School teachers cope with two major problems: salaries that make it difficult to save in the first place and, then, cost-ridden savings plans that can make their work life look like Fat City compared to their retirement income.
Now there are glimmers of hope for the savings plan part of the problem.
If you’ve never heard of 403(b) plans, don’t worry. They are similar to 401(k) plans but for non-profit institutions. Unfortunately, the plans are rooted in insurance-based products that tend to be burdened with high commissions, high redemption penalties, and high operating costs. While expenses for employer sponsored 401k plans are relatively low and falling— with many large plans well below one percent a year— the typical variable annuity sold to people eligible for 403b plans has annual expenses over 2.0 percent. Worse, much of the investment money goes into fixed income annuities that have significantly lower returns than equity funds have had over the last fifteen years.
So where are the glimmers of hope?
In lawsuits and in the development of web based information on the products being sold to teachers. One example of legal action is Martin, Drought, and Torres, a San Antonio law firm that started to take insurance companies to court in the early nineties. According to G. Wade Caldwell at the firm, they have filed and settled one suit, have five pending, and will soon be filing another two suits. All the suits are in Texas.
In a recent telephone interview Mr. Caldwell explained that the situation was particularly bad in Texas because the legislature had passed a law prohibiting school districts from limiting 403(b) venders. Aimed at protecting teachers from sweetheart deals that could enrich a school superintendent or board member, the law worked to allow a proliferation of vendors.
“It prevented school districts from protecting employees,” he said. “So teachers are offered expensive and sometimes fraudulent products. We’ve seen cases of 23 percent commissions…”
I asked what kinds of problems he has seen.
“There are a lot of product and conduct issues. One (product issue) is called Tax Sheltered Life. It has a large premium with a small death benefit. Another is Equity-Indexed Annuities. In the ones we’ve seen the sales people don’t understand that the product isn’t invested in the stock market.
“Another is Old Money/New Money contracts. The teacher gets credited 6.5 percent on new deposits but money that has been invested 12 months or more only earns 4.5 percent.
“Still another is the two tier annuity. (These are sold as rollover products where the teacher is told that the seller will compensate the teacher for the withdrawal penalties on the annuity being redeemed.) The teacher sees two account balances, the 100 percent balance plus interest and the second tier balance which is the actual deposit less surrender charges. There is a gap between the two amounts that never disappears. The only way to get the upper tier amount is to stay with the company and annuitize (giving up the principal for a lifetime monthly income). When that was done, the company paid zero interest (on the amount annuitized.)
“Beyond that there is the basic problem of the use of variable annuities inside 403b plans and the expense of the death benefit.”
Mr. Caldwell also said that some insurance companies go to great lengths to look like they are sponsored by teacher organizations or the school district. One company they are suing, he said, formed a cafeteria plan administration company and then offered to do benefit administration for the school district for free— in exchange for being allowed to sell variable annuities during enrollment periods.
While Texas may be one of the worst states for major abuses and deceptive marketing practices, it is not unique.
So what can teachers do?
Get educated about investments and the choices available for 403b plans.
Where do you start?
On the web.
Mr. Caldwells’ firm offers basic reading and helpful links on its website, (mdandt.com). For a more ambitious effort, visit 403bwise.com, a site operated by two former California teachers. Like fundalarm.com this site carries no advertising and is supported only when visitors buy books and other things on linked sites.
If you are a teacher, think of these sites as your summer reading assignment.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Max Fischer
(c) Scott Burns, 2022