Retirement Plans improving For Millions of Employees.

THERE'S one group of retirement savers -- maybe 6 million people -- whom I think of as forgotten. They're primarily teachers, health-care workers and employees of nonprofit organizations. They contribute to a type of retirement plan called a 403(b).

In the geography of investing, the 403(b) is a backwater.

These plans will improve under the new tax law. Still, the investments they offer are often mediocre. Participants can switch to something better. But no one may bother to tell them that they have that option.

If you've never heard of a 403(b), you're not alone. Most people know only about its more famous sister, the 401(k).

All 401(k)s are private-sector, company plans. Employers set them up and take a continuing interest in how they're run. They offer workers the best and most up-to-date retirement options and services, at the lowest cost.

By contrast, school boards and hospitals rarely get involved with 403(b)s. A "b" is an individual plan. The employer arranges for you to invest through payroll deduction but pretty much ignores what's going on.

So what's going on?

Most 403(b)s are run by insurance companies. They solicit schools and hospitals for the business. Participants invest in a tax-sheltered annuity (TSA).

Annuities offer you various "subaccounts" to choose from. Subaccounts are like mutual funds. You can get stock funds, bond funds, combination funds and funds that pay guaranteed interest rates.

But TSA investments tend to carry higher costs than no-load mutual funds charge.

403(b) participants can generally switch from an annuity to a no-load mutual-fund group. But most participants don't understand this.

"People have nowhere to get unbiased information," teacher Dan Otter of Anaheim Hills told my associate, Don Perrucci. "We have to get better investment choices."

I highly recommend a Web site that Otter co-founded last year, www.403bwise.com. It should help 403(b) participants figure out what they're doing.

The new tax law improves 403(b)s. Individuals will be able to contribute more money to their accounts. And no-load mutual funds may find it more attractive to compete for this business.

Among the changes:

* You can make higher maximum contributions to 403(b)s. Currently, the highest official contribution is $10,500. That rises to $11,000 next year and $15,000 by 2005.

There also are "catch-up" contributions for certain employees. The new law increases the catch-up for people 50 and up.

* More people will be able to put more money into their 403(b)s. Formerly, contributions were held down by a ghastly, complex calculation that I don't even want to talk about. Now, that calculation is history. What's more, the change is effective now. You can change your contribution this month if your 403(b) provider is ready.

What might this mean for you? An IRS specialist compared the old and new limits for a particular teacher earning $40,000 a year. Formerly, she could save up to $7,000 a year. Now she can save up to $10,000, and next year, up to $11,000. (Of course, higher contribution limits do the most for families with extra money to save.)

* More no-load mutual funds might decide to solicit 403(b) business. In the past, few funds worked to get on a school's or hospital's "approved" list for automatic payroll deductions. The complex calculations made it hard to establish how much each employee could contribute. If an IRS audit showed more taxes due, the plans might be held liable.

But the simpler calculations make plan administration easier. Fund companies might decide to compete with insurance companies for 403 (b)s.

* You can transfer money from your current annuity to a 403(b) at a no-load mutual fund group, even without the new tax law! The mutual-fund group will send you the necessary paperwork. Check with the insurer to see if it needs special paperwork, too, Otter advises.

One warning: Insurance companies make it hard to switch to another plan. They might charge penalties as high as 7 percent. The penalty declines over time, but it often takes seven years before you can switch money into a mutual fund penalty-free.

Here's a possible way around the problem: Your annuity might have a money-market fund with few or no fees for-switching money out. You could direct your payroll deductions into the money fund, then switch from there into the mutual fund of your choice.

I should mention two other forgotten groups - state and local government workers with retirement-savings plans called 457s. Right now, if these workers leave a job, they cannot roll their-money into an Individual Retirement Account. Starting in January, you'll be able to use IRAs. The big mutual-fund groups, such as Vanguard and Fidelity, will be ready for you.