Uncovering secrets: The self-directed K-12 403(b)

Even though I’ve specialized in working with teachers since 2012, there are things I learn every day that can help them with their finances. For the most part it revolves around pensions, 403(b) and retirement planning, and this is typically where people are looking for the most guidance.

As I’ve gone on this learning-journey, one of the big secrets that myself and others have been shining a light on, is the disparity in fees throughout the 403(b) marketplace. Districts have lists of vendors that teachers can use to open a 403(b) and save for retirement, but typically do not give any more information – mostly because they are not legally allowed to. What teachers don’t see on this list is how there are two different types of 403(b)s – the annuities and the investment accounts. While they both look the same, the annuities are sometimes 3x as expensive without providing much extra value (look for companies with “insurance” in the title and you can avoid many of these products). Many times, they even underperform the investment 403(b)s without providing any other features that make up for it. Myself and the team over at 403bwise.com (amongst others) have been trying to get the word out for a long time about these differences.




But another option is becoming more prominent in the K-12 marketplace, providing certain vendors are available in a district: “The self-directed 403(b).”

Only available with a couple of vendors – Fidelity and Aspire (and Vanguard where they can be found) – this option allows you to not have a representative assigned to your account to help you manage the investments. This is important as that’s where the majority of the cost comes from with 403(b)s. Hiring someone to maintain your investments can be an annual cost of 0.75-1.5% of your account balance depending on which 403(b) company you choose to retain. By using a self-directed 403(b), it can bring the overall cost to below 0.5% per year (investment expense ratios included).


So how does this account work?

In order to do this, you have to be confident that you can choose suitable investments, complete some basic paperwork and have the discipline to review your account on a set schedule (every 6 months, every 12 months, etc.).

Let’s say for example’s sake, you choose to have a 403(b) at Fidelity and they are an approved vendor in your district:

  • You’d go on the Fidelity 403(b) website and find the application to open a 403(b).
  • You’ll need to make sure you know the plan number that Fidelity has with your district so your application goes through.
  • There’ll also be a form to assist you in making sure your retirement contributions are deducted by your payroll department and make it to your 403(b).
  • You’ll then be given online access and can go and design an asset allocation for your contributions.
  • If you don’t want to get that detailed, using a Target Date Retirement fund would suffice as well.
  • Periodically, you’ll go online and make trades to rebalance your investments back to the original investment objective.


Is it worth it?

It all depends on what you value. If you are ok paying someone to manage your account and would like time to do other things, then this might not be the best option. But if you are comfortable with managing an investment account and are looking to save fees this way, it can be a great way to put lots of money in your pocket over an extended period of time. It should be made clear that aside from the time taken to complete some forms to open the account, it shouldn’t take more than a few hours per YEAR to manage this account appropriately.

There’s also the added benefit that you can add a financial advisor onto the account (for Fidelity and Vanguard) and they can manage the account for you. This helps if you already use an advisor to manage other money for you, or you have one who helps you implement a financial plan. This would help you eliminate using two people to manage money sometimes meant for the same reason, and you can use someone who is also customizing your investment portfolio for your specific retirement plan.

This option won’t be appropriate for those who aren’t educated in managing an investment account, or simply don’t have the desire to do so. But for those who are capable and willing, the financial savings over a career can be substantial.