Yusra3
VIP Contributor
The 403(b) retirement investment account is popular among teachers, healthcare workers, nonprofit employees and others. But there are some drawbacks to 403(b) plans that warrant consideration for your long-term retirement investing strategy.
High Fees
403(b) plans often come with much higher fees compared to IRAs or 401(k)s. The average annual fee is around 0.5-1%, eating into your returns significantly over decades. 403(b)s may charge administration, account, investment and transfer fees.
Limited Investment Options
403(b) plans generally provide a narrow menu of mutual fund choices. Most are actively managed funds with higher expense ratios versus passively managed index funds with proven long-term performance. Lack of indexes limits diversification.
Restrictive Withdrawals
You can't access 403(b) funds penalty-free until age 59.5 outside some exceptions like permanent disability. Early withdrawals face a 10% penalty on top of taxes owed. IRAs allow earlier access to contributions. 401(k)s have loan provisions.
Less Asset Protection
403(b)s receive less protection from creditors in bankruptcy proceedings compared to 401(k)s. Since they're offered through employers, 401(k)s tend to have stronger legal protections overall.
For these reasons, maxing out an IRA and/or 401(k) first for retirement may be smarter than contributing heavily to a 403(b). The tax savings benefit of 403(b)s may not outweigh other downsides.
That said, participating in a 403(b) - especially to get an employer match - is still far better than not saving at all. Just be aware of the limitations, and have a balanced view of 403(b)s in your broader investing strategy for retirement. For many, the superior choice is prioritizing IRAs then turning to 403(b)s after that and other options are maximized.
High Fees
403(b) plans often come with much higher fees compared to IRAs or 401(k)s. The average annual fee is around 0.5-1%, eating into your returns significantly over decades. 403(b)s may charge administration, account, investment and transfer fees.
Limited Investment Options
403(b) plans generally provide a narrow menu of mutual fund choices. Most are actively managed funds with higher expense ratios versus passively managed index funds with proven long-term performance. Lack of indexes limits diversification.
Restrictive Withdrawals
You can't access 403(b) funds penalty-free until age 59.5 outside some exceptions like permanent disability. Early withdrawals face a 10% penalty on top of taxes owed. IRAs allow earlier access to contributions. 401(k)s have loan provisions.
Less Asset Protection
403(b)s receive less protection from creditors in bankruptcy proceedings compared to 401(k)s. Since they're offered through employers, 401(k)s tend to have stronger legal protections overall.
For these reasons, maxing out an IRA and/or 401(k) first for retirement may be smarter than contributing heavily to a 403(b). The tax savings benefit of 403(b)s may not outweigh other downsides.
That said, participating in a 403(b) - especially to get an employer match - is still far better than not saving at all. Just be aware of the limitations, and have a balanced view of 403(b)s in your broader investing strategy for retirement. For many, the superior choice is prioritizing IRAs then turning to 403(b)s after that and other options are maximized.
