(Article from Kiplinger's Retirement Report, April 2005)

IF YOU ARE INVESTED in a 403(b) retirement plan, it's a smart idea to determine whether your plan includes fat commissions and high annual fees that are sapping your investment returns. If that's the case (and for many plan participants, it is), there are ways to stop the hemorrhaging.

Similar in structure to the more familiar 401(k), the 403(b) is the principal voluntary workplace retirement plan for teachers. Some hospital workers, as well as people who work for charities and churches, can also invest in them.

What makes many 403(b)s so expensive is the widespread use of deferred annuities as the investment choice, which are heavily promoted by insurance agents and stockbrokers. According to Spectrem Group, which tracks the 403(b) industry, 81% of the $578 billion invested in these plans is stuck inside annuities. Only 19% of the cash is invested in stand-alone mutual funds, which usually cost less to buy and maintain.

A deferred annuity is an investment product that's insured and tax-deferred. It comes in two flavors: fixed and variable. A fixed annuity guarantees a minimum yield or interest rate; a variable annuity offers a choice of investments, usually mutual funds. The big drawback to annuities is that the required insurance that protects your contributions against loss is an extra expense on top of the actual annuity investment's fees and sales charges. With variable annuities, insurance costs alone can equal the total annual fees that an average mutual fund charges. Annuities are a very expensive way to insure that your heirs will receive at least the amount you invested, says Janet Briaud, a fee-only financial planner in Bryan, Tex.

A second drawback to annuities is that investors already get the tax-deferral benefits when they invest in a 403(b). So buying an annuity inside a 403(b) is like using an umbrella inside your house when there's a rainstorm outside--it's redundant.

Here's what you can do to get out of a bad 403(b):

Read the fine print. Finding out what your 403(b) investments are costing you is easy: Request the prospectuses for your investments from your plan provider. The prospectuses will tell you what insurance and investment expenses are being charged.

Investigate alternatives. If your 403(b) investment options are too limited or mediocre, use the escape hatch. In most cases, you should be able to transfer the money out of your account to an outside 403(b) provider. Making this move is called a 90-24 transfer. Consider shifting your money into low-cost, no-load mutual funds offered by such firms as Charles Schwab, Fidelity Investments, T. Rowe Price, and Vanguard Group. Emptying an annuity, however, can trigger surrender charges. You should weigh the surrender costs of bolting from an annuity with the high price you're presently paying in annual management fees. If moving your money makes financial sense, don't procrastinate: The Bush administration has proposed eliminating your ability to use a 90-24 transfer to an outside provider.

Request better options. Ask to see your employer's list of approved 403(b) providers for a better place to park your ongoing investments. You are restricted to this list when choosing a new provider for your current contributions. Scan the list for no-load mutual fund firms. Stick with mutual funds that charge less than 1.5%, advises Scott Dauenhauer, a fee-only planner at Meridian Wealth Management in Laguna Hills, Cal. If you don't find any acceptable candidates, ask your employer to add a fund company that interests you. Your employer isn't obliged to comply with your request, however.

Consider a 457 retirement plan. If your 403(b) options are dreadful, ask your school district if it sponsors a 457 plan, which also provides tax-deferred retirement saving. (Other tax-exempt groups can offer 457s only to upper management and highly paid employees.) The available 457 providers might be more palatable.

Consult these resources. You can learn more about 457 plans by visiting 457bwise (www.457bwise.com), an educational Web site co-founded by Dan Otter, author of a forthcoming book titled Teach and Retire Rich. Otter co-founded a second Web site (www.403bwise.com) that focuses on 403(b) retirement plans. In California, teachers can check out a separate site, 403bCompare (www.403bcompare.com), which provides information on individual school districts' investment choices.