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Average 403(b) Fees: How Do Yours Compare?

March 20, 2023
3 min read
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While non-profits and other tax-exempt organizations can start 401(k) plans, millions of employees of tax-exempt organizations still rely on 403(b) plans - which can be significantly more expensive than modern 401(k) plans. Wait, what?

According to a 2022 study by the U.S. Government Accountability Office, found that fees for investment options ranged from 0.01% to 2.37%. In other words, expensive 403(b) investments cost 237 times more than lower cost alternatives. Worse yet, many 403(b) plans analyzed had surrender fees as high as 10% for some of the annuity options.

In a different study prepared by Aon Hewitt, they found typical 403(b) fees to be: 

  • Variable annuities: 2.25%
  • Fixed annuities: 1.15%
  • Mutual funds: 0.97%

Modern 401(k) plans, however, can offer mutual funds that are 20-50x less expensive (0.02% - 0.08%).

The average fees associated with operating small 403(b) plans vary widely

Just as is the case for small 401(k) plans, the cost of running small 403(b) retirement plans varies widely by provider. The BrightScope data reveal that total plan fees for small 403(b) plans ranged from 0.49% of assets all the way up to 1.48%.* The divergence highlights the need for a regular review of plan expenses, and the need for benchmarking against alternatives. The range was much narrower for large plans, with all-in costs ranging from 0.34% to 0.58%.

Who pays for 403(b) fees also varies

Costs incurred by 403(b) plans may be paid by the employer or the plan participants. How these costs are divided up can vary from plan to plan. For example, each participant may pay a flat fee for certain costs, or expenses paid for by participants may be allocated based on assets. In fact, based on surveys by the Plan Sponsor Council of America, there is little uniformity regarding key expenses when it comes to who pays for it. For example, participants paid for audit fees in 32% of plans surveyed while the organization foots the audit bill in 58% of plans. Some combination of responsibilities was arranged in the remaining plans. Recordkeeping fees were split 47% (participants) : 39% (organization).

Just as it makes sense to regularly review the overall costs of your retirement plan, it can be a good idea to review how those costs are funded. For smaller 403(b)’s the expenses can vary so much (as referenced above), making regular benchmarking even more important.

We’ve calculated the impact of various plan expenses – how much less would your employees have at retirement if the 403(b) plan expenses were higher? The table below shows how different employee-paid, asset-based fees can impact an individual’s retirement savings. This exercise assumes three separate retirement plans. In each, an employee invests $10,000 at the first of each year for 40 years – we’ve picked this time period to illustrate the impact over an individual’s career. The only difference between the three scenarios is the expenses paid by the employee.**

By the end of year 40, the employee in Plan C would have $390,233 fewer assets than an employee in Plan A. Such a large difference might equate to several years of salary:

Impact on Retirement Savings with Varying 403(b) Expenses

**Plan A****Plan B****Plan C**
*Gross Annual Return*7%7%7%
*Expense Ratio*0.58%0.80%1.30%
*Net Annual Return*6.42%6.20%5.70%
*Assets in Year 40*$1,831,422$1,728,534$1,441,189
*Difference from Plan A*-$102,888-$390,233
*Shortfall in Assets in Year 40 vs. Plan A*6%21%

According to the PSCA survey, more than one-quarter of respondents said they were re-evaluating how plan expenses were allocated.*** Are your allocations and 403(b) expense levels due for a review?

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David Ramirez - CEO at ForUsAll
David Ramirez, CFA

About the author

David Ramirez, CFA, is a recognized 401(k) expert with over 20 years of experience in 401(k), ERISA, cash balance plans, and ESOPs. A UC Berkeley graduate, he played a pivotal role at Financial Engines, a 401(k) advisory firm founded by Nobel Laureate William Sharpe, Ph.D., where he was a portfolio manager who helped manage over $50B in 401(k) assets.  His clients included some of the largest Fortune 500 companies and state governments.

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This material has been prepared for informational and educational purposes only and should not be construed as a recommendation by ForUsAll, Inc., its affiliates or employees (collectively, “ForUsAll”)  to activate a cryptocurrency window or invest in crypto.  Investing in crypto can be risky and investors must be able to afford to lose their entire investment.  You should consult with your own advisers before activating a cryptocurrency window or investing in crypto.  ForUsAll does not provide legal, tax, or accounting advice. Please refer to your Plan's fee disclosure for more details.© 2023 ForUsAll, Inc. All rights reserved.
1 Schwab 2022 401(k) Participant Study - Gen Z/Millenial Focus, October 2022.
2 As of 12/31/2022. Employees include both current employees and terminated participants with a balance.
3 "Morgan Stanley At Work: The Value of a Financial Advisor" Morgan Stanley, March 2022.
4 Sarah Britton was a client when she provided this testimonial through an independent third party review website. She received no compensation for her remarks. There are no known conflicts of interest in the provision of her comments related to the services provided.