What Investments Are Allowed in a 403B?

A 403b plan is a tax-sheltered retirement savings plan designed for public school employees, church workers and some nonprofit organizations. Like a 401k or traditional IRA, a 403b plan allows participants to contribute a portion of their salaries and not pay taxes on those contributions, or their earnings, until the money is withdrawn. 403b plans do have more restrictions on their investment options, however. Investments are limited to annuities and mutual funds.

Annuity Contracts

Annuity contracts are something like an insurance policy. You make contributions while you are working, and the annuity then guarantees you a certain regular payment during your retirement. The exact amount and frequency of the payments varies by contract, and is dependent on the payment options you choose as well as the value of the contributions you deposit. You can choose a series of payments for a particular number of years or for the balance of your lifetime. Most annuities guarantee a minimum rate of return on your investment, accomplished by investing the money in bonds or other lower-risk investments.

Fixed vs. Variable Annuities

There are two types of annuity contracts you can use in a 403b plan: fixed and variable. A fixed rate annuity promises a specific dollar amount -- a guaranteed set of payments over a period of time. The variable annuity allows the payments to fluctuate depending on the performance of underlying investments in the account.

Mutual Funds

403b plans are also allowed to invest in mutual funds. Mutual funds are like investment clubs. They pool all the investors' money and use it to buy investments that meet specific criteria. A fund might invest in the stock of large, well-known companies or in municipal bonds, for example. There are also funds that invest with a particular rate of income in mind, or a plan to grow the money a certain amount by a specific date. In most cases, your employer will offer several funds for you to choose from and you can divide your savings among them as you see fit.

Employer Discretion and Warnings

Employers who sponsor 403b plans are not required to offer both types of investment options, or even to offer more than a few choices in one category. Due to the limited number of 403b investment options, the costs for these investments may be higher than other, out-of-plan options. Investors should read all literature carefully before investing. If you have specific questions regarding your investment options, contact your employer or the 403b investment provider.

References

• SEC; Evaluating Your Retirement Options; June 9, 2008
• Life Insurance Company of the Southwest; What Forms of Investment are Available?; Dec. 3, 2007
• "Publication 571: Tax-Sheltered Annuity Plans (403(b) Plans)"; Internal Revenue Service; December 2010
• Pensions and Investments; 403(b) Participants Hurt By Unfair Rules; Donald Stone; March 21, 2011