Do you know what fees you are paying in your 403(b) account? If you are like most teachers, you don’t have a clue. Don’t feel embarrassed, you are in the same boat as your colleagues.
The system is designed to confuse teachers in order to generate high commissions for financial salespeople posing as investment advisors. Over 70% of public school teachers own an insurance product called an annuity.
These very expensive investments are pretty much non-existent in 401(k) plans because of something called ERISA rules. These are high standards that private retirement plans like 401(k)’s must follow. Guess what? K-12 403(b) plans aren’t covered by these strict rules.
We know many teachers who have spouses in 401(k) plans. They started investing at the same time, contributed similar amounts, and ended up with drastically different outcomes.
The teacher spouse ended up with a much smaller balance. Why? Fees are the main culprit. Fees are the most important factor regarding investment returns. Most teachers pay some of the highest fees on the planet!
Too many teachers think they don’t need to save in their 403(b) because they have a pension. This is why only about 30% contribute to 403(b) plans.
This is a big mistake.
Many teachers don’t work long enough to collect their full pensions. New teachers may get less out of their pensions than they put in because of state budgetary changes. In addition, most teachers’ pensions don’t adjust for inflation. Why does this matter?
If Inflation grows at its historic level of 3% annually, over a period of 24 years a $50,000 pension will only be able to buy $25,000 of goods in 24 years. This cuts purchasing power in half. If inflation is higher than 3% over this period, the results will be more devastating.
A good 403(b) plan gives teachers more options. This means retiring earlier than expected or having more money to pay for their “wants” in life. In other words, the high fees you’re paying means a longer working career, less money for college tuition or charitable giving, and shorter vacations.
Most of the salespeople in public schools are very nice guys so people think they are doing the right thing. This couldn’t be further from the truth. They are trained to sell. A good salesperson needs to be liked. They also give you stuff like Pizza and trinkets. This is another sales ploy. They know when teachers get stuff for “free”, they feel obligated to give something back.
Why do you think they stalk you in the teacher’s lounge? In this case, purchasing a very expensive annuity that will wreak havoc on your retirement plan.
The bottom line, the nice financial guy in your school will be the most expensive friend you’ll ever have. Teachers can do so much better. If you are interested in how, let us know.
TeacherCents thanks Tony Isola for sharing your knowledge and experience with our audience.
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