How to Get Out of a Bad 403(b)
A bad 403(b) is expensive
The majority of K-12 403(b) plans are high fee. That’s because the majority of the financial firms servicing the plan sell expensive, commission-based products. As the chart below demonstrates, high fees can be devastating to retirement plan balances. What should you do if you discover you have a bad 403(b) plan and want to get out of it?
By the Numbers
Total value of investment after 35 years, assuming $250 contributed monthly with an 6% average annual return:
Note: The chart above is presented for illustrative purposes only and does not reflect actual performance, or predict future results, of any investment account.
Situation One: You Have Other Good Choices Available At Work
Ideally you have at least one quality, low-cost vendor available. Quality vendors known for reasonable fees include: Aspire, CalSTRS Pension 2 (California), Fidelity Investments, NEA DirectInvest (offered through Security Benefit; be wary of other 403(b) products offered by this company), T. Rowe Price, TIAA and Vanguard. If you are fortunate enough to find yourself in this situation, you can reach out to one of these vendors to learn how to open an account. Next, cease contributing to the high-fee vendor and direct contributions to the new company. This can be done by changing your Salary Reduction Agreement with your school district or employer. This is an agreement in which you spell out how much you want to contribute each pay period to your 403(b), and which vendor the money should go to. It may take a month or two for the changes to go into effect, but it will be worth it.
Lastly, you will have to deal with the money in the old account. Unfortunately, most high-fee vendors charge surrender charges which can last from 5 to 10 years or longer. Worse, many vendors charge rolling surrender charges which means each new contribution (last month’s for example) locks that money into a new surrender time frame. One approach is to transfer money that is no longer subject to surrender charges. As new money passes the penalty threshold, transfer it to your new vendor. Another approach, which can be costly, is to simply transfer the entire balance regardless of penalty.
Situation Two: You Don't Have Good Choices Available at Work
Unfortunately, this is all too common. The good news is that firms like Aspire (which offers access to quality, low-cost companies for a nominal fee), Fidelity Investments, and Vanguard (offered through the Newport Group) are increasingly becoming available on 403(b) vendor lists. Reach out to these companies to see if they can be added to your vendor list. Ask your benefits official to add these companies. Enlist co-workers to help this effort. Use resources from 403bwise.org. The fee chart information here and above is especially powerful.
While you work to get better 403(b) vendors, open a Roth IRA if you don’t already have one. The beauty of the Roth IRA is that it can be opened with any vendor you wish. Here’s information on the Roth IRA.
Another plan often available to school employees is the 457(b). It is very similar to the 403(b). Since more employer fiduciary oversight is required of the 457(b), the investment products are generally lower cost. Here’s information on the 457(b).
- Avoid going through the sales agent who sold you the product (if that’s how you got into your expensive plan). He or she is going to try and talk you out of seeking better options. Instead, contact the firm at the highest level to initiate a transfer.
- The firm you are transferring your money to should be able to assist with the process. After all, it is in their financial interest.
- Don’t get down on yourself for getting wrapped up in a bad 403(b). Very few colleges of education or school districts teach about the 403(b). Unfortunately, most school personnel are on their own to get wise to the 403(b). This is why 403bwise.org exists.
- See if anyone in the 403bwise Facebook Group has tips for your situation
- Share your story with colleagues. Help them avoid high fee companies. Become a 403bwise advocate.