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 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, an excellent resource for finding 403(b) fees.

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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