We talk a pretty good game in our society about how we value our teachers and what they do for our children. But then we as a nation turn around and disrespect them by giving them some of the worst retirement plans of anybody out there.
Teachers get a raw deal on retirement
In its infinite wisdom, Congress set up inferior retirement plans for teachers called 403(b) plans way back in the 1950s.
403(b) plans come loaded with massive commissions and huge ongoing fees from the insurance companies that push them.
In fact, a new report from Bloomberg notes that 76% of 403(b) money is invested in high-fee annuities.
Unions and even school districts can be complicit in this colossal rip-off of our country’s teachers via crummy 403(b) plans, in some cases.
Case in point: This New York Times article profiles a number of educators stuck in high-cost retirement plans that are demolishing their financial future.
Some of these teachers the newspaper writes about would have 20% more money in their nest egg if they had a lower-cost retirement plan.
Others would reportedly have 50% more money if they were educated about the high fees they were paying to invest!
Here are four things to keep in mind when considering your 403(b) plan…
1. Who is managing your money?
The first thing you want to do with your retirement money is determine who is managing it.
I used to love a provider called TIAA-Cref. But that began to change in November 2017.
The $1 trillion investment and insurance giant was accused of creating an internal corporate culture that encouraged salespeople to use underhanded tactics to sell financial products that were revenue-heavy for the firm, but that didn’t put their clients’ best interest first.
At first, I was no longer recommending TIAA. But I’ve since rethought that and now believe TIAA is the best place to have your 403(b) money — despite the apparent problems with the company’s moral compass.
Meanwhile, it’s also worth taking a look at low-cost provider Vanguard.
NEW: 403bWise.com has a list of financial advisors they believe pass the fiduciary test. That means they work for you instead of trying to line their own pockets by steering you to bum investments with high profit margins for them.
2. Is there a match being offered by your employer?
In the private sector, it’s common for companies to offer a match on your 401(k) — maybe 50 cents on every dollar you save up to 6% or something similar.
In the education world, some school systems will offer a match, too. If there is an employer match, you need to at least contribute as much as necessary to pick up the maximum match.
You want to be sure you’re getting the employer match, but anything beyond that should be invested elsewhere.
So then from there, you can go one of two ways…
If you’re with a low-cost provider, you can continue investing in your plan. But if you’re with a high-cost provider, every dollar after you pick up the match should go to a Roth IRA at a low-cost provider like Vanguard, Fidelity or T. Rowe Price.
If there’s no employer match on your 403(b), I would rather see you be disciplined and do your own Roth IRA from the get-go. Again, check out Vanguard, Fidelity or T. Rowe Price to get started.
Earnings on a Roth are tax-free, and tax-free withdrawals may be made after age 59 and a half. By contrast, every dollar in a 401(k) or 403(b) will be taxed when you use it in retirement.
3. How much are you paying to have your money managed in your 403(b)?
If you get new plan info on your 403(b), find out what’s in it. Don’t be intimidated or confused by the verbiage. Look at the expense ratio. Most 403(b) plans are over 2%. You want that number to be below .5%. Vanguard, in particular, can be as little as .2%.
4. Why are management fees important?
A simple difference of 1% in fees can mean tens of thousands of dollars in the long run.
For example, the average variable annuity may charge fees of 2.25% annually; the average mutual fund may charge 1.4% annually; and the average no-load index fund, 0.18% annually, according to Meridian Wealth Management.
That means a $250 monthly contribution with 8% growth over 35 years will amount to either $336,320; $409,585; or $548,750 at retirement, depending on whether you paid fees of 2.25%; 1.4%; or .0.18%.
You decide which scenario you want!
If you’re a teacher and have questions about your 403(b), call our free Consumer Action Center at 404-892-8227. Volunteers are staffing the phones Monday-Thursday 10am -7pm ET and Friday 10am-4pm ET!