Beth Wilkinson, a reading specialist in the Oklahoma City Public School System, used to dream about the day she would retire. And at 54, Wilkinson says that day is inching closer. But now, because of a mistake she made in her 30s, she’s looking ahead to financial disaster.
Wilkinson joined a 403(b)—an investment plan for employees of public schools and certain tax-exempt organizations—25 years ago, after an insurance company targeting teachers came to her school. The company convinced her to sock away $100 a month in a tax-sheltered annuity. Then, four years ago, when she received a notice that the company managing her plan had been bought by another, she checked up on her investment. Her first discovery: The company had changed hands several times before, and she hadn’t been notified. “When I finally started asking questions, I couldn’t find anyone who knew anything that was going on,” she says.
The new company eventually dug up her original contract, and she got a second shock: The plan’s management fees—8 percent of her every dollar and an annual charge—plus the compounded interest lost on that sum over the years, wound up denying her a big chunk of money. All in all, Wilkinson has saved a measly $18,000. “Originally, I had planned on retiring in five years, but now I don’t know what I’m going to do,” she says.
Wilkinson’s situation is not unique. The idea behind a 403(b) is similar to that of the private sector’s 401(k): Workers stash away pretax income via payroll deductions for their retirements. An estimated 60 percent of public school employees invest in the plans. However, the potential downsides of 403(b)s, combined with school districts’ poor selections of financial institutions, can leave novice investors like Wilkinson with nothing more than chump change.
Most 403(b)s invest in annuity and variable annuity contracts with insurance companies, which tend to be conservative; only 15 percent invest in better- performing mutual funds. “Annuities are not inherently bad,” says Don Kuehn, a senior national representative with the American Federation of Teachers in Washington, D.C. But, he explains, the advantage of an annuity is tax deferral, which an investor already has with a 403(b). “Putting an annuity into a 403(b) is like using an umbrella indoors,” he says.
Another problem is that many 403(b)s can charge high annual dues and penalties for early withdrawal. Those that charge more reasonable rates often don’t have a shot at signing on teachers because most districts will work only with agents who sign agreements releasing them from any liability. Districts typically don’t educate teachers about investment options, says Kuehn, and agents take advantage of this. “[Many] are sharks that prey on unknowledgeable people and sell them these plans at the largest commission,” he says.
But now, a growing number of teachers are taking on the task of educating their colleagues and petitioning to improve their districts’ 403(b) plans. For example, Dan Otter, a teacher at McKinley Elementary School in Corona, California, has co-founded a 403(b)-related Web site, 403bwise. “People kept telling me I needed a [tax-sheltered annuity],” explains Otter. “But it didn’t make any sense to me. I don’t buy a car without doing my research, and I wasn’t about to do this either.”
“Our feeling is that members need advice,” says John Wendland, product manager of National Education Association Member Benefits, a separate corporation of the NEA. His group publishes a 60-page consumer guide on tax-sheltered annuities, but unions say they’re limited in what they can do. In recent years, teachers in the Chicago Public Schools and elsewhere have taken matters into their own hands and successfully lobbied their districts to offer better- performing annuities or no-fee mutual funds.
Not only teachers but districts, too, should want better plans, says Carol Calhoun, an employee-benefits attorney in Washington, D.C., who is working with several districts to make the plans more user friendly. “School districts want to attract and retain teachers,” she says. “The more options that [districts] can offer, the better off they both will be.” She adds, “Especially with all of the teacher shortages right now, [schools] should use this to their advantage.”
—Michele M. Capots