A couple of times a year our union representatives at my school district get together with the Superintendent for an event called "Meet and Confer" to discuss non contractual issues, grievances, concerns, etc. that employees can submit anonymously. Usually it involves things like supervision times, staff dress code, leaving the work place during working hours and things like that. I thought I would submit something about improving 403Bs. Please give honest and brutal feedback. I won't submit it to my union rep for a day or 2. If the graph on page 2 doesn't display, it is just the one from Dan and Scott's power point presentation provided for us on this site about why fees matter.
Meet and Confer Topic November 2019
I submitted a similar topic a couple years ago, but since then we have had changes in the Superintendent position as well as union leadership, so I will throw it out there again.
I would like to see Monticello become a leader in 403B reform at the K-12 level. This is an issue for thousands of school districts at the state and national level. The problem is that since its inception, almost 60 years ago, the K-12 403B market has been dominated by high priced and complicated insurance products usually called variable annuities, tax sheltered annuities, indexed annuities, etc. The salespeople that sell these products are allowed access to our buildings, often during school hours, calling themselves “financial advisors”, even though they have no fiduciary standard to follow and often no training or certification in financial planning. Unlike its cousin, the 401K, which is regulated by ERISA (Employee Retirement Income Security Act of 1974), K-12 403Bs are only regulated by the less rigorous insurance industry standards. As a result salesman push high priced, complicated insurance products on educators that limit their ability to effectively save for retirement.
The biggest misconception that the insurance salespeople push is that you need an annuity to get the tax deferred benefit of the 403B. This is absolutely false. The 403B tax code itself allows for deferred income if the employer allows it. Purchasing an annuity within a 403B plan is expensive, redundant, and unnecessary. It’s akin to wearing a raincoat inside your house (double tax protection that you don’t need). The 403B(7) is the specific code for deferred income that can be invested directly in the underlying assets like mutual funds, bonds, CDs, etc., without the insurance wrap-around.
This issue has been in the news again the last few weeks as the SEC (Securities and Exchange Commission) investigates the predatory sales tactics of the insurance industry directed at school employees. One of the companies under investigation is one of the most widely used and visibly present in the Monticello School district (see links below). The Barron’s article is shorter, https://www.barrons.com/articles/sec-looks-at-aigs-sales-of-annuities-to-teachers-51572426001 and the Wall Street Journal goes into more detail: https://www.wsj.com/articles/sec-launches-investigation-of-practices-in-retirement-plans-for-teachers-government-employees-11570651944
The price difference for the investor, between annuities and investing directly with a low cost vendor is staggering, with annuities often being 10-20 times the annual cost. I had an annuity product for many years that had expense ratios averaging over 2% (200 basis pts.) annually. Low priced vendors can give you the same exposure to investments but averaging only about 0.14% (14 basis pts). These fees are assessed every year on your entire account, not just on money going in. See chart below to see how fees make a huge difference over time.
*The chart above, which compares the average variable annuity, to an actively managed fund, and an indexed fund, makes the following assumptions: 35 year career, $250 invested monthly ($125/pay period), and a 6% nominal return. If you contributed more than this small amount over your career the differences would be obviously much greater.
So, what is the solution on the local level? The good news is that the Monticello School District does have some low cost vendors on our approved list that do offer non-annuitized options for employees. That is great, but I feel like we can do better. Here are some ideas that I have.
1. Explain and promote our great options at new teacher orientation. Let new teachers know that we have low cost options for tax deferral, since they are the ones most often targeted by insurances salespeople.
2. Cut down some of the names of insurance companies on our approved vendor list. Experts at 403Bwise.org (a non-profit organization) will tell you that more choices are not better for employee participation rate.
3. Put more restrictions on allowing salespeople into our building. Make them sign a fiduciary agreement, disclose all fees on their products (including commissions, load fees, expense ratios, and surrender charges), disclose their education and or certification that allows them to give financial advice.
4. Provide educational opportunities for current employees that maybe haven’t started savings, or that could use help switching from a high cost plan to a better option.
Better retirement savings options are a benefit for employees, employers, and students. Financially secure employees are more satisfied employees that can retire sooner, ultimately saving the district money. Teachers that need to teach until full retirement age in their late 60’s probably don’t benefit students, and certainly cost the district more in terms of salary. With somewhat stagnant wage increases and the future of defined benefit pensions in question, it is all the more important to allow employees to take more control of their future. Lastly, what a great recruitment and retention tool for the district, to be able to brag about our great 403B program to perspective employees.