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Advisor Insights

403(b) Plans Not Adding Up

Contributor Scott Simon discusses what upgrades 403(b) plans should make, with lowering costs being the first improvement.

Ben Franklin said "a penny saved is a penny earned." This simple but powerful adage underlies any savings and investment program, whether established by someone on their own or whether they participate in a private retirement plan such as a 401(k) plan. The lower the costs of investment options incurred when making contributions to a nest egg (a penny saved), the more money that becomes available to invest and grow that nest egg (a penny earned). In the context of a retirement plan portfolio, this adage ignores that crazy little thing called risk, but this month's column focuses generally on costs.

Franklin's adage also applies to, say, retirement plans in the public sphere, such as 403(b) plans made available to educators by public school districts. It's no secret that many educators participating in 403(b) plans are forced into suboptimal investment options, such as high-cost annuities and mutual funds. Why? Because in many states like California and Texas, school districts can offer educators just about any looney insurance company-issued financial product no matter how high their costs may be and how imprudent they are. In such states, the bad guys rule the roost and the good guys--low-cost providers--stay away because they refuse to sign school district hold harmless agreements, which legally shield districts from unforeseeable events that may negatively impact a provider.