Your 403(b) Can Hold Two Very Different Products
The "403(b)" label describes a tax status, not a single product. You'll also hear this account called a Tax-Sheltered Annuity, or TSA — that name comes from the original 403(b)(1) product, which really was always an annuity contract. Since 1974, 403(b) plans have also been able to hold mutual funds through what is called a 403(b)(7) custodial account. But because K-12 districts historically maintained vendor lists dominated by insurance companies, most teachers were funneled toward 403(b)(1) annuity contracts instead — and many still are, which is exactly why the old "TSA" name has stuck around even as the account type has broadened.
If your statement uses terms like "surrender charge," "mortality and expense fee," or "annuity contract," you are in an annuity. If it references fund tickers and an expense ratio with no surrender language, you are more likely in a mutual fund custodial account.
The Fee Problem, in Real Numbers
A 2022 Government Accountability Office study found 403(b) investment option fees ranging from 0.01% to as high as 2.37% — meaning the most expensive options can cost well over 100 times more than the cheapest ones available in the same plan type. Layered variable annuity fees (mortality and expense charges, administrative fees, and underlying fund expenses) commonly total 2% to 3% per year, on top of surrender charges that run 5% to 10% and can apply for five to ten years after each individual contribution.
The Department of Labor's own guidance puts the long-run impact plainly: each additional 1% in annual fees can reduce a retirement account's ending balance by roughly 17% over a 20-year period. That is not a rounding error over a 20 or 30-year teaching career.
Why a Fee-Loaded Annuity Inside a 403(b) Rarely Adds Value
A 403(b) is already tax-deferred. An annuity's core selling point — tax-deferred growth — is redundant when it is wrapped inside an account that is already tax-deferred. What you are left paying for is the annuity's insurance features (death benefit riders, guaranteed minimum withdrawal riders) layered on top of costs you would not otherwise incur in a plain custodial account. For most teachers building long-term retirement savings, that combination adds cost without adding much benefit.
That said, a low-cost fixed annuity can be a legitimate tool for someone who specifically wants a guaranteed income floor. The distinction is cost: a 0.3% fixed annuity used deliberately is a different animal than a 2.5% variable annuity sold as the default option on a vendor list.
What to Actually Do About It
- Request a prospectus or fee disclosure from your current 403(b) provider and identify the total expense ratio, including the M&E fee and administrative charge.
- Check 403bCompare.com, a California-specific tool that lists fees and surrender terms for 403(b) products offered to school districts.
- Ask your district's benefits office for the full approved vendor list — many multi-vendor districts include at least one lower-cost fund option buried alongside the insurance products.
- If you are in a surrender period, calculate whether the ongoing annual fee drag over the remaining years outweighs the one-time surrender charge of moving now.
The question is not "are annuities bad." It's "what is this specific contract actually costing me, and is there a lower-cost option on my own vendor list I never knew about."