Exit Strategy

By Lani Harac — April 14, 2006 7 min read
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Dan Otter had barely begun his teaching career the first time he was approached about a retirement plan.

“A lady waltzed into my classroom and said, ‘Do you care about your financial future?’ ” he recalls. “I was angry that she would be selling in my classroom, and I was angry that I hadn’t heard before about what she was talking about in a non-sales environment.”

The woman, a representative for a financial company, was pitching a 403(b), a type of supplemental retirement plan offered to employees of educational organizations. In 1993, when Otter was working for a school district in California, it was standard practice for sales reps to hang out in teachers’ lounges—and in many places, it still is. But when the rep started rattling off phrases like “annuity product” and “TSA,” Otter realized he was out of his depth.

Although he knew little about investing, his father—who had a background in finance—discouraged him from signing up for what the rep was selling. With no further knowledge, Otter initially did what the majority of other educators in the same situation have done: nothing.

While many teachers have district-funded pensions that are the envy of their counterparts in other professions, the reality is that most must still augment their retirement savings. Yet K-12 educators and administrators are often uninformed about how to invest wisely, according to Otter. The problem is compounded by a lack of federal regulation over 403(b)s, many of which charge high fees that sap the benefits of investing over time.

“Stuff just kind of came in a packet,” says Jason Ingram, a guidance counselor at William H. Farquhar Middle School in Montgomery County, Maryland, of his introduction to retirement-savings options. “I don’t remember really ever talking about it with anyone.”

Otter believes teachers should have plenty of financial options. Through books, Web sites, and seminars, the 40-year-old hleps them look into supplemental retirement plans. "My mission," he says, "is twofold: education and empowerment."

But Otter—who, in the mid-1990s, began educating himself, then advising his colleagues—has undertaken to change the norm. He recently published a book on retirement planning, his second on the subject, and now travels to schools across the country giving seminars. He also thinks district administrators, who often take a hands-off approach to the supplemental plans they offer, should use their leverage to negotiate lower fees. And in one school system, Otter has found an unlikely ally: a former employee of a financial services firm who’s helping winnow out the district’s higher-priced vendors.

“My mission is twofold: education and empowerment,” Otter says. “I want to unlock the grips that high-fee providers have on this plan.”

In the private sector, employees supplement their retirement savings with 401(k) plans; teachers, health professionals, and other public service and nonprofit employees contribute to 403(b)s. Named for the subsection of the federal tax code that defines them, such plans include an investment component wrapped in an “annuity product”—essentially, life insurance that guarantees a certain investment return should the stock market lose value.

Financial enthusiasts will tell you it’s a sure thing that stock prices will fluctuate, so on its surface, insuring against that doesn’t seem unwise. But Otter argues that the fees for such security are usually so high, investors end up paying more on average than if they simply accepted the vagaries of the market.

Tall and dark-haired, with full eyebrows and an open demeanor, the 40-year-old Otterdidn’t start socking away money until he talked to a friend in the investment industry, several years after that first sales pitch. Then he began chatting with colleagues. They’d converse in the teachers’ lounge about sports, current events, and, eventually, retirement. Ever curious, Otter wanted to know how their plans compared with his. “These teachers would say, ‘Oh, I’m fine. My [financial] guy is taking care of me,’ ” he recalls. “The typical answer would be, ‘Oh, there’s no fees.’ ”

Otter told them to bring in their paperwork so he could help them tease out the hidden costs. As he continued teaching in California and Maryland K-12 schools and universities over the next decade, Otter’s impromptu counseling sessions grew into a second profession as a “financial advocate.” With two friends—one a fellow teacher, the other an investments adviser—he created the Web site, then several companion sites. Out of that grew The 403(b) Wise Guide, a slim, self-published primer outlining the basics for teachers and nonprofit workers. More recently, Otter released Teach and Retire Rich, which goes into more detail, and he now travels the country delivering seminars to K-12 and university educators.

Jason Ingram met Otter during the 2004-05 school year, when Otter was teaching 6th grade at Farquhar Middle. Although Ingram hadbeen investing in the stock market since college, he began asking Otter questions about Montgomery County’s supplemental retirement plans. “A lot of it was over many conversations in passing—you know, in the hallways [and] after school,” he says. “[Otter] did hold an informal workshop for fellow staff members. There was pretty good turnout.” Now in his third year as an educator, Ingram puts more than 10 percent of his income into several retirement options offered through his district, including a 403(b).

John Kevin, an investment expert, was hired by a district in Maryland to manage its retirement plans. He narrowed the field of potential vendors so that the district could negotiate lower fees and better benefits.

Otter had to work hard for his knowledge of the arcane minutiae of retirement plans. The district administrators at his first teaching job in Corona, California, couldn’t give him any insight: With representatives from more than 60 companies—none of which were vetted—approaching teachers on campus, he says, they didn’t know where to begin.

The confusion stems in part from a lack of federal regulations. Alternately called a tax-sheltered or tax-deferred annuity, the 403(b) was created in 1958 for employees of public educational institutions, churches, hospitals, and nonprofit organizations. While the plans have changed over time, they still lack some of the reporting requirements of other retirement programs. The IRS, however, has proposed a number of changes that would bring 403(b) plans in line with two other tax-deferred programs, the 401(k), which is offered by private companies, and the 457, for state and local government employees. Established under a 1974 ruling, the Employee Retirement Income Security Act, the mandatory plan documents for 401(k) and 457 plans require that fees be disclosed and kept at a “reasonable” level.

The changes, which could take effect as early as next January, would force central-office administrators to pay closer attention to the supplemental plans offered through their districts. Right now, Otter points out, it’s too easy for school officials to say, “We have a pension. There’s too much to do; let’s not get involved in the extras.”

Among the districts where administrators are already taking the initiative is one of Otter’s former employers. In Montgomery County, Maryland, 50 percent of the 20,000 employees—from teachers to bus drivers—invest $750 million a year in 403(b) and 457 plans. Two years ago, the suburban Maryland district hired John Kevin, a 10-year veteran of the Vanguard investment firm, to manage its retirement plans. One of the first things he did was vet the approved companies, ultimately reducing the list to 14.

If Kevin had his way, the list would be even shorter—three direct-sales companies and three with higher-cost, full-service representation. According to a report published by Vanguard, “choice overload” leads to significantly lower participation rates. Reducing the number of approved providers also allows districts to negotiate with companies for lower fees and better benefits, Kevin adds.

So in advance of the possible IRS regulation changes, which Kevin wholeheartedly supports—“It’s going to force K-12 employers to get rid of vendors,” he says—he spearheaded a review of the district’s approval process. The move to trim the 14 current providers to just six, however, has been postponed for further review.

Regardless of the setback, Kevin continues to work on increasing participation in retirement savings programs, especially among new teachers. To that end, he’s creating a Web site that will supply information on everything from retirement-planning details to an explanation of the benefits of investing. Otter, who met Kevin before leaving the district to attend graduate school in New Mexico last fall, is helping develop the site’s structure and content. He’s also hoping Kevin will ultimately succeed at revamping Montgomery County’s vendor-approval process.

“This is ground zero right now,” Otter says. “MCPS is a high-profile public school system. If they get this done, other districts will say, ‘Hey, we can do this, too.’ ”


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