If You Are A Teacher Enrolled In a 403(b) Plan, Please Read This!

Oct 24, 2016
Article, Behavioral Finance, Career, Policy, Index Funds, Investing, Stocks, Current Events, Ethics

This is a great example where your knowledge of investing can come in handy for yourself and other teachers in your building. The NY Times story shows what happens when light regulation meets rapacious financial firms. This is why financial literacy is so important! We can wait for regulation or we can arm ourselves with the knowledge necessary to avoid disasters like the story told below. Without knowing the right questions to ask or understanding the alternatives, too many teachers have seen their retirement savings swallowed by excessive fees. Actually one question may have gotten to the core of this scandal: Show me the fees (and persist until you get the answer)!

The problem:

Margaret Jusinski first got to know her investment broker through the breakfasts he provided when he visited her public school in the leafy suburbs of New Jersey, where she teaches middle-school children computer coding and how to build robots made of Legos. After the bagels, muffins and coffee, the broker made his sales pitch — and Ms. Jusinski bought it. So did many of her colleagues.

The teachers only recently learned how much those meals actually cost them. Had she been able to choose a simpler, less expensive plan instead of the broker’s costly offering, Ms. Jusinski would have approximately 20 percent more in savings, according to an analysis performed for The New York Times. One colleague would have a balance 50 percent fatter. The list goes on.

How big is the problem?

As a result, the people who do the most good in the world, spending their careers helping others in exchange for modest paychecks, often get the worst retirement plans. In fact, millions of people who save in 403(b) plans may be losing nearly $10 billion each year in excessive investment fees, according to a recent analysis by Aon, a retirement consultant.

This is the most egregious example of fees that I have seen: 

The teachers were each charged a fee of at least 2 percent of their savings to manage the money, in addition to sales charges of up to 6 percent each time they made a deposit, the analysis found. Moreover, the calculations didn’t include the expenses of the dozens of mutual funds they were invested in, some of which exceeded 1 percent.

We know what happens when consumers have too many choices:

In some places, including California, Ohio, Texas and Washington, the lists may run much longer because of state laws that require it. Public school workers in California, for instance, have access to up to 59 providers and more than 220 investment products.

What can you do about it?

  • Educate yourself about the fees in your plan…and if they are high, invest in an IRA instead of the 403(b): Tracee Huffman, a 26-year-old who teaches seventh and eighth graders in Norfolk, Va., became so fed up waiting for the representative to get back to her — it took more than six months — that she educated herself about costs and decided her personal individual retirement account was a better deal.
  • Avoid annuities which prove the adage “the more complex the product, the higher the fees!”For instance, many teachers are encouraged to invest in high-cost variable annuities, typically explained in thick instruction manuals filled with jargon. Buyers who later decide they want to move money into a lower-cost investment vehicle often learn their savings are being held hostage: Pay a surrender fee or the money must remain in the annuity.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.