403(b) plans, which are entrusted with the retirement funds of our nation’s public school teachers, have serious flaws. One of the most obvious defects is the oldest trick in the book: divide and conquer.
Companies like Walmart are able to receive massive discounts from their suppliers. The reason for this enormous competitive advantage is they buy in tremendous bulk. They maximize their gargantuan resources to get the lowest prices from their vendors.
Contrast this with teachers’ 403(b) plans, that do just the opposite. Instead of collectivizing the investment needs of millions of teachers, spindly individual contracts with plan vendors are the rule.
When teachers negotiate their salaries, collective bargaining is invoked. This colossal advantage enables the union to mass all of its firepower to attain higher wages and better working conditions for its members.
Shockingly, collective amnesia is the case when negotiating lower fees for teachers’ retirement plans. There are no group contracts.
Each teacher is on his/her own to sign up for a plan through a myriad of high-cost providers under the current 403(b) system. Combined with a toxic brew of conflicted salespeople, many teachers often end up with a completely unsuitable variable annuity or a high-cost actively-managed mutual fund.
This system has a dramatic effect upon the final balances of the individual teacher accounts, jeopardizing their retirement. According to a white paper by Aon Hewitt, teachers in 403(b) plans pay an astonishing ten billion dollars a year in unnecessary expenses!
The biggest contributor to this conflagration is the individual annuity and fund expenses. Teachers are not in the position to derive the benefit from low-cost institutional funds because they have little negotiating power due to the amount of vendors on the platform and a lack of a group contract.
Imagine if the ten million U.S. soldiers in World War II each had their own personal strategy to defeat the Axis. I would be writing this post in German or Japanese!
Having multiple 403(b) providers structured under individual contracts is like writing a blank check to the big insurers and brokers.
Not having a single provider that provides a low-cost negotiated solution compounds the costs of investing exponentially for public school teachers.
It also makes the administrative expenses go through the roof. Imagine the work involved in keeping track of contributions, loans, IRS requirements, etc., when there are a dozen or so providers? All of this is unnecessary and counterproductive for the financial needs of public school teachers.
Most importantly, the plan sponsor is far less likely to take on a much-needed fiduciary responsibility under this chaotic system.
The school district cannot mandate teachers to sign up with any individual company. Even if the district negotiates and implements a low-cost superior plan, they will still have too much potential liability stemming from individual contracts.
Due to general inertia, some teachers may not switch their ill-suited plans. They have an individual contract and retain this right. Looking forward, the district could end up in heaps of trouble if it takes the position as a fiduciary and still has teachers in unacceptable legacy plans.
It seems the only beneficiaries of the current individual contract/multi-vendor 403(b) structure are large insurance companies selling high-cost variable annuities, along with brokers peddling expensive mutual funds.
Until teachers learn to unite under a single vendor group contract (similar to 401(k) plans), their plans will continue to contain high expenses and poor choices.
I can certainly think of about ten billion reasons why this archaic system needs to be changed immediately.