Finally: 403(b) Fee Lawsuits!
Ever since an insurance salesperson walked into my classroom in the early 1990s pitching crappy high-fee 403(b) products I have been waiting for the lawsuits. Plans were bad then and they aren't much better today. I mean, how in the year 2016 can we still be allowing the following:
- 2+ percent in fees
- 10 to 12 year surrender charges
- Bullshit claims that a product offers upside of market without risk
- Salespeople masquerading as financial advisors
The New York Times article announcing the lawsuits (written by the brilliant Tara Siegel Bernard) was chalk full of claims my podcast partner CFP Scott Dauenhauer and I (and many others) have been making for years:
- Employers "failed to monitor excessive fees paid to administer the plans and did not replace more expensive, poor-performing investments with cheaper ones. Had the plans eliminated their long lists of investment options and used their bargaining power to cut costs, the complaints argue, participants could have collectively saved tens of millions of dollars."
- "Even modest reductions in costs can have a significant effect on retirees’ savings. An oft-cited example from the Labor Department: Paying one percentage point more in fees over a 35-year career — say 1.5 percent instead of 0.5 percent — could leave a worker with 28 percent less at retirement. An account with $25,000 — and no further contributions for those 35 years — would rise to only $163,000 instead of $227,000, at an annual rate of 7 percent."
Note: for a fun illustration of the impact of fees, check out a 23-second claymation my 12-year-old son made called: Beware the Fee Monster
Siegel Bernard's article noted that three employers were being sued. Two days later she ran a follow up piece announcing that four more employers were being sued over retirement plan fees.
Happy Days for the 403(b) are Finally Here, Right?
Unfortunately, not so fast.
The current crop of lawsuits are all directed at universities. Many of whom already have great vendors (Fidelity, TIAA-CREF, and Vanguard). And while the fees in these plans could be lower they are all grossly better than the majority of K-12 plans offered to our public school teachers.
Don't believe me?
- Check out our list of K-12 Stories where numerous teachers detail how they were sold horrible 403(b) products.
- Check out this list of vendors selling 403(b) products in the state of California. Click on one of the insurance companies and peruse some of the gems they are selling teachers. Called 403bcompare, the site is run by the state of California. Note: you have to check in two place to get total fees. See the "Fees and Charges" tab and then hit the "Subaccounts" tab to find the cost of the underlining investment. Add these charges together to get the total cost.
K-12 Teachers Sold a Product Charging 3.43% in Fees
An August 14, 2016 visit to 403bcompare showed that AXA — a big seller of K-12 403(b)s — was offering something called the AXA EQUI-VEST Series 201 (Roth Eligible) product. This offering shows a 1% personal income benefit charge; $30 annual administration fee; and a six year rolling surrender charge according to the Fees and Charges tab. Add to that a 2.43% annual expense fee shown in the Subaccounts tab for investing in the AXA Agressive Allocation fund. Folks, that's over 3.43% in fees!!!
Hello, are any lawyers reading this?
ERISA vs. Non-ERISA
Here's a sad, sad fact. Public K-12 plans are not subject the Employee Retirement Income Security Act of 1974. Better known as a ERISA, this federal law sets minimum standards for most voluntarily established pension and health plans. In general, ERISA does not cover retirement plans established or maintained by governmental entities, and churches. This means that K-12 403(b) plans, public university and public hospital 403(b) plans, and church plans are generally considered to be Non-ERISA plans. Thus, K-12 plans cannot be part of the suits currently being filed against universities.
Look, I am all for the lowest possible fees. Employees at the universities being sued are probably going to go from B+/A- plans to A+ plans. Good for them. But folks, pubic K-12 employees are being screwed on a daily basis.
- Where's the outrage about public K-12 403(b) plans?
- Where are the lawsuits around public K-12 403(b) plans?
- And how soon can we expect Trump University to be sued?
Note: Scott Dauenhauer and I discuss these fee lawuits in episode 34 of the Teach and Retire Rich podcast.