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WHEN I WAS IN COLLEGE, working toward a bachelor’s degree in music education, a friend’s dad told me about Vanguard Group. I’d never heard of Vanguard, and I had no idea what a mutual fund was.
I did some research on the firm and its founder, John Bogle, and read his book Bogle on Mutual Funds. Soon after, at age 19, I opened an IRA at Vanguard and thereafter contributed the maximum allowed every year. I began to follow Bogle’s tenets, including his emphasis on holding down investment costs and on indexing. As Bogle wrote, “In investing you get what you don’t pay for.”
After college, when I began working as a New Jersey public school teacher, colleagues told me to do two things: join the union and contribute to a 403(b) plan. After a little research on sites such as 403bwise.org, I learned there were actually two very different 403(b) plans: a 403(b) and a 403(b)(7).
The former is a tax-deferred annuity overseen by an insurance company and typically involving hefty fees. Most of the time, this type of product yields a nice commission to the sales representative who lurks in the faculty room. By adding the “7” to 403(b), the plan becomes a mutual fund-type of product known as a custodial account. Although the two types of plan are very different, they’re often known by the same title in the faculty room, which leads to some confusion. During my career, I invested solely through 403(b)(7) plans.
Most teachers I know live in a bubble. They’re much too busy writing lesson plans, grading papers, responding to students’ and parents’ questions or concerns, making sure they’re following IEP (individualized education program) and 504 accommodations, completing SGO (student growth objective) and SGP (student growth percentile) reports, and keeping up with an ever-changing curriculum and standardized tests. After their work day is done, many are athletic coaches or have a side hustle, and then head home for their most important “job” as a parent. Spending time learning about 403(b) options doesn’t rank high on the list of priorities.
Schools have a list of approved 403(b) vendors. To be on the list, a vendor must first approach and be approved by the school’s business administrator and then by the school board. Where I worked, the union had very little to do with what vendors or what 403(b) options were available to members. I found nothing in our collective bargaining agreement about these plans. The only way members could get a better plan was by getting enough folks to lobby the school board.
When several of my colleagues and I wanted a better 403(b), this is what we did. We were able to get Vanguard added to the approved vendor list. Doing so eliminated the sales rep and provided us with direct access to Vanguard’s low-cost mutual funds. This worked great until the IRS changed the compliance and recordkeeping rules in 2009. Now, a third-party administrator was added and all vendors had to comply with the school district’s 403(b) rules. In our case, Vanguard wouldn’t agree to the employee’s ability to take a loan from a 403(b), so off the list it went.
For a few years, I stopped contributing to my 403(b) and just channeled money to my Roth IRA. One of our vendors, Lincoln Investments, offered access to Vanguard funds, but I would still have to pay a commission to the firm’s sales rep. This didn’t sit well with me, so I did a little digging and found an unadvertised “participant-directed plan” with the vendor. It wasn’t offered through the sales rep that came to the faculty lounge.
Instead, I had to meet with a vice president of the firm at a local office and complete the paperwork. To buy Vanguard’s funds, I still had to pay the third-party administrator’s fees, but not a commission to the sales rep. I chose Vanguard Total Stock Market Index Fund because I wanted to own “the haystack,” as John Bogle put it, rather than hunting for needles. The fund invests in close to 4,000 stocks.
Not all my colleagues wanted to do it themselves. I would tell them that, if they wanted a sales rep to help them, make sure he or she is a Certified Financial Planner. That way, the sales rep is obligated to act as a fiduciary and choose investments that are in the teacher’s best interest.
I never found a good reason to contribute to a 403(b) annuity contract, with its high expenses. I knew I already had two annuities in my future. My pension is an annuity, and Social Security functions like one.
Tim Moyer was a New Jersey public school music teacher for 28 years. During those years, he was an investment resource for his colleagues and union treasurer. He continues to serve as director of a music ministry, a calling he’s had for more than 30 years. Tim lives in Moorestown, N.J., with his wife and two sons. He enjoys hiking and skiing with his family, and taking long walks with the family dog. Tim also enjoys composing music for choirs and for the piano.
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Retired Texas teacher here, no unions or Social Security. I was the only one of my teacher friends to actually know the difference between a 403(b) and 403(b)(7). We too had an approved list that changed when I was about halfway through my career, so I was forced to choose a “less bad” option. I wasn’t happy about it, but saving money is better than not. As soon as I was able to, I rolled it into my IRA.
And a big shout out to my (now deceased) husband for forcing me to learn about investing from the start.
Nice to see an article from Moorestown (and no, that’s not Morristown!)
As someone who has mostly worked for non-profits, I agree there are some 403b plans that are so bad it’s better to ignore them. Others are tolerable if you find the one lowest cost investment offered and ignore the rest, but they still have (typically undisclosed, because it’s not required) administrative fees. I have also experienced one that is actually quite exemplary.
The custodian for the 403b at the nonprofit with which I am currently associated is so bad it was censured and fined by the SEC and I found other evidence of inappropriate actions online. When I gave it a bad review on google maps, the owner came after me by tracking down my personal information, shaming me to my CEO, and disclosing private information about me in his online response to my review. I suppose I should not have been surprised. I feel for my colleagues who are using this plan without doing due diligence, probably because no one has ever taught them what that is or how to do it.
I hope you had more success with your fellow teachers, Tim!