Compare 403(b) Annuities vs. Mutual Funds: What to Buy, When, and Why

Understanding 403(b) Plans

What Is a 403(b) Plan?

A 403(b) is a tax-advantaged retirement savings plan for employees of public schools, hospitals, and other nonprofits. It allows you to defer part of your salary into a retirement account, where your money grows tax-deferred
. Helpful Tip: If you are looking for a general retail investment comparison rather than rules specific to a workplace retirement account, read our master breakdown comparing an annuity vs mutual fund to evaluate personal portfolios.

Unlike 401(k) plans that mostly offer mutual funds, 403(b) plans often include annuities—in fact, some providers only offer annuities. That’s because 403(b) plans were originally created for employees of religious and nonprofit institutions, which insurance companies, rather than investment firms, historically served.

The Two Main Choices Inside a 403(b)

Option 1: 403(b) Annuities

403(b) annuities are insurance products that are tax-sheltered inside your retirement plan. They’re structured to grow your money and eventually provide you with guaranteed retirement income, depending on the contract you choose.

Common Types of Annuities in 403(b) Plans:

• Fixed Annuity: Offers a guaranteed interest rate, typically set for one year at a time.
• Fixed Indexed Annuity (FIA): Links your interest earnings to a market index (like the S&P 500), with no downside risk and a guaranteed minimum.
• Variable Annuity: Lets you invest in subaccounts similar to mutual funds, with no guaranteed return but potential for higher growth. Optional income and death benefits add cost.

Unique Features of 403(b) Annuities:

• Can be annuitized or converted into guaranteed lifetime income.
• Income riders like GLWB (Guaranteed Lifetime Withdrawal Benefit) offer flexible, income-focused alternatives without giving up control.
• Some contracts include long-term care or return of premium benefits.

Pros:

• Guaranteed income for life through annuitization or riders.
• Protection from market loss (in fixed and indexed annuities).
• Avoids sequence of returns risk in retirement.
• Can be funded with pre-tax payroll deductions.
• Optional spousal and death benefit protection.
• Access to penalty-free withdrawals in certain cases (e.g., separation from service after age 55).

Cons:

• May duplicate your pension if you’re already covered.
• High fees in variable annuities (up to 3%+).
• Surrender charges if you withdraw early (usually 5–10 years).
• Interest rates on fixed annuities can be low.
• Complexity and lack of transparency.

Option 2: 403(b) Mutual Funds

If your employer offers a custodial account, you can invest in mutual funds. These are collections of stocks and bonds managed by fund companies. They don’t come with income guarantees, but they offer flexibility and potentially higher long-term growth.

How It Works:

• Choose from a list of available mutual funds (actively managed or index).
• Diversify across asset classes (stocks, bonds, international).
• Withdraw funds in retirement to fund your lifestyle.

Pros:

• Lower fees, especially with index mutual funds.
• Higher growth potential over time (depending on market conditions).
• No surrender fees or long lock-up periods.
• Easy to rebalance or change investments.
• Greater liquidity.

Cons:

• No guaranteed income.
• Exposed to market risk.
• Must self-manage withdrawals and taxes in retirement.
• Higher emotional risk during down markets.

Key Rules You Should Know

• Mutual fund accounts (custodial 403(b)(7)) can only hold mutual funds.
• Roth 403(b) accounts no longer require RMDs (Required Minimum Distributions) starting 2024. Traditional 403(b)s require RMDs at age 73 (or 75 if born in 1960 or later).
• If you leave your job at 55 or later, you can take withdrawals without the 10% penalty. This is called the Rule of 55.
• After leaving an employer, you can roll your 403(b) into an IRA (mutual funds or annuity) or another employer plan.

The Cost Difference

• Annuities often come with insurance fees, optional rider costs, and surrender charges if you take money out early.
• Mutual funds charge expense ratios, and your plan may add recordkeeping fees.
• Generally, annuities cost more but give you lifetime income guarantees. Mutual funds cost less but offer no guarantees. This fee structure is consistent across the entire annuity vs. mutual fund landscape, whether you are investing inside a workplace 403(b) or a personal IRA.

Fee Comparison: 403(b) Annuities vs. Mutual Funds

403(b) Annuity Vs. Mutual Fund At A Glance

Who Should Choose What

• Annuities are best for: People who want a pension-like paycheck, don’t want to worry about market crashes, or need income that lasts for life.
• Mutual funds are best for: People who want flexibility, lower fees, and are comfortable with market ups and downs.
• Not great fits: If you’ll need quick access to your money, annuities can be too restrictive. If you’re nervous about risk, mutual funds may keep you up at night.

Rollover Options When You Leave

• Keep the 403(b) where it is.
• Roll it to an IRA annuity for guaranteed income.
• Roll it to an IRA invested in mutual funds or ETFs for low costs and flexibility.
• Move it into your new employer’s plan if they allow it.

Alternative Option: Roll the 403(b) Annuity Into an IRA Annuity With a GLWB

If you’re unhappy with your current 403(b) annuity—due to high fees, poor growth, limited income options, or lack of flexibility—you may have a powerful but underused option: a direct rollover to an IRA annuity with a guaranteed lifetime withdrawal benefit (GLWB).

How It Works:

• Transfer funds tax-free from your 403(b) into a traditional IRA annuity.
• Choose a fixed indexed annuity (FIA) or variable annuity (VA) with a GLWB rider.
• The income base may grow at a guaranteed rate (e.g., 6%–8%) until you activate withdrawals.
• Income is guaranteed for life and can be based on a single or joint life payout.
• Your account remains liquid—you’re not forced to annuitize.

Pros:

• Often lower fees and better performance than legacy 403(b) annuities.
• More income potential via stronger GLWB growth rates or payout factors.
• Flexible withdrawal options—you can delay withdrawals or stop/start if needed.
• Ability to name your own beneficiaries and ensure legacy planning.
• Can add death benefits, long-term care, or return-of-premium features.

Cons:

• Still carries surrender charges (usually 5–10 years).
• Can be complex to understand.
• Income is taxable if the source was pre-tax.

Who Needs This Strategy:

• 403(b) participants nearing retirement who want income security and control.
• Anyone dissatisfied with their current annuity or looking for better rates.
• Employees retiring early (age 55+) who want to delay income but protect principal.

Final Comparison: Choose What Matches Your Goals

Talk to a Professional Before You Decide

You don’t have to settle for poor-performing annuities or low-return options inside your 403(b). There are smarter ways to protect your income and get more for your money.

Contact The Annuity Expert today for free quotes and advice on rolling your 403(b) into an IRA annuity with guaranteed income for life. We’ll show you how to lower your fees, maximize income, and protect your legacy.

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