I am taking the opportunity of writing about this topic hoping to reach out to more fellow teachers and create awareness. My hope is that at some point our 403B plans make it to the news as a scandal; one of the biggest scams and rip offs to the people we claim to love and supposedly hold in high regard.
I will not go over what 403B plans are again, but if you are interested just read my previous post.
For a long time, districts have managed our 403B plans. However, and unfortunately, that is not the case anymore. Now many districts have passed the torch to the so called TPAs(Third party administrators). These are companies that make sure that districts are complying with all the rules and regulations demanded by IRS, since these are tax deferred accounts.
That doesn’t sound bad at all, right? Well, the problem is that many of these companies also act as a gate-keeper for sound investing firms. Let me explain.
Upfront, the TPA service provided to the district is not paid by the employee, at least not directly, but rather by the investing firms that offer mutual funds and index funds to the employees. I know, it is confusing, and confusion lends itself for shenanigans.
So, imagine a company such as Vanguard or Fidelity. They have been around for years and they offer great investing products at a very low cost. However, the TPA that works with your district might demand from Fidelity $30-$50 per employee that will have access to their service.
Fidelity, on the other hand may say, “well, we are not doing it because we have great products and we are not paying a gatekeeper to serve teachers or any other public employee.So, we are out!”
With that, you, as an employee, lose your access to great investing opportunities.
Then the TPA that works for your district may come up with the argument that under their umbrella(Gatekeeper’s umbrella) they have great and diverse options. Which is where the problem starts.
One of the first options you may see in your district’s list is AXA. One of the companies, or the one company with the highest fees out there. It works more like an insurance company than an investing one. They offer annuities, which is basically what our pensions are. Very limited growth and very, I mean outrageous, high fees. They promise guaranteed growth as well as capped earnings. That guarantee is where they make their money and it also makes you poor.
There are people paying 5-6% in fees. Historically the market has had a return of almost 7% since inception, which would leave you with a minimal yearly growth. Taking in consideration that yearly inflation is around the 3% mark, draw your own conclusions. I will spare you the pain and I won’t mention anything about when the market doesn’t grow at all.
In other words, they are ripping us off.
Since I don’t want to get sued, here is my disclaimer:
I am not a professional and I have no idea what I am talking about. I am simply exercising my freedom of speech. If you need help with your finances, talk to a certified professional who promises to have a fiduciary responsibility to act in your best interest and behalf.