Some 403(B) Retirement Plan Advice

As teachers across the country brace themselves for playground duty, homework assignments and kids who fall asleep in class, many find themselves with one more thing to worry about: retirement security.

Faced with rising budget deficits, states are slashing pensions for educators and other public workers. That has made it even more important for teachers to supplement their pensions with their own savings. Unfortunately, many 403(b) plans -- the public sector's version of 401(k) plans -- get failing grades from retirement experts.

Most 401(k) plans are managed by a financial firm selected by the employer to administer the plan. Employees are given a menu of investment options from which to choose. In many cases, economies of scale allow the plans to offer institutional funds, which charge lower fees than funds sold to retail investors.

Most school districts take a more hands-off approach, allowing any investment firm to offer a plan to employees. For example, in California, teachers must muddle through more than 3,000 investment options from more than six dozen providers, according to a study by investment firm TIAA-CREF. Many of the plans included high-cost annuities and other insurance options, the study found.

IRS regulations that became effective last year require school districts to take a more active role in monitoring their employees' retirement savings plans. As a result, some districts have taken a more active role in vetting plans offered to their employees. Some have selected a handful of providers, based on competitive bidding.

While more choice usually means lower costs, that's not the case with 403(b) plans, says Bruce Corcoran , head of the K-12 segment for TIAA-CREF, the nation's largest provider of 403(b) plans. The TIAA-CREF study found that the average fee for 403(b) plans offered to teachers in California is 2.11%, more than double the fees charged in states that control who can offer the plans.

The report also found that a quarter of California's investment choices paid sales commissions that were deducted from the participant's savings.

In addition to high upfront commissions, plans offered in open-access districts often charge hefty surrender fees, says Dan Otter , a former teacher and founder of 403(b)wise, an educational website. "It's not a teacher-friendly model from our perspective."

Confusion can also create opportunities for chicanery. Last month, the Securities and Exchange Commission charged two Florida men with running a Ponzi scheme that bilked more than $22 million from teachers and retirees. The men, one of whom was a former insurance broker, told investors they managed a private equity fund that delivered annual returns of 124%.

Managing your money

Even if you think you're too savvy to fall for a Ponzi scheme, a high-cost plan with subpar investments could jeopardize your retirement security. Tips for teachers:

•If your school district offers a low-cost 403(b) plan, participate, even if you don't get matching contributions. While a company match is a common component of 401(k) plans, only about 10% of school districts match contributions to 403(b)s, Corcoran says. Even without the match, though, you'll receive the benefits of tax-deferred investing.

•If your 403(b) choices are limited to high-cost investments, consider saving money in a Roth individual retirement account or traditional IRA instead. If you're under 50, you can invest up to $5,000 in a Roth or traditional IRA this year; savers who are 50 and older can invest up to $6,000. You can invest IRA money anywhere you want, which means you can select a provider with lower costs than those available through your 403(b).

•Be proactive. If you're faced with a dizzying array of plans, encourage district administrators to conduct competitive bidding. Remember, this is their retirement plan, too.

After the school district of Montgomery County, Md., mandated competitive bidding, the list of 403(b) plans shrank to nine. Teachers can invest in plans offered by low-cost providers such as T. Rowe Price and Fidelity Investments. Meanwhile, "A lot of the nefarious plans are gone," Otter says.

•Educate yourself about fees. You can find more information about how fees affect your plan's returns by clicking on the "For Participants" link at 403(b)wise.com. The site provides information about average fees for different types of products, such as variable annuities, actively managed mutual funds and index funds.

"There are very few things we can control in investing," Otter says, "but we can control how much we pay for our investments."

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