The Failing 403(b) Was My Wake-Up Call

The Failing 403(b) Was My Wake-Up Call

Have you ever been so eager to get, do, or have something that you couldn’t see its failings? We've all been there, at some point in our lives, wearing those rose-colored glasses. Many times we're not fully to blame, and sometimes we are. Massive marketing makes it easy to see only the roses, while the reality is vastly different.

Join me as I shed light on my failing 403(b). The turning point in my investment life, and subsequently my ascent to FI. It was also pivotal in propelling me forward into other investment vehicles beyond the 403(b).

Why is it important for you to read this, and how can it help you? After  all, you are savvy and appreciate value. Fair enough questions. I'm writing this post about it because I'm smart, I understand value, and yet I was fooled into saving in an innocuous 403(b) that was rife with fees in disguise. I want you to be informed, too.

I'm going to fill you in on some nasty secrets in the 403(b) world that even the Millionaire Educator doesn't reveal.

Everyone seems to know what a pension is and recognizes 403(b) as a something like a 401(k), but with a different number. And while that much is true, they're actually worlds apart.

First: Why It Matters

Everyone knows the value of a pension but they all assume that working for the same employer for 30 years was an acceptable given. “Oh, you have a pension? Your future is set.” Don’t ever move, don’t change your mind, and don’t aspire to try something new, is left unspoken.

Teaching was a career change for me and it's immensely rewarding, but I wanted to be able to choose my retirement date and a 403(b) seemed like a great vehicle to get me there. I wanted something I could count on “just in case” I didn't want to stick around for 30 years.

Looking back, I realize that ultimately, I wanted to be in charge and not reliant on a pension system. And that's why it matters.

Next: Differences In Retirement Plans

If you've ever contributed to a 401(k), you might expect a 403(b) to be the same. You'd be partially right. Here's a short–but critical–explanation of the differences in retirement plans.

457 plan

This is a tax advantaged deferred-compensation retirement plan that is available for governmental and certain non-governmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pre-tax or after-tax (Roth) basis.

401(k) Plan

A 401(k) plan is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan.

The options are carefully chosen by the employer. By law, (ERISA 1978) they must have the employee's best interests in mind. In some plans, the employer may also match the employee’s contributions up to a certain percentage.

403(b) Tax-Sheltered Annuity (TSA) Plan

The 403(b) is a retirement plan offered by public schools and certain tax-exempt organizations. It's similar to a 401(k) plan maintained by a for-profit entity. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salaries into individual accounts.

The HUGE difference is that the same law that governs employers offering 401(k)'s, (ERISA), does NOT apply to non-profits. This means that employers are NOT accountable for choosing fair and competitive fund options. They load the employee up with high-cost vendor options, tell the employee “good luck, and then invite the sales representative (AKA financial advisor) to the place of employment to prey on an unsuspecting employee.

As a result, vendors like AXA, Ameriprise, and others, have a FIELD DAY!

But don't take my words and experiences for it. Read it yourself, directly from a 403(b) sales rep: (login is required but it's free, and wise, to do so.)

I am a 403b annuity sales representative and am in agreement there needs to be massive changes in the way 403b annuities/custodial accounts are sold to non-for-profit employees. In the schools, teachers have no clue what they are being sold to them by us, as we explain it like a 401k for teachers (which is half-truth). We are told to dumb it down and explain it like in the most elementary terms possible. Most teachers don't even know what they have when they sign up for it (call it a 401b or something like that). Fees and surrender charges are rarely mentioned and when they are, the teachers look at you like a deer in the headlights. 

Employees are under the impression the 403b provider has been vetted by the school and endorsed by the administration, however, many in the administration don't even know the difference between a ROTH and a Traditional IRA, let alone what to endorse when picking the right retirement vehicle. I have been told by administrators not to mention fees and expenses to staff because some can't even balance a checkbook, let alone understand what I am trying to explain. 

It can be like a kid at Christmas for the annuity salesman in the schools. Where else can you walk the halls, knock on doors, introduce yourself, and get an appointment all at the same time. You can tell the teacher anything and there is little accountability. We call ourselves advisors, even though we are working as brokers selling commissions and no one knows the difference.

Shocked? Take Action

I was all in and signed up for a 403(b). I signed on the dotted line just as my next class was walking in. Boy, was I happy I took care of that. I remember the sales rep saying “annuity“ and “12 years” and we determined I had a moderately aggressive investment profile. Beyond that, I don't remember much else.

I set about maxing out my contributions. I considered it an expense. Soon after that, my rep was long gone and I met another rep in the faculty room. Again, I didn’t know it at the time, but only certain vendors were allowed in our school. While they were vetted by the district’s business office, they were selling investment choices they wouldn’t sell their mothers. Nobody knew if the plans were good or bad and if they did, they couldn’t comment, for fear of being accused of advising.

He was quick to point out the problems with my plan. The fees were high, but I justified it as paying for a service. Everyone has to make a living, right? I started to get wise, but apparently, not wise enough.

I switched to his plan. Rather, I tried to. I couldn’t yet move my money because of, lo and behold, plan one's ridiculous surrender fees because I held the plan for less than twelve years.

Eventually, I started a new plan–plan two. Here, I was paying front-loaded fund fees. I went from worse to bad. How could I be that foolish? It was almost embarrassing. BUT I TOOK ACTION.

To avoid the same mistake, examine the chart below and reflect, then take action. Find out how your plan, no matter which type, stacks up. It's tens of thousands of dollars, and more, in terms of lost potential.

What’s In A Percentage Or Two?

A modest $250 month investment with an 8% return over 35 years yields drastically different results depending on the 403(b) fees.


See Also: When 2% Costs Everything–How Investment Fees Cost You Your Freedom

My Action Steps And 403(b) Wise

I finally tuned in when I came across the website 403(b)wise. I learned about the impact of fees and I learned how others had been duped.

I came across a really helpful community on the 403(b)wise Discussion Board. Why would anyone knowingly spend over $200,000 for unnecessary costs? Because they think 1-2% is a small price to pay for so-called advice. Boy, does that really add up! And yes, advice has its place, but not on my dime. Or my Franklins.

What Can You Do?

I researched alternative vendors, connected with Aspire (brokerage window allowing access to low-cost mutual funds without the add-on commissions), contacted our Third Party Administrator, appealed, educated and requested the addition of Aspire.

My district’s business office personnel completed that process and I put an end to this saga by transferring both 403(b) accounts into my third 403(b) account, where it lives today. Goodness prevails.

Action step: Compare your plan's fees here, no matter what state you're in. And then take action.

Read the New York Times series here. Tara Siegel Bernard and I spoke at length and I gave her actual statements as documentation. Call your business office and ask questions. Demand better options.

And then share it with any teacher you know.

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The Failing 403(b) Was My Wake-Up Call

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14 thoughts on “The Failing 403(b) Was My Wake-Up Call”

  1. So glad that you wrote this article! I also work for a non-profit and have the option available to me for a pension, 403(b), and an 457(b). I am in each except the 403(b) when I noticed the aggregate fee on all the investment options was 1.99%. I signed up for the 457(b) instead which had much lower fees.

    I’ve been trying to explain to my boss that she is paying 10-20 times higher fees with the 403(b) than the lowest fees such as those in Vanguard (0.03-0.10%). She just says shrugs and says that can’t be right. Not my responsibility to look after her investments.

    My struggle is whether or not I made the right decision choosing the pension route. It is 7% deduction in pay with a 10-year vestment period. I’ve looked at statistics on how the pension fund is doing lately (down 3%). Every older co-worker I come across equates their retirement timeline based on the pension. They’ll say I can retire in x number of years. Based on what? Not based on their retirement funds but based on receiving their maximum benefit from the pension and from health care. Neither one of those two are guaranteed no matter what “they” say is guaranteed.

    I wonder if I could have taken that 7% from my paycheck and invested it myself and done better. It’s always hard trying to figure out whether you can make more post-tax investment gains versus pre-tax savings that are earning lower returns.

    Thanks for your article, unfortunately only the ChooseFI will read it and most of the uninformed will stay that way but that is their own choice. Ignorance with financial responsibility is a choice each person can decide whether or not to take.

    • Thanks for your comments. You are right about most of the audience being from Choose FI. Unfortunately the reaction from your boss is too common. People think, as I once did, that the cost of fees cannot be right, we must be wrong. Tara Siegel Bernard, Finance writer for The New York Times published a five-part series on what’s wrong with the 403(b) plans in 2016. Slowly, people are starting to listen.
      The laws changed and Vanguard was removed as a choice at many districts. For the most part, higher cost options remain because they simply pass on the cost and then some, to participants. You are wise to evaluate your options. Too few do. I believe it was Joshua Sheats of Radical Personal Finance and/or The Mad Fientist who examine your last question: comparing pre and post tax investments.
      Sounds like you have a good mix between your pension and 457. And so true, people count down until they can retire based on a maximum pension. It’s like they have zero control to move up the date by saving.
      Keep talking to your boss. I’ve learned that you cannot be judgemental and people will always be too embarrassed to acknowledge they might have made a poor choice. Inform and share articles!

  2. hrmmm. this is really interesting. For what its worth, my wife(s) investment options for her 403(b) and 457(b) are really pretty ok. (I can basically make VTSAX for 0.09 ER). I figured our opportunity cost of maxing it out for 9 years and buying out her pension at about $1,000 (vs dumping money in other accounts with 0.05 ER). while leaving a couple hundred k in 457 at the end for pension supplement. I guess is my point is to make sure you give proper effort to comparing the tradeoffs before fixing a direction.

    I’m also curious how you’re going between different custodians. My understanding is my wife got really lucky with a not-too-ridiculuous custodian and set of options (VALIC), because she cannot use anyone else. Maybe you/anybody have the option to roll-out to your own choice once a year or something? I guess it has to be allowed by your emplyer plan. IIRC, I asked Vanguard many moons ago if we could do this since I know they administer 403(b) plans and we were unable to do so.

    Anyway, I’m really interested to put together a Missouri teachers pension FI/RE tutorial or maybe subredit. I’m looking for someone to perk up and kick me in the ass to do so. I’ve already built some pretty hardcore calculators and a list of bulletpoints outlining the logic and discussion points.

    • Hi James,
      Thanks for your comments. If you have fees like 0.09 in a 403b and NO wrap fees, consider yourself lucky. Most 403b plans offer dozens of higher-cost choices instead of one low cost option. No, I didn’t move between custodians. Instead I waited out the 12 years in one to avoid surrender fees and in the other, I had front-loaded fees so I could stop contributing at any time. The day came finally when I transferred them both into an account managed by Aspire where I now self-direct. I max out my 457.
      Transferring out of custodians is allowed but you must persevere because vendors will send you the wrong forms, ask you to get them notarized, lose your paper work, not call you, give you false information in hopes you give up-many do- and don’t move your money out.

      Thanks again for your comment.

      And consider me kicking you in the butt. If not for my experience, I might not have woken up to the FI world. I will be happy to collaborate with you. I am teaching an online class now on the very topic and the demand for it is there. People need to know the reality of deferred compensation plans.

  3. Great post. The 403b and 457 market is beyond horrible due their use of fee-bloated annuity contracts and their onerous surrender charges. It’s a classic “heads-I-win-tails-you-lose” scenario where these plans are established to benefit the financial intermediaries and the investors are a tertiary consideration at best. I always remind people not to invest in plans that have surrender charges because they magically make your money THEIR money. Thank God there is the separation-of-service escape…when you quit your job, you can move your money. What a novel idea!

    I used to write about horrors of the 403b world at my blog “The 403b Boondoggle.” I had to stop because the subject made me an angry and negative person. The 403b/457 marketplace is beyond repair, so it’s imperative that anyone using these plans have an escape plan to move YOUR money to greener financial pastures.

    Good luck teachers, government workers, policemen, and firefighters because there’s an army of charlatans and hucksters trying to legally steal your retirement savings. Ed

  4. Thanks Ed!
    It’s easy to understand how it made you angry and negative. It continue’s making us angry and I can understand why teachers, government workers, police officers and firefighters do little about it – because it is THAT unbelievably bad, incomprehensible and convoluted.
    If those in our FI community catch on, maybe together we can spread the word and help out those who continue spending hundred’s of thousands in fees and opportunity cost.
    And thank you for sharing your 403boondoggle blog. ( Your chart showcasing an investor gain of 21% compared to the advisor’s 78% is inexcusable and it continues to get worse in this decade. (My apologies for thinking you didn’t reveal the exuberant costs – I wasn’t aware of your earlier blog.)
    I am making it a mission to help get teachers out of their handcuffs if they’ll only accept the help. My online Professional Development course is being approved now and we will be implementing it in May.
    Thank you again for your comment and for all you continue to do, in and out of the classroom.

    • Hello I work for Minneapolis Public schools as a bus driver. I have a 403b and 457 plan of which ive contributed now for 13 yrs. The main issue i have is with 403b AIG customer service. You see what happened was i took out a loan for 2100.00 in 2008 of which i defaulted. I’ve called since 2009 to get a payoff amount that didnt include interest. In Sept i was quoted 2047.00 November 2018 $2080. Fast foward to March of this year i was then told that the payoff amout to take out another loan was $4090.00 they now are charging interest!!! How am i suppose to come up with 4k plus?? Ive spoken to many different Managers all who quoted a payment of 2k plus up until now. Its obvious their reps aren’t trained well. One rep laughed at me when i asked for confirmation that all the money goes back into my balance of which he said no. But thats not what the previous rep said so I hung up. Out of frustration i ended up calling my financial adviser who made a 3way call to AIG and we still couldnt get answers about interest being applied all of a sudden. He apparently wasnt sure if the money goes back into my balance either. Im stuck and trust no one at this point. I want to cancell them. Please help!

  5. I stumbled across this post while searching for information on 403b plans as I have an appointment set with a rep from Axa this week. It sounds like I’m the perfect candidate to get steam rolled by a plan I don’t understand so I’m thinking I should cancel this appointment. I’m new to investing and retirement. Not sure where to even start.

    • Hi Becky,
      Congratulations on stumbling upon this timely post. Here are a few questions to ask any rep. If you don’t understand, don’t sign!! Do you have access to a 457 plan? Often, the fees are lower (because there are no sales reps) and you have index funds to invest in. I recommend you find out who your 403b vendor choices are. Look on your district website or call and ask your business department for this list. Aspire is a vendor that many 403b providers include as a choice. Aspire allows you to choose the popular Vanguard index funds without adding excess AUM fees (with or without a Financial Advisor). I successfully petitioned my employer to add Aspire to our lineup because they were all bad choices! Lastly, reply again with your vendor options and I can steer you.
      Questions to ask:
      1) How do you come up with an investment plan for me?
      2) How will you educate me about the investment process and my specific portfolio?
      3) What are the NET returns for the funds you recommend in the last year (after fees are accounted for)?
      4) Please detail all fees or commissions involved, including all costs of mutual funds or variable annuity sub accounts.
      5) Please include any fees related to closing an account (i.e. surrender or back-end charges.)
      6) How are you compensated?
      Hope that helped Becky! Congratulations again on taking action.

  6. I guess I came across this site a little too late. I had no idea what a 403b was, but again, the same equivlenece to a 401k was used so I didn’t really question anything. What do you suggest for me to do now that I’m already on the 403b ship?

  7. Hi Carly,
    Congratulations on saving in a retirement vehicle. Your 403b plan might be better than others but you will need to ask in order to know with certainty what the associated fees, charges and costs are. Call the 403b company directly using the 800 number on your statements. Do not call HR or the sales rep. They won’t be able to answer your questions clearly enough, most likely. Call your HR department and inquire about all options available to employees. Maybe you have a 457 plan. In any case, the Self Direct option is your least expensive option. You will pay the least and choose the index funds yourself. If you want a financial advisor to look over your choices, you can pay one a one-time fee to do so. Refer to and for resources and more information.
    Good luck. Post back in a few days to report your findings and your action plan.

  8. I am in a different situation compared to many. My current no-profit (mutal of america) offer 4% contribution of annual salary. I am hesitating to contribute 4% of annual because of 403b non-sense you outline.

    [1] No FDIC insurance on 403b
    [2] wait for 15 years to get money (you get money for emergency & hardship but payback in 60 days or so)
    [3] hoping that market behave when you want to take out money
    [4] hoping fund manager is smart enough and do a good job with your money
    [5] if all goes well you get 4% matching contribution aka free money in your hand
    [6] profit = your investment profit (2 to 10% max) – fees – tax (not sure your actual tax % at the time of retirement considering you’re making more as your deductions are gone – unless you have a kid under

    So should I invest to get employer 4% as tax benefit is useless for me plus I good at budgeting

  9. Great points and discussion. I have recently discovered the FI world and your podcasts. Excellent content and very inspirational. We will start the Travel Hacking next month, which is when we’ll have our credit card at zero carryover balance. And we’ll use your link for sure!
    My wife and I have made significant changes with our budget that will allow us to have extra money each month for investing and/or debt payoff.
    And just this week, our WA state retirement system sent us a letter inviting/encouraging us to invest in their state managed 457(b). After reading your article, I will be much more careful to understand fees attached. (Maybe they will be less given that it is managed by the state?)
    With our budget changes and savings, what should we do with extra money each month? Our remaining debts are our mortgage and two bad-decision car payments. Would you recommend we use our extra money each month to pay off the car loans? (One has a balance of about $14,000 at 4.2%; the other about $25,000 at 4.9%)
    Or should we start putting the extra money directly into retirement investing?
    And when we do start contributing more to retirement, what should we do:
    1) Vanguard low fee Index funds
    2) 403(b) (if we find a low fee option)
    3) 457(b) (if this state option is low fee)
    And can we move pre tax dollars into Vanguard now (2019), or is our only option to invest in the Index funds post-tax, and separate from our school district payroll deductions?

    We appreciate any comments you might have to help us make these decisions. And thank you for introducing us to FI.

  10. Hi! I am starting work at a non-profit, private Waldorf school and was offered a 403b via TIAA. I am reading some bad things about it and now just read your article.

    After a year my employer will match 2.5%. Though, I have no idea what the fees are, I do see I have the choice of choosing my own investment profile (of which I must say I am not quite clear the best place to do those investments. Not sure if low-cost index fees are available either).

    Should I just say I don’t want to participate in this program and instead invest on my own behalf but know that I am missing out on the employer contribution?

    I am just getting started with investing and have no clue where to start. An IRA? What type and with whom? A vanguard? Try the 403b?

    Thank you for any insight you can offer.

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