Public school teachers might want to recalculate the money they stand to collect on their 403(b) plans when they retire. That’s assuming, of course, the money will be there. In a lengthy expose in its April 25 edition, the Los Angeles Times revealed how cozy relationships between teacher union officials and investment companies result in retirement plans that charge unusually high fees but deliver below-average returns. The article’s author, Kathy M. Kristof, amassed extensive evidence to suggest that union officials actively steer funds into these plans.
The 403(b) plan for nearly a half-century has been the primary vehicle for investment for teacher retirement funds. Congress created the 403(b) in 1958; today such plans account for more than $600 billion. Like its more familiar private-sector equivalent, the 401(k), the 403(b) is a defined-contribution plan; the employee makes regular contributions until retirement, at which point he or she is ready to make penalty-free withdrawals. But there is a major difference. Employers sponsor 401(k) plans, and by law, must screen out certain investment options while making sure employees have a reasonable range of choices. Employers of 403(b) plans – school districts – are not so obligated. As a result, teachers, especially the ones beginning their careers, are subject to a multitude of slick, and potentially misleading, investment pitches by mutual fund companies and financial planners. And the “middlemen” acting on their behalf are their unions.
“It’s a rare school district that gives teachers access to quality choices,” says Dan Otter, a former Maryland teacher and founder of the investment guide 403bwise.com. “In most cases, they just turn a blind eye to the problems. And it’s the rare union that’s advocating for better 403(b) investments for its members.” Union officials can make out very well by steering rank and file to plans managed by friendly investment advisers. For example, New York State United Teachers receives $3 million a year from the Netherlands-based ING Group for encouraging its 525,000 members to invest in its annuities. The National Education Association, now with 2.8 million members, collected $49.6 million in royalties in 2004 on the sale of annuities, life insurance and other financial instruments it endorsed, according to disclosure data NEA filed with the Department of Labor. It’s now a familiar pattern: Teachers unions refer their members to union-approved products, and in return they get a cut of the revenues.
Whether one calls these payments royalties or kickbacks, the real test is whether such an arrangement benefits employees. Too often they don’t earn a passing grade. One reason is that fees tend to be unusually high. Buyers of an NEA-endorsed annuity sold by Security Benefit Life Insurance Co. pay combined annual fees of at least 1.73 percent of their savings. Kristof noted that this is about 10 times as much as they would pay in 403(b) plans available from Vanguard Group, T. Rowe Price and other low-cost mutual fund providers. The most costly NEA-endorsed plan charges 4.85 percent. “The nature of the marketplace is such that you have these little under-the-table payments, or whatever you want to call them, and a good-old-boy network that really works against the teachers,” said Mark Fischer, an Ohio-based designer and manager of retirement plans. Also, returns are on the low side. Art Dawe, a teacher of English as a second language in Middletown, N.Y., for example, two years ago took a closer look at the performance of his ING Opportunity Plus variable annuity. It had delivered an annual return of 1.6 percent since 1990. By contrast, mutual funds as a whole in this country grew by 8.4 percent a year during this time. For teachers in their 20s, in the early stages of growing their nest egg, it doesn’t make sense to put more than a modest percentage of their contributions into annuities, either fixed or variable.
Union and investment company officials defend the arrangements. “We are giving Finance 101 lessons, explaining what a stock is, what a bond is,” said Troy Dueker, a vice president of the California-based Plan Member Services, which charges annual fees of 2.5 percent to 4.6 percent. “We take them through life-cycle planning.” Kathleen Murphy, ING’s group president for institutional financial services, echoed this view. “Overwhelmingly, the teachers have chosen the higher-service model because they want help, education and advice,” she said. Dennis Tompkins, a spokesman for New York State United Teachers, says endorsement deals are good for members because they help underwrite union benefit departments. “A lot of our members are beginning investors who need a lot of hand-holding and guidance,” he remarked. Such talk is really doubletalk, counters Steve Schullo, a Los Angeles teacher and critic of 403(b) endorsement deals. It assumes “teachers are too stupid and too naive to manage their own retirement savings.” Schullo noted that the main reason why so many young teachers choose products sold by financial planners – the ones recommended to them by their unions – is because they aren’t aware of their high cost.
If teachers are as smart as their chosen profession would suggest, there’s no reason why they can’t get a good remedial financial education on their own. A seemingly infinite variety of investment guides exists in the form of books, newspapers, magazines, Web sites and other sources. It’s unfortunate their unions aren’t likely to be of much help in their search. (Los Angeles Times, 4/25/06).