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403 Beware

Tony Isola  |  October 12, 2018

PUBLIC SCHOOL teachers’ biggest problem isn’t rowdy students. Instead, it’s their retirement plans that should be sent to the dean’s office.

After leaving my job as a foreign currency trader for an international bank, I became a middle school history teacher. My teaching career lasted more than 20 years. One of the worst things I encountered was the state of public school teachers’ non-ERISA 403(b) plans.

Having a front-row seat to the carnage was not pretty. My co-workers knew I had a financial background, so they often came to me with their statements. High-fee variable annuities and loaded mutual funds littered the crime scene.

After speaking with many teachers, more horror stories emerged. The financial salespeople who sold them this garbage also infected many of their other accounts. Whole life insurance policies and egregiously expensive, advisor-sold 529 plans were popular items on this unhealthy menu, along with non-traded real estate investment trusts in taxable accounts. I was aghast. Right then, I knew something had to be done.

Why are these 403(b) plans so horrible?

  • Non-ERISA plans offer employees very little protection. School districts are only responsible for administration—not the quality or cost of the investment options.
  • The vendor lists are dominated by large insurance and brokerage firms that sell expensive products. No one asks for an annuity in a retirement account. As the saying goes, annuities are sold, not bought.
  • School districts outsource their administrative duties to third party administrators (TPAs). These TPAs offer “free” services. In effect, this is a pay-to-play model that keeps low-cost providers off the “recommended lists.”
  • Most teachers lack basic financial literacy skills and, unlike 401(k) plans, the employer is under no obligation to educate them. Teachers often choose “advisors” based on what their (equally confused) colleagues are doing. Likability, instead of competency, becomes the main criteria for money management. “Nice guy” salesmen dominate the market.
  • Many companies hire former teachers to do their dirty work. This creates a false sense of trust. These ex-teachers aren’t there to help their colleagues. High commissions, in exchange for valuable contact lists, are the real terms of engagement.

According to Spectrem Group, 76% of teachers’ assets are invested in some form of annuity product. In other qualified plans, this would be grounds for massive class-action lawsuits.

How can we put an end to this exploitation? Here are five things my wife Dina and I are doing:

  • Publish articles, use social media and encourage respected financial journalists to educate the public.
  • Work with unions to get legislation passed that changes this conflict-ridden system in favor of transparency and education.
  • Lobby to get low-cost investments added to vendor lists.
  • Find teacher leaders to spread the movement organically.
  • Offer financial literacy programs for teachers and their students through webinars and school visits.

In the end, we believe history bends toward justice. This will be no different. Please help us by sharing this blog with any teachers you know. Every little bit counts when so much is at stake.

Tony Isola works at Ritholtz Wealth Management, specializing in helping educators reach their financial goals using a fiduciary model. To learn more, visit his blog,  A Teachable Moment, or follow him on Twitter @ATeachMoment.

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