The Bogleheads' Guide to Investing

by Mel Lindauer

Unlike 401(k) plans, which are designed for profit-making entities, 403(b) plans are designed for nonprofit entities such as schools, universities, churches, and certain charitable organizations. According to the Spectrem Group, which tracks the 403(b) industry, approximately 80 percent of the $578 billion invested in these plans is held inside annuities. Most of the remainder is invested in stand-alone mutual funds. A 403(b) plan is the only salary-deferral plan available for public school employees. 401(k) and 403(b) plans are similar in that they both allow employees to defer tax on a portion of their salary. Both allow matching contributions and generally have the same maximum limits. The major disadvantage of 403(b) plans is their choice of investments. Most offer only high-cost annuities sold by brokerage and insurance firms. It makes no sense (except to the annuity company) to pay the extra cost of the annuity’s tax deferral when the 403(b) or other tax-deferred plan already provides the same tax-deferral advantage. A minority of 403(b) plans offer a variety of options from insurance companies, brokerage companies, and mutual fund companies. This places the 403(b) participant at the mercy of commission-paid salesmen, who often have a serious conflict of interest. Never forget, the more taken from your returns in the form of higher fees and expenses, the less you’ll end up with in your retirement account. If you are a participant in a 403(b) plan, it’s important for ...