403(b) Story: No Victims Here
by Dina Isola, Investment Advisor Representative
“Hey, listen. Nobody’s forcing you to be here. You have a choice. You can stay or you can leave… It may not be a choice you like, but it is a choice. There are no VICTIMS in this classroom!” — LouAnne (as played by Michelle Pfeiffer, Dangerous Minds)
Often when I speak with teachers regarding their 403(b) investments, I watch in horror as tails slide between their legs. They are ashamed. They are embarrassed. They feel victimized, and they blame themselves.
A Benefit That Can Cause Distress
The New Times’ five-part series on the underbelly of 403(b) world has caused teachers from all over the country to reach out to us. Many had suspected that they had been misled, perhaps even lied to, but they wanted to do the responsible thing and save for their retirement. While their intentions were right, sadly their suspicions proved true.
These teachers understood that a pension, while a wonderful benefit, will not grow and outpace inflation. If someone retires at age 60 or younger, there is a good chance retirement may last at least 30 years. That’s a mighty long time to live off a flat check. Participating in their 403(b) seemed reasonable; except many of their options were anything but.
Every year, we see the options grow uglier. Low-cost mutual funds have been pushed aside for high-cost funds and annuities (insurance products) that carry a plethora of fees that often are hard to understand. Close to 99.9% of the teachers we have come across own these unfortunate products because they were hoodwinked.
Many times they are told that there are no fees. Really? These companies are in business not to make money? Come on, now!
My personal favorite is when a sales rep confessed to earning just a “small percentage.” True 3% is small, but relative to an option that is less than 1%, that is a pretty big mark up.
Think of it this way:
- If the investment earns: 6%
- And inflation reduces the investment: -2%
The real rate of return equals: 4%
- But now deduct the fee: -3%
To get a dismal return of just: 1%
Earning 1% on an investment with exposure to the risks of the stock market is like paying $100 for a wager, when the most you can win is $1. Why would you do that? The risk is not worth the reward.
“I kept putting in money, but my account never seemed to grow,” many a teacher has told me. At 1%, per year – good luck!
In Order to Leave, You Must Pay
I’ve seen these surrender charges last 12 years; or, worse, they will last just five years but every new dollar that goes in starts the five-year clock on that new contribution. Why? Because that “small percentage” of a commission the sales rep made needs to be recouped. Especially since agents are paid between 8-10% of the contract value up front in their first year’s commission. No wonder these products constitute 76% of 403(b) assets in secondary schools.
“I feel so stupid. I trusted him; he seemed like a nice guy. I let him do this to me!” No matter how many times I hear this from teachers, I cringe. They sound like crime victims, blaming themselves for the bad deeds done to them.
Is it too much to expect that what they are being offered from their employer might actually be good for them? Shouldn’t school administrators want the 403(b) options offered to actually be beneficial to participants? Do they actually need a law forcing them to ensure this protection for employees?
Though the situation may seem dismal and disturbing, there are ways to avoid being a victim.
Call up the actual service provider company (not the actual sales rep) and ask specifically what fees you are being charged. Here is a nice list to start with:
- Administrative fee
- Management Fee
- Wrap fee
- Recordkeeping fee
- Account termination fee
- Surrender charges
- Investment and/or Fund fees
- (For annuities) Insurance-related fees (e.g., Personal Income Benefit, Mortality Expense?)
- Advisor Fee
Go to 403bcompare to verify the answers you were given.
Suspend new contributions if you are unhappy with the investments/fees. Meet with a fee-only fiduciary that represents your best interests to look at your options and assist you in uncovering the best options you have. In the event there are no good options, approach the decision makers in your district armed with The New York Times articles as basis for why they need to add better options to your plan. Let your colleagues know; more voices help your cause.
Protect the Newbies
Make sure to give new teachers a heads-up, so that they don’t get taken advantage of. Turn them on to 403bwise, so they can get educated, too.
Now that you know this, now that you have heard it – you cannot un-know or un-hear it. There is only the choice – to be a victim or not; and the choice to help educate others to learn these truths.
When asked by your colleagues why you care, give them LouAnne’s response, “Because I make a choice to care.”
Remember, choosing is never the action of a victim…
Following a successful career in marketing communications in the financial industry, Dina helped her husband, Anthony, establish an independent registered investment advisory firm, where she worked closely with clients to service their accounts. Dina draws on her experiences and challenges, to give readers a relatable way to look at personal finance. She hopes to provide clarity and common sense to demystify the “jargon” of the financial world, so that investors stop feeling intimidated or inadequate when considering their financial planning options. At Ritholtz Wealth Management, her role of Investment Advisor Representative is to address issues affecting clients beyond their investments.