The 403(b) plan has been around for a long time, but compared to the 401(k) plan - its more famous cousin - the 403(b) plan gets little attention. While not nearly as popular, the 403(b) plan is a valuable tool for eligible investors. A quick question and answer session can you get the most out of your 403(b) plan. (For a background, see our 403(b) Tutorial.)
Even if you are affluent or extremely risk averse, passing up free money is probably not a wise decision. Since most 403(b) plans offer a money market fund as one the investment options, you could tuck your contribution and your match in there and hold it with relatively little risk when compared to the potential fluctuations of the mutual funds that invest in stocks. (Check out Money Market Mutual Funds: A Better Savings Account to learn more.)
Financial advisors often recommend against investing in annuities in a 403(b) and other tax-deferred investment plans for a variety of reasons. The first reason is that annuities are designed to provide tax-deferred growth. Since tax-deferred investment plans already offer that feature, investing in a vehicle (annuity) designed to provide the same feature is redundant.
Second, annuities often charge high fees. Not only do high fees detract from investment performance, as every penny spent on fees is a penny taken away from your investment returns. To pay a high fee for an investment that offers a benefit (tax deferral) that you already get from the provisions of the 403(b) plan is not viewed as a wise way to spend money.
Third, annuities often levy surrender charges if you transfer your assets out of them prior to the passage of a predetermined period that is often set at several years. Locking up your money for such a long period of time severely limits your flexibility in making investment decisions.
Fourth, annuities are complex investments that often include a significant amount of fine print. Many investors lack the time, patience or knowledge to fully evaluate the annuities offerings in their 403(b) plans.
Fifth, variable annuities, which offer a variable payout based on the performance of underlying investments, can lose money. Investing in an overpriced vehicle that can lose money is generally not a good idea. (Learn more in Getting The Whole Story On Variable Annuities.)
Of course, annuities also come in another flavor - the fixed annuity. Fixed annuities offer a guaranteed payout. Considering the stock market's negative or paltry returns over long periods of time, a guaranteed payout can have a real appeal to investors. If you are conservative investor and your 403(b) offers a fixed annuity, it may be an appealing place to put your money. (To learn more, read Exploring Types Of Fixed Annuities.)
If you have been contributing to the plan for at least 15 years you are also eligible for another catch up provision. Under this provision, you may contribute the lesser of $3,000 or $15,000 reduced by (a) the sum of pre-tax deferrals made in prior years (b) aggregate amount of designated Roth contributions . (For more, see Paying Retirement Catch-Up.)
Though the 403(b) is less popular than the 401(k) plan, it still has a lot to offer for certain eligible investors. The common questions that were answered above will help you make the decision that's right for you.
For more information about 403(b) plans, read The 4-1-1 on 403(b) Plans.