403b plans for K-12 public school districts are for the most part uniquely different from 403b plans usually found in higher education and other non-profit organizations. Typically the district maintains a list of 403b providers from which the employee must choose. Neither the companies on the list nor their 403b offerings are vetted by the district in any meaningful way. Life insurance companies selling annuity-based 403b plans usually dominate the list, with fees totaling 2% to 3% per year. These annuity based plans usually have a surrender fee of 5 to 10% that can last from 5 to 10 years. Paying the surrender fees is usually cheaper than waiting out the surrender period because of the high annual fees. Financial firms selling expensive mutual fund based 403b products with fees of at least 1% per year are also common. Companies that offer both high cost annuity based and lower cost mutual fund based 403b plans focus on selling the annuity plans with little or no mention of the lower cost mutual fund based plans. These companies are allowed to enter and sell their high cost plans at the schools. Less common on the vendor lists are low-cost, internet based providers, such as Vanguard and Fidelity with fees of 0.05% to 0.20% per year.
An excellent source of information on 403b plans, especially those of K-12 school districts, is Dan Otter’s 403bwise.org website. There is a growing movement to reform the K-12 403b. The NY Times recently published a series of 5 articles called “Public Sacrifices” describing the K-12 403b problems with suggestions for change.
Another excellent source of information on K-12 403b plans are the podcasts by Dan Otter and Scott Dauenhauer.
California has a unique law that requires 403b providers to list their offerings with all fees disclosed on the 403bcompare.com website which is maintained by the California State Teachers Retirement System (CalSTRS). This website is an excellent source of information about a plan’s fees in other states as well, because usually the same generic plans are offered nationally. The low-cost DIY Lincoln Investment Group offerings below is not described on 403bcompare and so is not available in California.
Be aware that many school districts have hired a Third Party Administrator (TPA) to help administer their 403b/457 plans. When this is the case, the provider list is found on the TPA’s website. The TPA may have established rules for adding a new provider to the list.
If neither Vanguard nor Fidelity are on the provider list, which is the usual case, there are other possible options for a low-cost plan.
- Aspire offers a “Self Directed” 403b plan. Aspire is an “aggregator” which offers a large number of funds from various providers, including Vanguard Admiral index funds. They add 0.15% to each fund’s ER and have a $40/yr fee. TPAs will frequently add Aspire to the provider list.)
- Lincoln Investment Group offers “Retirement SOLUTIONS Participant-Directed Platform” as a DIY internet based plan. Vanguard Admiral class funds, no added fund fee, and has a $60/yr fee. It is not publicized and must be obtained through a regional Lincoln office, not through a local rep. Not available in California.
- Vanguard In 2017, Vanguard divested their small <20M 403b plans to Newport Group. The fee structure is now $60 per year rather than a fee per fund. Admiral class funds are now available, as is the Roth 403b option. There is no longer a limit of 4 mutual funds.
- Fidelity offers Premium class funds and charges $24/yr.
State-wide 457 plans are offered to K-12 employees in many states and are usually excellent and low-cost. For an incomplete list, see: 457B State Plans. This list also includes a few low-cost state-wide 403b plans and the rare 401k plan where available to K-12 employees. 457 plans can be used in addition to a 403b plan, or instead of a high-cost 403b. However high-cost 457 plans are also offered by insurance and financial companies.