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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!
This is why retirement investment should be totally unlinked from the employer. Imagine simply investing in your own IRA but with the same limits allowed by a 401k/403b. No more suffering from the limited options of employer plans, and no more doing rollovers every time you change jobs. Your employer already sends money directly to the third party plan administrator, so they could instead send it directly to your own IRA account, with a simple law change to allow it. The current system is absurd, and shows that these plan rules were never really designed to benefit employees to begin with.
Does it not seem that’s it’s all about $$$$$$ in our country. Doesn’t the teachers union have a fiduciary responsibility for its members
As Dan wrote, the union wasn’t really involved. It’s the school districts that approve 403(b) vendors — and, yes, it strikes me that they are indeed negligent.
While the union negotiates contributions and benefits to the various pensions they simply don’t have the resources to act as fiduciary advisors for investments. Also, a member’s personal choice of investments are probably considered outside of the employer/employee relationship. As a local union president I had a relationship with a few good financial planners who were happy to meet with and advise members just for the opportunity to establish relationships. Sadly, very few members sought help.
Of course (and as you outline above), not all 403b plans are created equal. I contributed for many years to TIAA-CREF 403b and supplemental plans, and on the whole have felt well treated with respect to fees, service, expense ratios, and performance. I have especially liked the annuity feature of guaranteed returns for fixed income.
Were it not for tax consequences, I would now in retirement have annuitized every asset in my plans. The payout rates would be generous and indeed, I believe, superior to anything available commercially (8.9% at age 66, single life, with the possibly of modest annual increases).
When it came time to decide to take a lump sum or annuitize my pension from the hospital I researched the payout available from insurance companies to see if the hospital’s offer was better than what was available on the open market, and it was significantly so. I decided that if I was ever going to annuitize some of my retirement assets this was the time to do it. Plus the hospital did all the work. No regrets.
One note of caution regarding inheriting a TIAA-CREF account. When my father passed away my sister as executor had to jump through innumerable hoops to be able to convert it into an IRA for us siblings, as it was an annuity and not an IRA.
My wife and I are retired academics who also have large amount in our TIAA accounts (8 between us). So far, we have simply opted to withdraw our RMDs each year. However, our TIAA traditional annuity investments are earning ~4% so we will probably annuitize soon.
TIAA used to call their traditional annuity that employees contribute to a variable annuity because the amount that contributions earn vary based on current interest rates. For obvious reasons, they no longer do so.
My one grip about TIAA is that their fees are higher for smaller academic intstitutions and fund options are fewer.
Your journey is very similar to my wife’s. She was a teacher in Western PA. Fidelity funds were an available choice until 2009. Then, the the district limited the choices to those that would pay the fees for the TPA and Fidelity refused. The funds that remained were supported by the union as they contributed to union programs. The district did not care about how terrible the choices were. She dropped out of the program for two years until I could find the program at Lincoln that you mentioned. She invested in the Vanguard funds, too. She retired two years ago and we immediately rolled the funds to an IRA to save on the Lincoln’s fees.
Congratulations on becoming a boglehead at such an early age: it took me much longer. But otherwise your article makes sad reading. It’s a shame the union couldn’t have pressed for something better, and that the regulations allow such exploitation.
John Bogle is my number one financial idol (Christine Benz at Morningstar is my runner up)
Follow the money.
Sad to see how poorly teachers are treated as most are not financially literate enough to know how they are paying excessive fees for guaranteed underperformance. The unions needs to rectify this terrible financial relationship. Unfortunately its all about money and excessive fees to salesmen
Good article Tim, thanks. I never understood the difference in 403b plans – thanks for the clarification. I saw similar dynamics in nursing organizations – they often had bad 403 or 401 plans, and no one to help them through it. I counseled a number of nurses over the years, steering them into similar investments as you suggest.
Great information, Tim. It’s a shame that school administrators and school boards are not better informed about 403(b)s. Did your friend’s Dad know about big influence he had on your life?
Great article! Readers may be interested in the interaction between the 403B and 457 accounts. My wife works for a state university and we were able after a little bit of research to get her enrolled in both plans simultaneously. Because the university is a state institution, and a nonprofit each of those plans were available to her And each could be maxed out at the federal level. Unfortunately the HR people at the University were not well schooled in this information and it took a little bit of effort on our part to get it set up. It’s definitely worth it if you happen to be lucky enough to work for such an organization .
Yes, you can max out both a 403b and a 457b in the same year! (If you have the funds to do so). A huge opportunity that no one seems to know about… even my accountant! It could be that salaries are low enough that most teachers/professors are unable to do so.