K-12 Story: Pennsylvania High School Teacher Gets Wise to the 403(b) (After an AXA Experience)
by Terry Newman, High School Teacher
When I started teaching in 2004, I vaguely remember someone mentioning something about retirement. I knew in Pennsylvania that we have a defined benefit plan through the state (PSERS) and wondered why anyone would need anything to supplement the guaranteed income PSERS provides in retirement. The first few years of teaching, my wife and I did quite a bit of traveling, purchased our first home, and generally enjoyed life.
By 2007 my interest in personal finance and investing was re-piqued. I enjoyed the craziness of the ‘90’s bull while in high school and thought actually having a little money to invest for real might be even more fun. By this point I started to think more deeply about long-term needs, retirement, and the eventuality of having kids. I also started to think about the process of gaining and growing wealth – as existential as that seemed at the time. I didn’t really have any goals, but I knew I needed to start somewhere.
It was at this point that an advisor from AXA came calling. I had no reason not to trust the company, the product, or the pitch. After all, they were an “approved vendor” from my district...how bad could it be? I met with the advisor who showed us the wonders of the 403(b) and various life insurance policies.
Now, I’m a doubter by nature. As a pessimist, I’ve missed many market opportunities, but it has also saved me from making poor decisions. Having said this, I didn’t really read over the prospectus for our 403(b), nor did I understand the investment vehicle inside of the 403(b). OK, so I didn’t even really understand what a 403(b) was! Our total expense ratio was over 2.2%, but that didn’t seem significant. An interest rate of 2.2% is a great for a mortgage, credit card, etc. As I found out over the next several years, it isn’t so hot for an investment fee. To be honest, at the time, I didn’t know what an expense ratio was or the fact that we were paying “over the odds” for our account.
My wife and I agreed to deposit a very small $25 each into our respective 403(b)’s. I considered this $25 to be a sort of test drive. We were only in our mid-20’s at that point and would have rather spent our resources on saving for a home and traveling in our summers. Considering my current view on our AXA 403(b), those dollars spent on our first home, traveling, and wine all seem that much cozier and sweeter. Over a period of about a year and a half, we ended up contributing a little over $1,000 each into our respective accounts. Then, I started my quest to figure out what this account was really all about. It was one of the best financial decisions I’ve made during my adult life.
To put this in perspective, I think it is important to remember how this product was sold to us and then compare that to the market (S&P 500). We purchased the investment inside of our 403(b) with the understanding that it provided a safety net of a guaranteed investment with the upside of the stock market. We invested through the financial crisis and stopped contributing shortly thereafter. Since 2009, around the time that we stopped contributing to the account that was supposed to give us upside in the market, the S&P 500 had a positive return in every year and is currently squeaking out a small gain in 2016. Below is a chart of the yearly return of the S&P 500 with dividends reinvested.
- 2009: 25.95%
- 2010: 14.82%
- 2011: 02.10%
- 2012: 15.89%
- 2013: 32.15%
- 2014: 13.52%
- 2015: 01.36%
Data from the NYU Stern School of Business
The “average” return from 2009-2015 was 15.35%, well above the historical average. Surely my 2.2% fee should have justified at least keeping up with the market! In fact, the original investment of $1,025 is now worth less than $1,000. You could argue that I invested through the down turn, dollar cost averaging my investment so it isn’t prudent to say that I would have enjoyed the same return on $1,000 from 2009 as I would have from the beginning of 2008. Yes, fair enough. Money invested in the S&P 500 at the beginning of 2008 would only have increased in value by 50% through the end of 2015. I’d take 50% over a negative return any day. Wouldn't you? My feelings echoed those of Robert Hiltonsmith in the Frontline episode titled The Retirement Gamble when he asked about his 401(k) “Why does this thing never go up?”
The original investment was an expensive lesson in reading, learning, and ensuring the safety and protection of my money. In our profession, we perform due diligence in the research of content that we share with our students. We painstakingly obsess over the smallest of details in order to ensure that our students are offered with the best possible environment to learn and grow. We should expect the same to be true of those investing our money, but we must also perform due diligence, network with other teachers in similar situations, and be willing and able to say “no” when the product being sold is not right for our circumstances. We need to be willing to share our experiences with one another to ensure that others do not make the same mistake of buying inappropriate investment products. Be bold enough to speak out. You’re likely not alone.
Terry Newman teaches high school in Pennsylvania. His wife is an elementary school teacher.