When you contribute to a 403(b), you can choose between two categories of investments: annuities — either fixed or variable — or mutual funds. No other choices are allowed.
Experts sometimes criticize 403(b)s for that reason, especially if the mutual funds and annuities the plan offers are not strong performers or if there is a very limited selection.
But you may have some flexibility to seek more variety within these limitations. If all the contributions to your account are from your salary — and there are no matching funds from your employer — you may have the right to make a tax-free transfer from any investment your employer offers to a mutual fund or annuity offered by another 403(b) provider who is affiliated with your employer. You may find you can get stronger returns or pay lower fees than if you left the assets in your employer’s plan.
The cons
There are some potential drawbacks to this approach. Making additional investments to your new account may be a two-step process that requires regular supervision on your part. And while the transfers may be tax free, and the choice of investments in the alternate plan may be stronger, there may be added fees. Also, some 403(b)s impose steep surrender charges when you roll your assets into a new provider’s plan. These can add up to 7% or more of the amount you’re moving, especially if you’re rolling over assets from certain fixed-income accounts or variable annuities.
These transfers may be further restricted when new 403(b) regulations go into effect on January 1, 2009.
