It’s very unfortunate that school teachers, arguably one of the largest value-ads to communities across this nation, are getting taken to the woodshed on their retirement options. It’s 2019 and public school districts still haven’t found a way to properly help these individuals build a nest egg. We hear and see it all the time. In fact, we met with a 66-year old teacher yesterday from right here in Montgomery Country. As we wrapped up the introductory meeting, we already knew what would be uncovered as we began going over her statements. Sure enough, we were correct. To be frank, seeing this stuff is really frustrating, especially to me, a son of a public school teacher, who learned all of this first hand.
Most Americans who save for retirement at work have a basic 401(k) plan. These are offered at most companies and provide a decent selection of investment opportunities. The fees may be a little high, but these employees can build a properly diversified portfolio and it’s a win-win in the end for everyone involved. But there is a whole other sub-set of Americans who do not get to participate in a 401(k) plan. These include public school teachers, clergy members, employees of religious institutions or nonprofits, etc. These individuals are allowed to invest in what is known as a 403(b) plan. As a result, the people who do the most good in the world, spending their careers assisting others for below-average pay, often get screwed the most.
Value after 35 years, assuming $250 contributed monthly with an 8% average annual return. Source
But it’s not their fault. They have to invest in something, right? And if this is their only option, what else are they to do? Most 403(b) accounts are peppered with complex, expensive products that usually cost their owners tens of thousands of dollars over their careers. How is this possible? One reason is that the 403(b) accounts that many workers contribute to are not held to the same rules and regulations as a 401(k). When these employees are told that these are approved products, they automatically assume the school district did some due diligence on it. Think again. We hate to be the bearer of bad news, but the district you work in doesn’t pay any attention to these plans or products. To them, it’s just another hassle.
Be wary of any adviser who takes commissions of any sort from investment or insurance companies. Ask whether any adviser your organization hires will be on call for one-on-one advice, too. We once talked to a teacher who said she literally called around to vendors in her state, looking for anything with a fee under 1.50%. What’s the worst part? No one could meet those (very simple) requirements. In fact, according to the analysis prepared by Aon Hewitt, the average fees charged on variable and fixed annuities and mutual funds included in a 403(b) plan look like this:
- Variable annuities: 2.25%.
- Fixed annuities: 1.15%.
- Mutual funds: 0.97%.
By contrast, the average expense ratio of an ETF is just 0.44%. Unfortunately, ETFs rarely appear as an investment option in 403(b) plans.
So, who’s fault is this? Ultimately, it falls on the individual school districts to properly vet the companies and salesman who are finding their ways into schools, like cockroaches in the night. We wrote a piece recently on why it’s an employer’s responsibility to ensure that their employees are being properly educated and informed on their retirement options. It is not the individuals responsibility to research the best choices. In all honesty, these individuals wouldn’t even know where to start in regards to due diligence between various products and funds.
In the end, 403(b) plans in the modern world are outdated compared to their for-profit employer 401(k) plan peers by roughly 20 years. Most importantly, their existing multi-provider record keeper platforms, incredibly long investment menus, and inability to employ proper, institutionally-focused investment options have created an environment that impairs retirement outcomes for participants. It’s a sad reality for those who contribute to our society in such a respectable and positive way.
If you are school teacher and are having trouble navigating your 403(b) plan and are unsure of where to turn for conflict free advice, please feel free to reach out to us and we’d be happy to assist you and any manner.