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The 403(b) Basics

403(b) Fact Sheet

The 403(b) was established in 1958. Originally participants could only invest in annuity products. Paragraph 7 was added to the plan in 1974 permitting investment in mutual funds through a 403(b)(7) custodial account.

ERISA 403(b) vs. Non-ERISA 403(b) Plans

Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets standards of protection for individuals in most voluntarily established, private-sector retirement plans. ERISA requires plans to provide participants with plan information, including important facts about plan features and funding; sets minimum standards for participation, vesting, benefit accrual and funding; provides fiduciary responsibilities for those who manage and control plan assets; requires plans to establish a claims and appeals process for participants to get benefits from their plans; gives participants the right to sue for benefits and breaches of fiduciary duty; and, if a defined benefit plan is terminated, guarantees payment of certain benefits through a federally chartered corporation, known as the Pension Benefit Guaranty Corporation (IRS).

  • ERISA 403(b) plans include: private not-for-proift K-12 schools, not-for-profit hospitals, and not-for-profit universities
  • Non-ERISA 403(b) plans include public K-12 schools

Note: Lack of ERISA oversight is considered a factor in the long vendor lists, individual contracts, and higher fee structures common in public K-12 403(b) plans. 

READ: Failing Teachers about how ERISA came about and why it doesn't apply to the K-12 403(b). 


  • Employees of tax-exempt organizations established under section 501(c)(3). 
  • Employees of public school systems who are involved in the day-to-day operations of a school.
  • Employees of cooperative hospital service organizations.
  • Civilian faculty and staff of the Uniformed Services University of the Health Sciences.
  • Employees of public school systems organized by Indian tribal governments.
  • Certain ministers (IRS)

Annual Contribution Limit

  • $19,500 in regular contributions
  • $6,500 in age 50 catch up
  • For those with employer matches or other employer contributions, the limit is $58,000 or 100% of compensation (whichever is less). This limit rises to $64,500 if age 50 or over. The participant is still limited to the employee elective deferral limit ($19,500 for 2021). An employer can add up to another $38,500. (IRS)

Plan Assets

Overview: The not-for-profit (NFP)/governmental defined contribution (DC) segment represents approximately 8% of the total U.S. retirement market. This sector includes the Federal Thrift Savings Plan (TSP), 403(b), 457, and 401(a) markets. Total NFP/governmental DC plan assets are expected to grow at a compound annual growth rate (CAGR) of 7% to reach $2.4 trillion by 2020

403(b) Plan Assets as of 2014 (higher education, public K-12, healthcare, private k-12, and “other.”). 

  • Mutual Funds $260 billion (24%)
  • Variable Annuities $351 billion (33%)
  • Fixed Annuities $464 billion (43%)

Note: this is the latest plan asset data that we have had acces to. If you are reading this and have updated information that you are able to share, please contact us here.

Key K-12 403(b) Issues

  • K-12 403(b) multi vendor environment leads to higher investment fees, and higher plan maintenance costs 
  • Lack of teacher knowlege about the 403(b)

California K-12 403(b) Issues

  • 1970 insurance code (770.3) prevents K-12 districts from putting plan out to bid
  • Annual fees for 403(b) products range from 0.56% to 4.58%
  • The average cost of all 403(b) products is 1.78%
  • More than 60% of products charge a surrender fee
  • 70% of products include sales commissions

K-12 403(b) Recommendations

  • Eliminate inidividual contracts
  • Put plans out to bid. According to AON Hewitt (2016), "the benefits of consolidating 403(b) record keepers to a single or reduced number of providers include lower administrative costs, improved regulatory compliance, and a more effective plan governance structure. Effective plan governance and oversight have the potential over time to increase participant satisfaction and improve retirement readiness for participants."
  • Educate teachers about the 403(b) before they enter the classroom
  • Ensure that at least one quality, low-cost option is available. Companies known for offering quality investments at a reasonable cost include:  
    • Aspire
    • CalSTRS Pension 2 (California only)
    • Fidelity Investments
    • MissionSquare (formerly ICMA-RC)
    • TIAA
    • T. Rowe Price
    • Vanguard


IRC 403(b) Tax-Sheltered Annuity Plans
IRS Publication 571

Key Media Stories on the K-12 403(b) 



AON Hewitt Investment Consulting, Inc. (January, 2016). “How 403(b) Plans are Wasting Nearly $10 Billion Annually, and What Can Be Done to Fix It.” Deerfield, IL.

Blair, S. (2018, October 4). RISE of California retirement investment summit on education: Protecting investors in 403(b) and 457(b) plans. Presentation at the Securities and Exchange Commission investor protection event. Sacramento, CA.

Cerulli Associates. (2016). “U.S. Not-for-Profit & Governmental Defined Contribution Plans 2016.” [Executive Summary]. Boston, MA.

Updated 6/23/20

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