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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