Teachers’ pension website revamp
The California State Teachers’ Retirement System has finally upgraded the website where public-school employees can get educated about their 403(b) retirement plan options, making it easier to compare fees and performance and sign up for a plan.
While the upgrade of 403bcompare.com could save teachers some serious bucks, it’s still not perfect because there is no easy way to compare the thousands of options available in the public schools. What it does do is highlight the shamefully daunting task teachers face trying to save for retirement.
“The website is a symptom of the problem,” said Scott Dauenhauer of
Meridian Wealth Management, who has consulted with the system. School districts can’t control which companies sell to their employees, he said.
Similar to 401(k) plans, 403(b) plans let employees of public schools and certain nonprofits have money deducted from their paycheck and invested in a tax-sheltered retirement account. Although the income limits and tax rules are the same, when it comes to protecting participants, 401(k) and 403(b) plans are very different.
Private-sector 401(k) plans are subject to the Employee Retirement Income Security Act, which protects participants in workplace plans. Employers who offer 401(k) plans are fiduciaries, which means they have to manage the plan in the best interest of their plan participants. They must be “prudent, diversify, and manage costs,” said Jon Chambers, a retirement-plan consultant with SageView.
Employers who fall short can get sued. The St. Louis law firm Schlichter Bogard & Denton has won or settled lawsuits against 13 companies on behalf of more than 1 million 401(k) investors, alleging excessive fees and mismanagement.
Some 403(b) plans are subject to this act, but public-education 403(b) plans are not, “so there is no federal law that imposes fiduciary requirements on these plans,” attorney Bruce Ashton wrote on Plansponsor.com. Some states have laws similar to the federal one, but California’s does not apply to public school employers, other than to make sure that employees’ salary deferrals go to the right vendor.
Employers who offer a 401(k) plan generally choose one company to administer it. The plan offers a number of investment options, typically mutual funds. The average number is 25, according to Brightscope, but some research suggests that once you get past 10 or 14 options, participation rates drop.
In California, publicschool employees have thousands of options. That’s because school districts cannot choose or endorse a plan provider. In fact, they must allow any qualified vendor to sell plans to their employees, as long as they register with 403bcompare.com.
The average California public school employee has 30 to 35 vendors to choose from, said Michael Wilson, the system’s 403bcompare.com administrator. Each vendor offers one to more than a dozen different plans or “products,” each with different fees and multiple investment options — in some cases more than 100. Vanguard offers just one plan, but with 97 mutual funds.
Overwhelmed, many school employees don’t pick a plan (Wilson estimates that only 20 to 30 percent participate) or get sold one by vendors who show up in their school lunchroom. These visits
often give the impression that the vendors have been vetted or approved by the school. They have not.
“They come to our school quite a few times a year,” said Michael Lee, a third-grade teacher at Lakeshore Elementary in San Francisco. “They are pretty slick, they offer free lunch in the teacher’s lounge, they have their laptops, then offer to meet with us individually.”
About 18 years ago, Lee agreed to a visit in his home and opened a 403(b) with Americo, an insurance company. Around five years later, he got a card in his mailbox at work from Transamerica, had another home visit, and opened a second 403(b) with them. At the time, 403bcompare did not exist and Lee did not think to ask about commissions or fees.
Not surprisingly, companies that have money for lunches and home visits tend to have the highest fees and commissions. Wilson said the state’s three biggest 403(b) vendors are large insurance companies.
Angelia Brye-Jones, a third-grade teacher in Sacramento, signed up for a 403(b) plan at a free lunch that also included a
$100 gift card of her choice. She chose Starbucks “because that was my addiction at the time,” she said. She transferred $100,000 from another plan into the account. When she discovered the fees were costing her $100 a month, she wanted to transfer the money out, until she found out “it was going to cost me $8,000 to $10,000 in surrender fees,” she said. So she left the money there but opened a lower-cost account elsewhere.
Los Angeles Unified School District has banned vendors from soliciting employees on campus.
A 2002 bill would have required California school districts “to select and provide options to its employees from among the registered vendors” and allow them to “limit the availability of investment products,” taking into consideration factors including administrative burden and fees.
When the 403(b) industry threw a fit, that language was stricken from the bill and a watered-down version passed. It required the teachers retirement system to set up a registration process for vendors and an “impartial information bank” to compare them. The result was 403bcompare.com. (This site has nothing to do with the traditional defined benefit pension plan the system runs for educators.)
The upgrade, announced last week, was the first since the site was launched in 2004. Instead of relying on vendors to input performance information, that data is now drawn from Morningstar, although it will always be from the end of the prior year.
The improved site makes it easier for educators (including those at community colleges) to compare some costs. From the home page, click on “compare products” and use the dropdown
menu on the left to choose a school district. Then, use the menus on top to sort by cost (from low to high) or to enter a particular vendor.
Here you will see four types of costs. The colorful gauge that looks like a speedometer shows whether the average expense ratio of the underlying investment options is low, medium or high. But this is only one cost component, and your average expense ratio could be higher or lower depending on which investments you choose.
To the left of the gauge, under annual costs, you will see how much you would hypothetically pay on a $10,000 investment each year in account maintenance, custodial and other fees, including the average expense ratio. To see a breakout of these fees, click on cost details.
Some of these fees are a flat amount, some are a percentage of assets. As your account grows, asset-based fees increase, while flat fees will not.
Also note that some fees could apply separately to each fund in your portfolio. Vanguard’s annual cost of just $41 includes a $15 custodial fee, but that’s for one fund. What’s not clear is that if you own more than one fund, you will pay $15 a year for each.
Another low-cost option is Pension 2, which is offered by the retirement system itself, separate from the mandatory defined benefit plan it runs.
The upgraded website shows whether each vendor charges a commission when money is invested, or a surrender fee when it is withdrawn. Unfortunately, it doesn’t say what these commissions are. You’ll have to ask. And you might be shocked by the answer.