Rich Plan, Poor Plan

403(b) plans are treated like the ugly stepsister compared to their more glamorous close relative, the 401(k). Both plans were designed for the same purpose. Unfortunately, their separate governance structures are a textbook case definition of discrimination. Workers who participate in a public rather than a private retirement plan are being given the short-end of the regulatory stick.

While the 401(k) is deemed essential to an employee’s retirement, inexplicably, the 403(b) is labeled supplementary. When something is not considered important, its treatment tends to be something bordering on criminal.

The Department of Labor’s proposed fiduciary rule will strengthen already modernized 401(k) regulations. Remarkably, it will have no bearing where it is needed most. 403(b) plans provide very little or no fiduciary protections for employees. The proposal will do NOTHING to change this sorry state of affairs.

Since 403(b) plans are considered to be supplementary to the retirement needs of employees, the regulatory standards they are held to are almost non-existent. For some strange reason, 401(k) plans, which have average balances of $102,000, are considered more essential than a teacher’s 403(b) plan.

While teachers receive a pension, many are not eligible for social security benefits. In addition, many states are in dire fiscal straits and are cutting back promised payments. The idea that the 403(b) is not essential to the retirement plan of a public school teacher is preposterous!

This has led to a disastrous outcome for teachers. Due to the fact that these plans are considered supplementary, teachers are stuck with plans that come up short next to the 401(k):

  • Unlike the 401 (k), there is no auto-enrollment or qualified default investment alternative (e.g., a low-cost target date fund)
  • Stringent E.R.I.S.A fiduciary rules are not mandatory, as they are with 401(k)s;
  • Single vendor plans, which would greatly lower costs and simplify matters, are not required in 403(b)s;
  • Only high-cost annuities and custodial mutual funds are allowed as investment options (no E.T.F.s or C.I.T.s are used);
  • Prohibited transaction rules do not apply (i.e., insurance salespeople can win trips and trinkets when selling product; this would result in a lawsuit if done inside a 401(k) plans);
  • Employers are not required to send out notices regarding fees paid by participants;
  • 403(b) vendors are not required to disclose both indirect and direct fees; and
  • There is no standard authority to hear complaints over 403(b) plans.

Often, when well-meaning individuals and districts try to stand up for the rights of public school teachers, they are mercilessly bullied by deep-pocketed insurance companies.

My friend, Scott Dauenhauer can tell you first-hand the harassment he experienced for writing posts such as this. To his credit, he has not been intimidated by these bullies and neither will we.

Whenever laws are proposed to try to equal the playing field between 403(b) plans and the 401(k), insurance company lobbyists spring into action to protect their illegitimate cash cow.

While they have won the battle, reform-minded advisors, districts, politicians, and unions will win the war. These insurance companies are clearly on the wrong side of history.

The more stories like these are publicized, the louder the cry will become calling for progressive reform of the 403(b).

I defy anyone, other than insurance companies, to pose a rational argument why both public and private retirement plans should not be regulated under the same fiduciary guidelines.

Hopefully, more politicians will become aware of this issue and demand answers as to why this gross injustice exists.

It was proven many years ago that “separate but equal” was a vicious myth. Unfortunately, financial regulation has failed millions of public school teachers using this same reasoning. We can and should do much better than this.


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