Do you have the WRONG 403b plan?

Are You Wasting Money on the WRONG 403(b) Plan?

Navigating the world of retirement savings can be overwhelming, especially when it comes to choosing the right 403(b) plan. Many Washington State employees are unknowingly spending more than necessary due to high fees, limited investment options, or penalties tied to their chosen 403(b) provider. This guide breaks down everything you need to know about annuity-based 403(b)s versus mutual fund-based 403(b)(7)s so you can make the most informed decision about your retirement savings.


Understanding 403(b) Plans

What Is a 403(b)?

A 403(b) plan is a retirement savings account designed for employees of public schools, non-profits, and other tax-exempt organizations. It allows individuals to contribute pre-tax dollars into an account, letting their investments grow tax-deferred until withdrawal during retirement.

Annuity-Based 403(b) vs. Mutual Fund-Based 403(b)(7)

The two primary types of 403(b) plans are annuity-based 403(b)s and mutual fund-based 403(b)(7)s. Although both fall under the same tax code, they differ significantly in terms of fees, investment options, and flexibility.


Key Differences Between Annuity-Based and Mutual Fund-Based 403(b)(7)s

Fees: What Are You Really Paying For?

Annuity-Based 403(b)

  • High Fees: These plans often charge high administrative fees, averaging 1.35% or more, on top of investment fees.
  • Surrender Charges: If you withdraw funds before a specified period, you could face penalties ranging from 5% to 10%.

Mutual Fund-Based 403(b)(7)

  • Lower Fees: Administrative fees are much lower, typically around 0.10% to 0.15%.
  • No Surrender Fees: You can move your money freely between funds or to another provider without penalties.

Investment Options

Annuity-Based 403(b)

  • Limited Choices: Investments are often restricted to the provider’s proprietary funds, which may include high-cost options.
  • Extra Layers of Fees: Even popular funds like Vanguard may incur additional charges if purchased through an annuity.

Mutual Fund-Based 403(b)(7)

  • Wide Selection: These accounts offer access to thousands of funds, including low-cost options from Vanguard, Fidelity, and others.
  • No Markup: Investment fees remain low, ensuring your money works harder for you.

Flexibility and Liquidity

Annuity-Based 403(b)

  • Lock-Up Periods: Funds are often tied up for 5 to 10 years, making it costly to switch providers.
  • Penalties on Early Withdrawals: Attempting to access your money early could result in substantial financial loss.

Mutual Fund-Based 403(b)(7)

  • Greater Flexibility: You can move funds between providers without penalties, giving you more control over your investments.

Common Providers and What to Watch For

Annuity Providers

Some popular annuity-based 403(b) providers include:

  • AXA Equitable
  • New York Life
  • Voya
  • Horace Mann
  • MassMutual
  • Security Benefit
  • Corbridge / Valic(Variable Annuity Life Insurance Company)

Key Consideration: Many of these providers use aggressive sales tactics and sponsorships to gain your trust. Be wary of signing up on the spot at benefit fairs or during unsolicited visits from sales representatives.

Mutual Fund Providers

Top mutual fund-based 403(b)(7) providers include:

  • Vanguard
  • Fidelity
  • Aspire

Why Aspire Stands Out: Aspire offers access to both Vanguard and Fidelity funds, giving you unmatched variety without locking you into a single provider’s investment lineup.


How to Transition Out of an Annuity-Based 403(b)

If you’re stuck in an annuity-based 403(b) and want to transition to a better option, here’s what you can do:

Evaluate Surrender Charges

  • Check your contract for surrender fees. If they’re high, you may need to wait until the lock-up period ends.
  • Many contracts allow you to transfer 10% of your account value annually without penalties.

Stop New Contributions

  • Redirect future contributions to a mutual fund-based 403(b)(7) while leaving your current account untouched until surrender fees no longer apply.

Seek Professional Advice


The Benefits of a Flat-Fee Advisory Service

Many people assume they need to pay a percentage of their assets for professional financial advice. However, flat-fee services provide tailored investment recommendations for a one-time or annual flat rate, helping you save significantly over time.

Our Flat-Fee Service:
We offer a program designed to help you maximize your 403(b) investments. You maintain full control of your account while we provide:

  • Specific fund recommendations
  • Timing strategies for contributions and withdrawals
  • Ongoing support and updates


Making the Right Choice for Your Retirement

Why Choose a Mutual Fund-Based 403(b)(7)?

  1. Lower Fees: Keep more of your money working for you.
  2. Greater Investment Options: Access thousands of funds tailored to your goals.
  3. Flexibility: No lock-up periods or surrender charges.

When Might an Annuity-Based 403(b) Be Right for You?

In rare cases, annuity-based 403(b)s might offer benefits like guaranteed income or other features suitable for highly risk-averse individuals. However, the high fees and lack of flexibility usually outweigh these advantages.


FAQs

What’s the biggest drawback of annuity-based 403(b)s?

The high fees and surrender charges make annuity-based plans less cost-effective. Over time, these fees can significantly reduce your investment returns.

Can I switch from an annuity-based 403(b) to a mutual fund-based 403(b)(7)?

Yes, but you’ll need to consider surrender charges. You may also transfer a portion of your account annually, usually up to 10%.

Which provider offers the best 403(b)(7) plan?

Aspire is often recommended for its wide range of investment options and low fees, though Vanguard and Fidelity are also excellent choices.

How do I know if my 403(b) plan is annuity-based?

Check the provider’s name for terms like “Life Insurance” or “Annuity.” Providers like Valic and AXA Equitable almost exclusively offer annuity-based plans.

Do I need a financial advisor for my 403(b)?

Not necessarily. Many providers offer tools to help you manage your account independently. If you prefer professional advice, consider a flat-fee service to avoid ongoing percentage-based charges.


P.S. Join our free community and gain exclusive access to expert financial insights, personalized tools, and step-by-step guidance tailored for Washington State employees. Whether you’re just starting out or nearing retirement, our community offers the resources you need to confidently plan your financial future. Connect with like-minded individuals, ask questions, and stay informed about the latest strategies to maximize your retirement benefits. Start your journey today and take control of your financial goals—it’s completely free!


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Join our free community and gain exclusive access to expert financial insights & personalized tools tailored for Washington State employees. Whether you’re just starting out or nearing retirement, our community offers the resources you need to confidently plan your financial future. Connect with like-minded individuals, ask questions, and stay informed about the latest strategies to maximize your retirement benefits. Start your journey today and take control of your financial goals—it’s completely free!

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