403(b) Plan Advisor in Boston: Escaping the Annuity Trap for MA Educators

Plan Education: Why High-Cost Annuities Still Dominate MA 403b Plans

Despite years of regulatory efforts, high-cost annuities still dominate many Massachusetts K-12 403(b) plans.

The Best Interest regulation, which requires broker-dealers and insurance companies to reduce conflicts of interest among their financial professionals, applies. However, it doesn’t require a financial professional to recommend the lowest-cost option. A professional with access to both a higher-priced annuity and a lower-cost mutual fund can still sell the more expensive product. (Nor should it, as people need to earn a living, but advisors can do so without pushing annuities in situations where they don’t belong.)

Additionally, many educators purchased their 403(b)s before the new Best Interest regulations took effect. Because the professional’s duty under Reg BI is transactional rather than ongoing, there is no federal requirement for the original financial professional to revisit or monitor that recommendation today. The responsibility for reviewing the investment falls solely to the investor.

The 2%+ Annual Cost of 403(b) Annuities

Annuities offer fixed interest guarantees, death benefits, and lifetime income protection, but these features often come with costs that can push your annual expenses—including fund fees—above 2%. They also include surrender charges that limit access to your funds for a set period.

Blame Congress: A 65-Year-Old Law That Keeps Costs High

• 1958: Congress establishes §403(b). Only annuities are permitted, leading to the term “tax-sheltered annuity.”
• 1960s: The IRS adopts “TSA” as the official term, and schools begin using it.
• 1978: Congress introduces 403b custodial accounts for mutual funds.
• 2007: The IRS issues final regulations, retiring the term. Today, these are called 403(b) contracts or accounts.

As a result, annuities continue to dominate K-12 403(b) plans, while private-sector 401(k) plans have shifted toward mutual funds. Notably, government entities are now seeking to include annuities in 401(k)s because employers have largely moved away from offering guaranteed lifetime income pensions, which annuities provide.

Why Annuities May No Longer Fit Your Retirement Strategy

Ironically, keeping annuities dominant in K-12 plans seems increasingly outdated, especially since most states still provide guaranteed lifetime income pensions. With the repeal of the Windfall Elimination Provision and Government Pension Offset, public employees now have even more guaranteed income, further reducing the attractiveness of annuities.

Instead, mutual funds and Roth 403(b)s should become more common in public employee retirement planning. Why consider a Roth? With the Social Security Fairness Act, a solid pension, and required minimum distributions from 403(b) and IRAs, some public employees may end up with more income in retirement than they had while working, making today’s deductions less attractive for future income.

Smart Retirement Planning Strategies for Teachers and Principals

Educators currently invested in high-cost annuities or underperforming mutual funds should consider exchanging their 403(b) for a fiduciary-designed 403(b) portfolio and directing new contributions to the 457 Smart Plan.

The Massachusetts Deferred Compensation 457 SMART Plan is a pre-tax retirement account with contribution limits similar to a 403(b). Many school systems offer it, though it is often less promoted than the 403(b).

The 457 Smart Plan offers institutional fund pricing and includes mutual fund families such as Dodge & Cox and Dimensional Fund Advisors, which I also use in my fiduciary 403(b) rollover planning.

A key advantage of the 457 plan is more flexible withdrawal rules. Participants can make penalty-free withdrawals before age 59 1/2 upon separation from service. However, 457 plans do not offer a loan provision.

Together, these plans provide a strong foundation for retirement savings.

Your Step-by-Step 403b Plan: How to Switch to Lower-Cost Options

Frequently Asked Questions: 403(b) Rules, the SMART Plan & Transfers

Independent 403b Plan Advisor and Wealth Planning Consultant for Your District

As an independent financial advisor offering flexible payment options, including fee-only, hourly rate, or commission, I can work with many companies in your school system’s 403(b) plan. (Partial list of companies I work with includes Fidelity and Aspire- fee-only; American Funds, Franklin-Templeton, Putnam, MFS, Security Benefit, and Invesco – commission).

These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. Content provided via links to third-party sites should not be considered an endorsement of content that we cannot verify completeness or accuracy of.