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Teaching Teachers

Chris Nye

ACROSS THE COUNTRY, teachers are losing out on hundreds of thousands of dollars in retirement money because of the fees in their 403(b) plans. When I tell this to most teachers, they look at me with a level of skepticism that should be reserved for the salesperson who signed them up for a 12-year variable annuity contract.

“That can’t be true,” they say. “The district wouldn’t allow this. The union wouldn’t allow this. Everyone I know uses that company. Is everyone I know getting a raw deal?”

Yes, they are.

A simple scenario illustrates the problem. Consider Sarah, age 25, who was just hired as a high school science teacher. She lives in New Jersey, where starting salaries for teachers tend to be around $50,000 annually and she can anticipate a 1.5% raise each year. Sarah plans on working until age 65, when she’ll have earned her full pension.

Sarah is committed to investing 5% of her salary every year. Let’s assume her investments, a combination of stocks and bonds, will return 7% annually. Sarah signed up for a 12-year variable annuity contract with an insurance company, a typical choice in 403(b) plans. The mortality and expense fee is 1.2% and the average expense ratio is 1%, for total annual fees of 2.2%.

At the end of her 40-year career, Sarah could have earned $582,986 without the fees. Instead, due to the 2.2% in fees, she’ll end up with $339,747, a loss of $243,239, or 42% of her potential account value. That’s astonishing—and completely avoidable in most cases.

This calculation was done using a 403(b) retirement calculator from Bankrate.com and taking one of the largest players in the 403(b) market as my example. This company offers just one product to kindergarten through high school teachers, a variable annuity contract with a surrender charge that applies if you sell in the first 12 years. The average expense ratio was found on 403bcompare.com, an excellent resource for finding 403(b) fees.

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Let’s examine why teachers aren’t doing better. For starters, the school district 403(b) world is the last true wild west of investments. Most districts can have anywhere from a few 403(b) vendors to more than 20. Compare that with 401(k) plans, in which companies typically choose one vendor, such as Fidelity Investments or Vanguard Group.

Insurance companies dominate the 403(b) market. In many schools, company representatives are allowed to attend faculty meetings, set up shop in faculty lounges and even walk into classrooms during prep periods, all in an attempt to sign up teachers for high-fee variable annuities. These products typically provide the salesperson with a nice signup bonus and a steady stream of monthly income, assuming the teacher continues to contribute.

I don’t blame salespeople for trying to do their job and provide for their families. I do, however, believe that school districts and unions need to take a stronger stand and more active role in educating teachers about what to look for in a 403(b).

What can a teacher do? Don’t simply sign up with the person in the faculty lounge telling you that your pension is in grave danger. Know who your 403(b) vendors are. Most school districts have at least one low-cost vendor.

Vanguard, for example, is committing more time and resources to expanding its 403(b) programs. T. Rowe Price, Fidelity and Aspire Financial also have excellent options that are available in many districts. But you may never know they’re available. Those companies don’t use salespeople to promote their products. They’ll never come to your school. Among other 403(b) options, Security Benefit and Lincoln Investments both offer teachers the opportunity to invest in Vanguard mutual funds.

Going back to Sarah, if she’d gone with Vanguard, she could easily build a portfolio of mutual funds with total expenses of 0.2% or less. Then she’d end up after 40 years with $554,235, or $214,488 more than with the high-cost annuity.

The bottom line: The school district 403(b) business is designed to make money from teachers, not for them. You have the ability to pay less in fees, which is one of the keys to successful investing and something you can control. If you don’t have at least one low-cost vendor available in your district, don’t settle. Talk to your union and make this an issue. School districts can easily add new vendors and it doesn’t cost the district a dime. Teachers deserve better, but we won’t get better 403(b) vendors and education unless we demand it.

Chris Nye is a high school business education teacher in Jackson, New Jersey. He also owns and operates his own registered investment advisor, 403b Solutions, LLC. Chris has been educating teachers about 403(b) plans for years, and has helped school districts and unions get better 403(b) options.

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David Hoecker
David Hoecker
2 months ago

I guess my wife was lucky to work for a good school district. We are both retired, her from teaching and me from the private sector. Well before ETFs were available I was an advocate for no-load mutual fund investing. Her district allowed teachers to direct their 403B to any fund, as long as 3 teachers were investing in the same fund. I guess that was their minimum limit to keep administrative costs lower. She joined with several other teachers in a nationally known broad-based no-load fund which is now paying back handsomely.

Mark Royer
Mark Royer
2 months ago
Reply to  David Hoecker

Similarly, my daughter is a Special Education teacher in California and in spite of the things you hear about CalPERS she has the option of using a wide variety of Vanguard funds. She has her portfolio in the Vanguard Target Retirement 2065 fund and gets to pay the institutional fund rate. As you know that fund is a fund of index funds with low fees.

DrLefty
DrLefty
2 months ago

I’m a professor at a state university and very grateful that Fidelity is our required vendor! I have my current 403B/457 accounts with them. I do have one of those lousy annuity contracts that I signed up for at my previous job. It’s only around $7500 and it never makes any money (after 25 years or so!), and trying to either cash it out or roll it into my IRA (rolled over from my previous job) is insanely complicated.

Dan Otter
Dan Otter
2 months ago

Excellent! Chris is one of the best spokespeople for 403(b) issues! Proud to know him!

Jim
Jim
2 months ago

Good job Chris. I like the way Scott Burns wrote about a similar problem in Texas last April. https://scottburns.com/beyond-whirled-peas-lets-save-our-kids-futures-by-helping-their-teachers/

Good luck Jim

parkslope
parkslope
2 months ago

My wife and I recently retired with a total of five 403(b) TIAA annuities at three higher education institutions. While TIAA deservedly lost its non-profit status quite some time ago, I am glad that we have substantial annuity savings. TIAA’s annuity expenses are better than their equity funds expenses, although charges for smaller colleges are unfairly higher than they are for large universities. TIAA offers multiple annuity options after retirement. For the time being, we are content to simply take RMDs while our accumulations continue to earn 3%-4%.

Andrew Forsythe
Andrew Forsythe
2 months ago

Chris, very interesting article—thank you for posting it. Just sent a link to our teacher daughter.

Harold Tynes
Harold Tynes
2 months ago

Great article. My wife was a teacher in PA and I was appalled at the 403b options she was given after they threw out Fidelity. Fidelity refused to pay to play and did not have an inside to the union or school district. My letters to the school directors were ignored. When you see your options are focused on annuities run away, I also corresponded with writers at the WSJ and New York Times that had investigated the mess in many 403b plans.

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