It is unfortunate but true that a majority of schoolteachers, and others in education-related careers, make savings contributions from their modest paychecks into lightly regulated retirement vehicles that often charge excessive fees.
Writing in the New York Times on October 21, 2016, reporter, Tara Siegel Bernard, illustrated this issue with the example of educator, Margaret Jusinski. Bernard wrote that Ms. Jusinski “. . .first got to know her investment broker through the breakfasts he provided when he visited her public school in the leafy suburbs of New Jersey. . . After the bagels, muffins and coffee, the broker made his sales pitch — and Ms. Jusinski bought it. So did many of her colleagues."
When it comes to employees of school systems, many financial services companies have for decades aggressively competed for domination by garnering the favor, sponsorship and, thus, the implied seals of approval of teachers unions, boards of education and school employers. These financial companies don’t offer teachers or staff personalized financial strategies. They only sell singular products that promise one-size-fits-all solutions for teachers’ future financial security needs.
If Margaret Jusinski had shunned the broker’s offering that day and had been able to choose a simpler, less expensive plan she would have earned approximately 20% more in savings, according to NY Times reporter Bernard.
"It is a heartbreaking situation for everyone," said Ms. Jusinski, herself a 50-year-old mother of two girls. "Especially for the staff members who were looking to retire within the next few years.”
In a transaction-based world that promotes selling financial products over offering financial knowledge, most working Americans are at least offered the option of contributing to a fairly highly regulated 401(k) plan. But millions of public school teachers are not even offered 401(k)s. Instead they typically must rely on what are known as 403(b) plans.
A 403(b) account can cost tens of thousands of dollars more over a career than a comparable 401(k) because (403(b)s aren’t subject to the more stringent federal rules and consumer protections that apply to 401(k) plans. Often the providers of 403(b)s are insurance companies whose plans are structured as annuities which can be confusing and much more expensive than 401(k)s or Individual Retirement Accounts (IRAs).
New IRS regulations in 2009 helped tidy of some 403(b) problems. But the main ones remained, those being lack the of expense transparency, education about investment options and administrative communication.
Margaret Jusinski paid more than $15,000 in fees and commissions on a 403(b) account worth no more than $87,000 after 8 years. She would have had almost $105,000 more at the end of 2015 if she had been in an IRA invested in standard mutual funds.
Ms. Jusinski and her colleagues turned to their local union for help, hoping they could find a better program to put their money in. The union representative recommended a sales agent affiliated with the retirement program run by the National Education Association (N.E.A.), a union with three million members. But the union’s products weren’t much different from what the teachers already had. The N.E.A.’s Member Benefits group, a subsidiary, exclusively endorses a set of products from Security Benefit, a financial services company with nearly $32 billion in total assets that creates fixed and variable annuities. Bernard reported in her New York Times article that, according to regulatory filings, the N.E.A.’s program for teachers receives at least $2.7 million from Security Benefit each year, which it says is for covering the costs of operating the program.
The referenced New York Times article states that Margaret Jusinski has now taken back control of her retirement account. But she worries about her fellow teachers all over the nation who are still stuck in costly 403(b) plans. What she and all her colleagues should really be concerned about is a lack of available financial planning and education for most teachers which preclude their falling victim to pushers of expensive products like 403(b) plans.
The lesson here: professional financial planning is necessary before making arbitrary decisions about participating in employer sponsored plans that could cost you your financial security in the long run.