Many educators have contributed to a 403(b) for years without knowing exactly what they own, or what they're paying.
Your account may hold an annuity, mutual funds or other investments available through your plan. Each can have different costs, features and restrictions. Before you make your next contribution, make sure you understand what you have.
Many educators are surprised to learn that a 403(b) isn't an investment itself. It's a retirement account, and what's held inside it depends on the products your employer has approved and the ones you chose, or were sold, when you enrolled. That may be an annuity, a lineup of mutual funds, or both.
Two teachers in the same building, contributing the same amount, can end up with very different results simply because of what's inside the account.
An annuity is a contract with an insurance company. Annuities in 403(b) plans are usually variable annuities, whose value rises and falls with investment "subaccounts," or fixed and fixed indexed annuities, which credit interest under the contract's terms. An investment portfolio uses mutual funds or other investments available through your plan.
| Annuity | Investment Portfolio | |
|---|---|---|
| What is it? | Insurance contract | Portfolio of investments |
| Costs | May include contract, insurance, investment and rider expenses | Fund expenses plus applicable advisory or platform fees |
| Guarantees | May provide insurance guarantees | No insurance guarantees |
| Access & flexibility | Subject to contract and plan provisions | Generally more flexible, subject to plan rules |
| Investment choices | Defined by the contract | Based on investments available through the plan |
Neither is automatically better. The right choice depends on what you're trying to accomplish.
An annuity is an insurance contract, and insurance features can be valuable when they solve a problem you actually have.
Some annuities may provide guaranteed lifetime income, principal protection, death benefits or other insurance features. Those benefits can be valuable for the right person. But guarantees and additional features can come with costs, restrictions or tradeoffs.
The question isn't:
"Are annuities good or bad?"
It's:
"Does this annuity make sense for my retirement plan?"
Tax deferral is one of the features most often used to sell annuities. But whether you contribute pre-tax or Roth, your 403(b) is already a tax-advantaged account. As the SEC puts it, when a variable annuity is held inside a 403(b), "you receive no additional tax advantage from the variable annuity."
That doesn't automatically make an annuity inappropriate. It means the decision should rest on the other features the annuity provides.
What insurance benefits am I receiving?
Do I need those benefits?
What am I paying for them?
Investment expenses don't arrive as a bill in the mail. They're usually deducted from your account or built into investment or contract performance, which is why many educators have never seen a total.
Depending on the product, annuity costs may include:
Variable-annuity costs vary by contract and may include multiple layers of expenses. That's why it's important to look at the total cost, not just one fee listed on a statement or prospectus.
To be fair, mutual funds and ETFs have costs too: management fees, operating expenses and transaction costs. And if you work with an advisor, including us, an advisory fee applies on top of those fund expenses.
Every dollar paid in costs is a dollar that's no longer invested and compounding for your future. Consider a hypothetical $100,000 portfolio earning 7% a year before expenses, left invested for 30 years:
In this hypothetical example, increasing annual costs from 1.00% to 2.00% reduces the ending value by approximately $142,000.
Not because one portfolio earned a higher return, but because more of the return stayed invested.
Hypothetical example for educational purposes only. Assumes a constant 7% annual return before expenses, costs deducted annually, and no additional contributions, withdrawals or taxes. Figures are rounded. It does not represent the performance of any particular investment, product or fee schedule, and does not reflect the value of any insurance guarantees. Actual results will vary.
Many annuity contracts charge a surrender fee if money is withdrawn or transferred during a set period, and moving money can also affect guarantees and benefits you've already paid for. Before making any change, find out:
For many educators focused on building long-term retirement savings, a diversified portfolio of mutual funds and, when available and appropriate, ETFs can offer several advantages.
Broadly diversified funds can provide exposure to hundreds or even thousands of securities across companies, industries and markets.
Low-cost funds can make it possible to build a diversified portfolio while keeping underlying expenses relatively low.
A portfolio can generally be adjusted as your goals, retirement date, risk tolerance and circumstances change.
Fund expenses, objectives, risks and holdings are disclosed in prospectuses and other regulatory documents.
Your allocation can be designed around your pension, 457, IRAs, Social Security and the income you'll need in retirement.
If your 403(b) isn't working for you, you usually have options, but the order matters.
Don't surrender it. Don't transfer it. Understand it first.
Bring us your latest statement and, if available, your annuity contract. We'll help you identify:
The type of annuity and the investments inside it.
Contract, investment and other applicable expenses.
Surrender provisions, guarantees and insurance benefits.
Based on your employer's approved 403(b) providers and platforms.
Then we'll help you look at your 403(b) alongside your pension, 457 and overall retirement plan.
Sources: U.S. Securities and Exchange Commission, Evaluating Your Retirement Options; Investor.gov, Tips for Teachers: Investing for Retirement. This page is general educational information, not individualized investment, tax or legal advice. Annuity features, costs and guarantees vary by contract; guarantees are subject to the claims-paying ability of the issuing insurance company. Investing involves risk, including possible loss of principal.
