The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 83. 403(b) Plan Reform

ONE OF THE PROBLEMS with 403(b) plans is the overwhelming percent of plan assets that are in high-fee, insurance-based products. In 2006, nearly 80 percent of the $652 billion dollars invested in 403(b) plans was held in annuity products, a high-fee choice that is not particularly suitable for retirement plans. Indeed, today it is widely accepted among financial professionals that putting an annuity inside a retirement account is a bad idea. That's because an annuity provides one layer of tax deferral, at a cost, and a retirement account provides another. Yet the basic 403(b) plan does exactly that.

In 1974, Congress added paragraph 7 to section 403(b), permitting employees to set up their retirement plans with mutual fund companies instead of insurance companies. Either company's products might include mutual funds as an investment option but the insurance company product wraps an annuity around the mutual funds at an additional cost, according to Mercer's Ethan E. Kra. Mutual funds come in two varieties—those with commissions and those without commissions. But all annuities have some kind of load or commission. "The load may be buried inside the annuity interest rate," Kra says. "But it's there."

The good news here is that a sweeping reform of 403(b) plans to address these abuses became effective on January 1, 2009. The Treasury Department and the Internal Revenue Service (IRS) released final regulations in 2008 designed to diminish or eliminate differences ...