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 SEC’s Regulation Best Interest requires broker-dealers and insurance companies to reduce certain conflicts of interest among their sales professionals. However, it doesn’t require a financial professional to recommend the lowest-cost option. A sales representative with access to both a higher-priced annuity and a lower-cost mutual fund can legally continue to sell the more expensive product.

Additionally, many educators enrolled in their 403(b)s years ago. Because an insurance sales duty is transactional rather than ongoing, there is no requirement for the original representative to revisit, monitor, or optimize that recommendation today. The responsibility for reviewing and upgrading the investment falls entirely on the educator.

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

Annuities offer fixed interest guarantees, death benefits, and lifetime income options—but these insurance layers often push total annual expenses above 2.0% to 2.5% once mortality charges, administrative fees, and internal fund costs are factored in. Furthermore, surrender charges frequently penalize early withdrawals for up to 5 to 10 years.

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

1958: Congress establishes §403(b). Only annuities are permitted, creating the legacy term “tax-sheltered annuity” (TSA).
1960s: The IRS adopts “TSA” as official nomenclature, and public school payroll systems adopt the insurance model.
1978: Congress introduces 403(b)(7) custodial accounts allowing low-cost mutual funds.
2007: Final IRS regulations require written district plan documents and third-party administration, modernizing the structure.

Because of this history, insurance carriers established deep sales roots in school faculty dining rooms and breakrooms, leaving many teachers locked into contracts that no longer serve their modern financial needs.

Why Annuities May Duplicate Protection You Already Own

The primary benefit of an annuity is "guaranteed lifetime income." However, Massachusetts public educators already have guaranteed lifetime income through the Massachusetts Teachers’ Retirement System (MTRS) or the Boston Retirement System.

When you already anticipate an inflation-adjusted pension replacing up to 80% of your salary—and potentially additional benefits from the repeal of the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO)—paying over 2% per year for private insurance income guarantees is often redundant. Supplemental savings are typically far better deployed in flexible, low-cost mutual fund portfolios and Roth options.

Tactical Planning: Put Your 403(b) Dollars to Work

Your 403(b) shouldn't just sit in an expensive holding pattern. For Massachusetts educators, supplementary retirement accounts can be actively deployed to maximize your state pension, reduce recurring fees, and protect your severance from heavy tax hits.

1. Fund an MTRS Service Time Buyback (Pre-Tax & Penalty-Free)

If you have eligible uncredited service—such as out-of-state teaching, maternity leaves, military service, or substitute time—you can transfer funds directly from your 403(b) or SMART Plan into the Massachusetts Teachers’ Retirement System (MTRS) or Boston Retirement System.

The Strategy: Because this moves trustee-to-trustee between qualified plans, there are zero income taxes and no 10% early withdrawal penalties. You convert deferred investment assets into guaranteed, inflation-adjusted pension income for life without writing a personal check.

Massachusetts Creditable Service Time Buyback Guide →
Military Service Buyback: 0% Interest & 11-Year Windows →
RetirementPlus Buyback Guide: House Bill H.4361 vs. Senate Bill S.3109 →

2. "Double Silo" Tax Savings: Pair with the MA 457 SMART Plan

IRC §403(b) and §457(b) have independent statutory contribution limits that do not offset each other. Active Massachusetts educators are eligible to contribute the full annual maximum to both plans simultaneously.

The Strategy: In 2026, you can contribute up to $23,500 into your school 403(b) and an additional $23,500 into the Commonwealth’s 457 SMART Plan (plus age 50+ catch-up contributions). Additionally, 457 funds can be withdrawn penalty-free upon separating from service—even if you retire before age 59½.

Can I Contribute to Both? 2026 Limits for MA Educators →
Why Target Date Funds Misjudge Your Pension in the SMART Plan →

3. Escape High-Cost Annuities While Still Actively Teaching

You don’t have to wait until retirement or age 59½ to leave an expensive insurance contract. Under IRS rules, active educators can execute a Contract Exchange to move balances from a high-fee annuity to a lower-cost custodial vendor on their district’s approved list.

The Strategy: The exchange is completed trustee-to-trustee under your district’s Third-Party Administrator (such as OMNI or TSACG), triggering no taxes or penalties. We evaluate your current contract's surrender charge schedule against your recurring internal fee drag to determine the most cost-effective exit plan.

Step-by-Step 403(b) Exchange & Rollover Guide →
Why Breakroom Agents No Longer Control Your 403(b) →

4. Shelter Sick Leave Buyouts from Higher Tax Brackets & IRMAA

When retiring, accumulated sick day payouts (such as under the Boston Public Schools collective bargaining agreement) can generate a severe taxable income spike if paid out in cash, which often triggers costly Medicare Part B and Part D IRMAA surcharges two years into retirement.

The Strategy: Coordinating with district payroll to direct that eligible severance payout directly into your 403(b) and 457 SMART Plan shields your income from immediate taxation, avoids the IRMAA surcharge cliff, and preserves your capital.

Boston Public Schools Sick Leave Buyback: How to Defer Taxes →
How Sick Leave Payouts Trigger Medicare IRMAA Surcharges →

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

Option 1: Retired, Separated, or Over Age 59½

If you are retired, over age 59½, or separated from service, you can execute a Direct Rollover out of your district plan and into a low-cost Traditional or Roth IRA. This moves the account entirely outside the district’s vendor limitations, eliminating recurring administrative platform surcharges and unlocking access to low-cost index funds and individualized portfolio management.

Option 2: Still Actively Teaching in the District

If you are an active teacher or principal, you do not need to quit or retire to cut costs. You can complete an In-Service Contract Exchange directly between your current vendor and an approved low-cost custodial platform on your district's list.

The replacement custodian must be on your school district’s approved vendor roster.
The assets transfer trustee-to-trustee under your district's Third-Party Administrator with zero taxes and no IRS penalties.
We check your contract's surrender schedule beforehand—frequently, free 10% annual withdrawal provisions or substantial fee reductions make moving cost-effective immediately.

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

Can I use money from my 403(b) to buy back creditable service years with MTRS?

Yes. If you have eligible uncredited service—such as previous municipal work, out-of-state public teaching, maternity leave, military service, or substitute time—you can transfer funds directly from your 403(b) or 457 SMART Plan to the Massachusetts Teachers’ Retirement System (MTRS) or Boston Retirement System.

Because the transfer is done directly trustee-to-trustee between qualified plans, there are no taxes withheld and zero early withdrawal penalties. This allows educators to buy back years to reach the 80% pension maximum earlier without paying thousands of dollars out of pocket.

Can I contribute to both my school’s 403(b) and the MA 457 SMART Plan at the same time?

Yes. Under IRS rules, IRC §403(b) and §457(b) accounts have completely independent annual contribution limits that do not offset each other.

In 2026, Massachusetts educators under 50 can contribute up to $23,500 to a 403(b) and an additional $23,500 to the Massachusetts Deferred Compensation SMART Plan—allowing you to shield up to $47,000+ in pre-tax savings every year (with higher limits if you qualify for age 50+ catch-up contributions).

Can I move my 403(b) to a lower-cost vendor while I am still teaching in the district?

Yes. You do not have to wait until you retire, separate from service, or turn age 59½. Through an IRS procedure called a Contract Exchange, active educators can transfer their balance directly from an expensive insurance annuity to any other approved vendor on their school district's list.

The transfer happens trustee-to-trustee under your district’s Third-Party Administrator (such as OMNI or TSACG), so it is completely tax-free. Before initiating, we review your current contract to verify whether surrender charges apply and whether the fee reduction justifies the switch.

Why does it matter whether an advisor is an IAR (Fiduciary) vs. a Registered Representative?

Most sales agents marketing 403(b) plans in school breakrooms are Registered Representatives of insurance companies or broker-dealers. They operate under a transactional standard (Regulation Best Interest) that allows them to sell high-commission annuities with annual fees often topping 2.0%—even when cheaper mutual funds exist.

An Investment Adviser Representative (IAR) operates under a legal fiduciary standard, requiring continuous portfolio monitoring, full fee transparency, and an obligation to prioritize low-cost investments like index funds rather than commission-based insurance contracts.

Can I roll my unused sick day buyout into my 403(b) or SMART Plan at retirement?

In many Massachusetts school systems (including Boston Public Schools), educators eligible for an accrued sick leave severance buyout can elect to defer that lump sum directly into their 403(b) or 457 SMART Plan prior to separation.

Taking the buyout as cash often pushes you into higher tax brackets and can trigger significant Medicare IRMAA surcharges two years later. Routing it into your retirement accounts defers ordinary income tax and preserves your retirement capital.

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

As an independent financial advisor offering flexible payment options, including an advisory fee, an 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, advisory accounts with no commissions; American Funds, Franklin-Templeton, Putnam, MFS, Security Benefit, and Invesco, commission.)

View Directory of Massachusetts School Districts Served (Statewide)

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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.

Boston 403(b) Plan Advisor for Massachusetts Public School Teachers

Advising Educators Across Massachusetts School Systems