth of a stock market index. For example, the S&P 500 index could soar past 15% one year and an annuity’s actual growth rate might be capped at 6%.
Unscrupulous salespeople state that there are no fees on indexed annuities but, of course, there are. Examples include surrender charges (fees charged when an investor withdraws money from an annuity before a specified time period ends), sales commissions, management fees, and mortality charges (fees charged to compensate insurance companies for the risk of guaranteeing benefits if death benefits exceed account value).
Accessing Index Funds Outside a 403(b) Plan
If index funds are not accessible through your 403(b) plan, lobby your employer to include vendors that include them. 403bwise has an online Advocacy Toolkit for use to advocate for better 403(b) plan choices like index funds. The toolkit includes articles, slides, a 403(b) fee calculator, podcasts, and videos.
In the meantime, purchase index funds in a taxable (brokerage) account. Unlike IRAs and 403(b) plans, taxable accounts have no annual contribution limits or age restrictions.
First, select an index fund type (e.g., total U.S. stock market, bond index, international stock market). Next, read the prospectus for at least three index funds in the category that you are considering. Look for a low expense ratio and an affordable minimum deposit. Lastly, open an account with an investment company by selecting one or more of its index funds and submitting an initial deposit.
Research Results
Research by the U.S. Government Accountability Office (GAO) found that about half of over $1.1 trillion in 403(b) plan assets in 2020 was held in ERISA-covered plans; the other half were in non-ERISA. Non-ERISA plan sponsors that responded to the GAO survey noted that their 403(b) plans were supplemental to another retirement plan offered by an employer (e.g., a pension).
Large 403(b)s had lower administrative fees than smaller plans with large plan sponsors taking multiple steps to reduce fees. Five public school plan sponsors reported that they did not know about the expense ratios for investment options offered by their plan.
Three (More) Things
- Mutual funds became available in 403(b) plans in 1974 following the passage of ERISA. From 1958 (when 403(b)s were created) to 1974, annuities were the only allowed option.
- Index funds charge low operating costs because their portfolio tracks an index and they do not require active stock-picking managers.
- According to a 2026 Investment Company Institute report, there are 523 index mutual funds holding a combined $7.7 trillion in total net assets.
Six Smart Strategies
No. 1: Hyper Diversify With Index Funds — Consider a three-fund portfolio with worldwide diversification by investing in a U.S. total stock market index fund, a U.S. total bond market index fund, and a total international stock market index fund.
No. 2: Minimize Taxes — Consider indexed exchange-traded funds in taxable accounts. ETFs are generally not offered in 403(b)s. An account with mutual funds exposes investors to taxable distributions each year even if they don’t sell shares.
No. 3: Core and Explore — Consider index funds the foundation (core) of an investment portfolio (in or outside a 403(b) plan). If desired, invest smaller amounts (e.g., 5% - 20% of portfolio) in actively-managed mutual funds and/or individual stocks.
No. 4: Invest Beyond Your 403(b) — Consider purchasing index funds elsewhere, whether or not they are available in your 403(b) plan. Think taxable (brokerage) accounts and a Roth and/or traditional IRA.
No. 5: Avoid Index Overlap — Understand that holding a S&P 500 index fund, large-cap index fund, and total stock market index fund may result in owning many of the same companies multiple times.
No. 6: Read a Fund’s Prospectus — Get to know a potential index fund investment by reading its prospectus to confirm the index being tracked and its investment strategy, fund expenses, performance history, and more. Compare at least three index funds.
In Summary
Index funds are an excellent choice for 403(b) plans if they are accessible through available vendors. If not, plan participants can invest in them elsewhere. With index funds, you know what you’re investing in and you can regularly track the benchmark index on which your fund is based. Besides transparency, index funds typically offer low expense ratios and broad diversification that reduces investment risk.
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This post provides general personal finance information and does not address all the variables that apply to an individual’s unique situation. It should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.