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Ryan Marshall, CFP®
642 Wyckoff Avenue
Wyckoff, NJ 07481
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Why must teachers continue to get hosed with their retirement plans?

Why must teachers continue to get hosed with their retirement plans?

| September 05, 2018

Why must teachers continue to get hosed with their retirement plans?

Full disclosure right from the start... my wife is a 5th grade teacher at the elementary school I attended growing up.  However, I believe as a financial planner this provides me with a unique inside look at her retirement.  I also know that growing up I had some amazing teachers that helped shape me into who I am today.

Recently teachers have been getting the short end of the stick when it comes to their retirements and paychecks.  Every year they contribute more and more into their healthcare and pensions while NJ has come up short on their pension contributions.  It is sad to see so many hard-working teachers get stiffed out of raises and resources.

What disturbs me is I recently read an article from InvestmentNews titled “403(b) sponsors finding success beating back lawsuits”.  Basically, the lawsuit was going after investment options and pricing. While I am not for lawsuits, I am for what is in the best interest of clients and investors.  Unlike traditional 401(k) accounts where there is one provider with multiple participants, a 403(b) often has multiple providers and multiple participants. They setup these accounts years ago and not much has changed since 1974.  

A 401(k) plan usually benefits from economies of scale.  In essence, the more money invested in the 401(k) plan helps drive down the overall cost for the participants.  Hence a smaller plan typically pays more as a percentage than a larger plan.

What bothers me the most is that most of the 403(b) plans offered are individual annuity contracts offered through insurance carriers. There is no economy of scale going on here.  When my wife first started working for the district I inquired about the plans and tried getting a lower cost plan available, but was told they already had enough plans in the school district and there was “not enough room for another plan”.  Now my wife is stuck with a plan that costs her 1.34% annually not even including her fund costs.

Most people don’t read those big thick books the company mails annually that disclose the fees or how their plan might actually charge them for pulling money from the provider.  Sometimes carriers have a minimum number of years you need to keep the money invested with them or they will charge you a penalty. In my opinion the thicker the disclosure books the more they are trying to cover their own tails.

What really gets under my skin is why should my wife or her colleagues pay for Mortality and Expense Risk.  This expense is charged annually for a risk that the sponsor company is taking on a death benefit. How do they know she even needs this benefit?  In fact, most teachers receive life insurance through the state and it is usually cheaper for someone to just get term life.  In addition to the mortality & expense charge there is an additional administration fee that is added to the cost annually. These charges are unique to annuity contracts and are not included in other retirement plans that are non-annuity based.

The second issue is the fund expenses or “subaccounts”. These fund expenses generally add an additional 0.5% to 2% to your overall annual contract expense. All these fees really add up. This brings up my next question of what is she receiving from that annual expense she pays every year?

I hear that the salesman, yes I used that term from the insurance company meets with the teachers in the teacher’s room in front of other teachers to discuss their accounts.  When you go to the doctor, does the proctologist exam you in front of other patients? How can you even have a tangible conversation about personal finance when others are listening.  In my experience this promotes information that is left out or information that might have a more positive spin.

Are they really doing any financial planning or trying to help these teachers, or are they just saying “increase your contribution by $50 per paycheck because I have a sales quota to meet”.  Not to mention the proprietary products they offer.  How can they ever have meaningful financial discussion when other teachers are coming and going? How do they know this is the right recommendation? Teachers are already contributing to their pensions and should have taxable retirement income.  Shouldn’t ROTH IRA accounts be part of the conversation? They may make more sense than “just contribute more to your 403(b) account”. I could make an argument a ROTH IRA is something to look into for most teachers since it could provide a tax free source of retirement income* without the need to take required minimum distributions which would most likely increase a retirees income bracket if they also have a pension.  Do the salesman not bring up ROTH IRA accounts because they don’t have enough time or do they get paid more if they push 403(b) accounts?

I am speaking for my wife here, but she is now on her 3rd salesman.  The first guy is now barred by FINRA and has 3 disclosures on his record according to Brokercheck.  The second person changed to another insurance carrier, but only had a couple years of experience and we will see how her new advisor works out.  I am sure there are some good advisors out there, but we have yet to experience one in the 14 years she has been a teacher. Maybe it’s because I know what she is paying and the level of services she is receiving, but I think they can do more for our teachers.

How are some of these salesman with quotas even allowed in the schools?  How is the NJEA and local school boards not doing more to protect our teachers?  The NJEA is one of the most powerful unions in the state, but I never really see the benefit going to the teachers.  Maybe I am wrong, but I would think having that large a union they would have more leverage than what I have seen over the past couple of years.   I know they are focused on issues like healthcare and pensions, but why not try to save these hardworking teachers money in their 403(b) accounts.

If a teacher was able to cut the cost of their plan by 1% every year, then over 30 years they would have 30% more right?  I think every teacher out there would like an additional 30% in their retirement account when they are about to retire.

*To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.

All investing involves risk, including the possible loss of principal.  There is no assurance that any investment strategy will be successful.

The views depicted herein are for information purposes only and are not necessarily those of Cetera Advisor Networks LLC. They should not be considered specific advice or recommendations for any individual.

Annuities are long-term investment vehicles designed for retirement income purposes. There is a surrender charge imposed generally during the first 5 to 7 years that you own the contract.  Withdrawals prior to age 59 ½ may result in a 10% IRS tax penalty, in addition to any ordinary income tax.  The guarantee of the annuity is backed by the financial strength of the underlying insurance company.  Investment sub-account values will fluctuate with changes in market conditions.