(B)Ware Of 403(b) Loans

The CARES Act doesn’t care enough about teachers’ 403(b) plans.

What else is new in a retirement space filled with more murder holes than Omaha Beach?

The CARES Act makes it easier to access retirement funds using loans. Previously, workers could borrow the lesser of $50,000 or one half of their account value. The new law doubled this figure.

We don’t encourage borrowing from the future to pay for the present. There are always exceptions. Now it could be one of them. 

We’ve preached about the egregious exploitation of teachers in their Non-ERISA 403(b) retirement plans. Lots of shady things happen when educators borrow from their programs in comparison to private sector 401(k)s.

Expensive and unnecessary variable annuities rear their ugly head. Our friend Dan Otter explains this shady practice.

“Be careful of agents advising you to move your money to a new product to take a plan loan. triggering a surrender charge, put you in another bad plan, and move you from a good plan to a bad plan. If your 403(b) product doesn’t offer a plan loan and you need to move your money to one that does (via an exchange), you will want to ensure that the new product has no surrender charges, is low in cost, and doesn’t charge a commission.”

Imagine desperate teachers taking advantage of the increased $100K loan provision of the CARES Act and end up paying thousands 0f dollars in annuity surrender fees to access their own money?

While illegal in 401(k) plans, this is the standard operating procedure in public school teachers 403(b)s.

Insurers go beyond usurious surrender fees, draining as much money as possible from plan loans.

Unlike most 401(k)s, some loans from 403(b) accounts are “collateralized.”  Insurers freeze a part of the 403(b), making a separate loan to teachers hoping to earn a profit on the interest rate spread differential and padding their profit margins even further.

In a sense, insurance companies are skimming off the top and self-dealing.

In most plans, the interest on the loan is an after-tax contribution deposited to the account. Not the case in 403badlands.

Some Insurer’s credit portions of interest payments back to the firm rather than the borrowing participant. Non-ERISA 403(b) plans are the wild west of retirement savings. It’s terrible enough raiding a long term retirement account due to financial hardship.

Some insurance companies make this unpleasant situation worse.

Essential workers like public school teachers deserve better.



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