Smart401k Blog

If you are an employee of a public school, hospital or other 501(c)(3) organization, then you are most likely eligible to participate in a 403(b). The responsibilities of employers offering a 403(b) plan are much looser than those of 401(k) sponsors. For example, employers offering a 401(k) (or 403(b) with an employer match) have a fiduciary duty to ensure that there is an appropriate mix of investment options offered and that the fees in the plan are reasonable for the services being provided. In contrast, voluntary 403(b) plan sponsors must only provide access to an adequate number of companies for investors to choose from. Adequate in this case, is most commonly defined as a number large enough to ensure that it does not appear that the employer is endorsing one company over another. The relaxed structure means that you as a 403(b) investor have to look out for yourself when it comes to selecting an option with a good mix of investment choices and reasonable fees.  As overwhelming as this may seem, I know that you can do it if you do your homework and seek guidance when needed. Here are a few tips to get you started.

In most cases, there will be 5-10 investment companies to choose from, each offering several annuity or mutual fund products. A list of these companies can be obtained from your payroll or HR department.  The typical menu is dominated by annuity and mutual fund options offered through on-site salespeople. However, most employers will include at least one low cost option that does not have an on-site representative. These options will usually provide a good selection of investments at a relatively low cost but will not provide guidance on how to allocate your invested dollars among the available funds.

If your employer only allows you to invest in options that are offered by on-site sales people, ask a few questions before you invest. Most of these salespeople can provide access low cost mutual funds so be persistent in finding out all the options they have to offer. Try to find a fee based mutual fund platform with a wide variety of funds and an annual cost of 1%.  In addition, ask the sales person the following questions, two yes answers would be OK, all three would be best:

-Will my account be reviewed at regular intervals to ensure that it remains in line with my investment objectives?

-Will I be able to move my money out of this investment at any time, without penalty?

- Will you show me all the costs associated with this investment including your compensation in writing and explain each in detail?

The fees associated with an investment are one of the most important factors to understand. An additional expense of 2% can have a significant impact on your retirement nest egg. For example, a person saving $500 dollars a month for 30 years, earning an average of 8%, would have roughly $745,000. In contrast, if the return was lowered by two percent to 6%, due to elevated fees and expenses, the end value would be reduced to around $500,000.

If you select a provider with reasonable fees and high quality investments, , you are in a similar situation as the average 401(k) investor. The next task is deciding which funds are right for you and your investment objectives. A properly allocated portfolio will contain funds investing in bonds as well as stock in small and large companies, in the US and abroad.  If you’d like more information on how to allocate your account, consider either checking out this article or contacting an adviser at Smart401k.  We assist our clients select a 403(b) provider in addition to making a personalized, fund specific recommendation on how to invest your account.

If you have questions about your employer sponsored retirement plan, please feel free to contact our adviser team at 877.627.8401 or info@smart401k.com

Charlie Koch, Investment Adviser

This entry was posted on Tuesday, February 2nd, 2010 at 8:18 pm and is filed under Adviser Commentary. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.