For teachers, school administrators, healthcare professionals, nonprofit employees and others who have access to a 403(b), the account may eventually become one of their largest financial assets.

Yet many employees spend considerably more time deciding which car to buy or where to take their next vacation than they spend reviewing the retirement account they may have been funding for 10, 20 or even 30 years.

In many cases, that's understandable.

You may have enrolled in your 403(b) years ago, selected an investment or provider, established automatic contributions and rarely looked at it again.

But as your account grows, and particularly as you get closer to retirement, there are several important questions worth asking.

And perhaps most importantly:

Understanding those answers can be an important part of building a retirement strategy.

What Exactly Is a 403(b)?

A 403(b) is a tax-advantaged workplace retirement plan generally available to employees of public schools and certain tax-exempt organizations.

In many ways, it is similar to the 401(k) plans commonly offered by private-sector employers.

Employees can generally contribute a portion of their compensation to the plan, subject to IRS limits and plan provisions. Depending upon the plan, traditional pre-tax and/or Roth contributions may be available.

A traditional 403(b) generally allows contributions and investment earnings to grow tax deferred until distributions are taken. Qualified Roth 403(b) distributions can receive different tax treatment when applicable requirements are satisfied.

But the fact that two employees both have a “403(b)” doesn't necessarily mean they have the same type of investments, the same costs or even the same range of choices.

That's where understanding the structure of your particular plan becomes important.

Not All 403(b) Plans Are Created Equal

As a result, two teachers working in neighboring school districts — or even two employees working for the same organization — could potentially have very different retirement arrangements.

That's why simply knowing that you “have a 403(b)” isn't enough.

Is Your 403(b) Properly Diversified?

Diversification is one of the fundamental principles of long-term investing.

At its simplest, diversification means avoiding unnecessary concentration in any single investment, asset class, industry or investment style.

A diversified retirement portfolio might include exposure to several areas, such as:

The appropriate allocation is different for every investor.

A 35-year-old employee with decades before retirement may have very different objectives than a 62-year-old employee who expects to begin taking distributions within several years.

Diversification Is More Than Owning Several Funds

One common misconception is that owning five, eight or ten mutual funds automatically means a portfolio is diversified.

Several funds can own many of the same securities.

For example, an investor could own several large-cap U.S. stock funds that all have significant positions in the same companies. On paper, the account contains multiple funds. In reality, the underlying portfolio could still be highly concentrated.

That's why a 403(b) review should look beyond the names of the investments and examine how the entire portfolio works together.

Questions to consider include:

These questions become increasingly important as retirement approaches.

Understanding Risk as You Approach Retirement

Investment risk isn't simply about whether the market goes up or down.

The timing of market returns can become particularly important when an investor begins withdrawing money.

Someone who is 25 years from retirement can generally approach a market downturn differently from someone who plans to retire next year.

As retirement gets closer, your 403(b) should increasingly be viewed as part of your overall retirement-income strategy.

That means considering:

Your 403(b) shouldn't necessarily be managed in isolation from the rest of your financial life.

Is Your 403(b) Invested Through a Variable Annuity?

Variable annuities have historically been used in many 403(b) arrangements.

A variable annuity is an insurance contract that combines investment options with certain insurance-related features.

Depending upon the contract, those features may include:

These features can potentially be valuable for some investors.

Understanding Variable Annuity Costs

Depending upon the specific contract, expenses can include:

When multiple expenses are combined, the total annual cost of certain arrangements can potentially approach 3% per year.

Some cost considerably less. Contracts and features vary significantly.

The important question isn't:

The better question is:

Why a 1% or 2% Difference Can Matter

A fee that appears relatively small in a single year can become much more meaningful when compounded over decades.

Consider the concept rather than any particular investment.

Over 20 or 30 years, even relatively small annual differences can potentially create substantial differences in accumulated value.

That doesn't mean you should automatically choose the least expensive investment.

Cost is only one consideration.

Investment quality, risk, diversification, professional management, insurance guarantees, service and your individual objectives all matter.

What Are Surrender Charges?

Some variable annuity contracts include surrender charges.

A surrender charge can apply when an investor withdraws, transfers or surrenders certain amounts during a specified period.

Depending upon the contract, an initial surrender charge may be as high as approximately 7% and then decline over a number of years.

For example, a hypothetical surrender schedule could decrease gradually each year until eventually reaching zero.

Before considering a transfer or replacement, you should determine:

A lower-cost investment alternative isn't necessarily better if moving to it requires giving up a valuable guarantee or incurring a substantial surrender charge.

The entire situation needs to be evaluated.

A Tax-Deferred Investment Inside a Tax-Deferred Account

This is one of the most important concepts for 403(b) participants to understand.

One of the frequently cited benefits of an annuity is tax-deferred growth.

However, a traditional 403(b) already provides tax-deferred treatment under federal tax law.

In simple terms, you're holding a tax-deferred product inside an account that already provides tax deferral.

That does not automatically mean the annuity is inappropriate.

The annuity may provide other benefits that are important to you.

But it changes the question you should be asking.

Instead of asking:

Ask:

Guarantees Can Have Value

It's important not to look at variable annuities solely through the lens of expenses.

Certain contracts may contain valuable guarantees.

That's one reason we believe an existing annuity should be reviewed before it is replaced.

Changing an annuity without understanding its guarantees could result in permanently giving up a benefit that cannot be recreated.

The goal shouldn't be to eliminate an annuity simply because it has expenses.

What Is an Open-Architecture 403(b)?

Depending upon your employer and the structure of its plan, an open-architecture investment arrangement may be available.

Open architecture generally refers to an investment platform that provides access to investments from multiple investment companies rather than limiting participants to a single proprietary product family or insurance contract.

Depending upon the plan, potential benefits may include:

Availability varies by employer and plan.

What Is Institutional Pricing?

You may have heard the term institutional share class without knowing what it means.

Mutual funds can sometimes offer multiple share classes. Although the underlying investment portfolio may be similar or identical, the expenses associated with each share class can differ.

Whether institutional pricing is available depends upon the plan, investment platform and investment selected.

Two people can invest in essentially the same underlying mutual fund strategy but potentially pay different expenses depending upon the share class available to them.

What About Commissions?

Some 403(b) arrangements have historically used commission-based products.

Other arrangements can be structured using an advisory model where compensation is disclosed as an advisory fee rather than being paid through product commissions.

Neither compensation structure should be evaluated solely by its label.

You should be able to answer:

Understanding the total cost is more useful than focusing on one fee in isolation.

Can You Receive Professional Management While You're Still Working?

Many employees assume their 403(b) can't be professionally managed until they retire, terminate employment or roll the account into an IRA.

Some 403(b) arrangements may allow an employee to work with an independent financial professional while remaining employed and keeping the retirement assets within the 403(b) structure.

The availability of this option depends entirely upon the employer's plan, approved providers and applicable plan rules.

This can be particularly important for someone approaching retirement who wants his or her workplace account coordinated with other assets.

Your 403(b) Is Only One Part of Your Retirement

A 403(b) shouldn't necessarily be evaluated as a standalone investment.

As retirement approaches, it should be coordinated with your larger financial picture.

That can include:

For example, someone who will receive a substantial pension may have a different capacity for investment risk than someone whose 403(b) will provide most of his or her retirement income.

Likewise, someone with significant assets outside the 403(b) may want to allocate the workplace account differently from someone whose 403(b) represents nearly all of their retirement savings.

Traditional 403(b) or Roth 403(b)?

Another area worth reviewing is how new contributions are being made.

Depending upon the employer's plan, employees may have access to both traditional and Roth 403(b) contributions.

The appropriate choice can depend upon several factors, including:

For some employees, using a combination of traditional and Roth contributions may provide greater tax flexibility in retirement.

Don't Forget Your Beneficiary Designations

Investment performance and fees tend to receive most of the attention, but beneficiary designations are another important part of maintaining a retirement plan.

Marriage, divorce, births, deaths and other family changes can affect your estate-planning intentions.

Beneficiary and spousal-consent rules can be complex, so legal advice may be appropriate when circumstances are unusual.

What Happens When You Retire?

As retirement approaches, additional decisions arise.

You may need to determine whether to:

An IRA may offer additional investment flexibility, while an employer plan may offer features or protections that are valuable.

The decision should consider investments, expenses, services, withdrawal flexibility, creditor protections, tax consequences and individual objectives.

Ten Questions to Ask About Your 403(b)

If you haven't reviewed your account recently, start here:

The Goal Isn't Necessarily to Change Your 403(b)

A 403(b) review should not begin with the assumption that something needs to be changed.

It should begin with information.

Once those questions have been answered, you can make a more informed decision about whether your existing arrangement remains appropriate.

Get a Second Look at Your 403(b)

At A&M Financial Group and AMFG Wealth Management, we work with individuals who want to better understand their workplace retirement plans.

A 403(b) review can help you evaluate:

And depending upon your employer's plan, you may have options available even while you're still working.

Your 403(b) may represent decades of work and savings.

Before making a change, understand what you own, what you're paying, what benefits you're receiving and what alternatives may be available.

Learn More About Your 403(b) Options

Visit our 403(b) resource page to learn more and request a 403(b) review:

Investment Advisory Services offered through AMFG Wealth Management LLC, a Registered Investment Adviser.

Diversification and asset allocation do not ensure a profit or protect against loss. Variable annuities are insurance products, and guarantees are subject to the claims-paying ability of the issuing insurance company. Before replacing, transferring or exchanging an annuity, carefully consider surrender charges, existing guarantees and benefits, potential new surrender periods, expenses and other consequences.

This material is intended for educational and informational purposes only and should not be considered individualized investment, tax or legal advice. Investment involves risk, including possible loss of principal. Tax rules and retirement-plan provisions can change. Consult appropriate financial, tax and legal professionals regarding your individual circumstances.