One Weird Trick to Give Teachers a $360,000 Bonus
June 20, 2023
1) Few teachers earn what they deserve; and 2) School districts across the country are facing historic teacher shortages. But there's one weird trick that can address both issues at virtually no cost to a school district. And at least one school district is already doing it.
Side-by-Side
Let's compare two school districts in close proximity to one another: Montgomery County Public Schools in Rockville, Maryland, and the District of Columbia Public Schools which share an attenance border.
Montgomery County Public Schools in Rockville, Maryland offers its employees one low-cost 403(b) vendor: Fidelity Investments.
The District of Columbia Public Schools offer six-high cost vendors.
Assumptions
Suppose a teacher from MCPS and a teacher from DCPS each do the following:
- Open a 403(b) at age 22
- Contribute $5,000 a year to a simple Target Date Retirement Fund
- Earn a 7% annual rate of return
- Contribute until age 60
The Result?
The MCPS teacher in this hypothetical scenario would have saved $873,146. The DCPS teacher? $513,776. That's a difference of almost $360,000! Why?
Fee Tax
The teacher in MCPS didn't have to face an army of non-fiduciary sales agents trawling teacher lounges offering free "lunches" and expensive 403(b) products. MCPS did the right thing: they put their 403(b) plan out to bid and selected one low-cost 403(b) vendor: Fidelity Investments.
Investing in a 403(b) — and a 457(b) — is easy in MCPS. Like employees of Apple Computer, they have access to one low-cost vendor: Fidelity Investments. Investment costs for the Fidelity Freedom Index 2045 fund selected by the teacher was 0.08%.
The teacher in DCPS faced an army of non-fiduciary sales agents trawling teacher lounges offering free "lunches" and expensive 403(b) products. Unfortunately this teacher signed up for the Equitable Target 2045 which charges 2.3%.
0.08% 2.3%
The difference between 0.08% and 2.3% doesn't seem like a lot. But it is. It's nearly 29 times more expensive!
Districts Using Good 403(b) Plans to Recruit Teachers
Denver Public Schools said in a symposium on K-12 plans that teachers had accepted jobs in part because of the low-cost single vendor plan. In the podcast below a Wisconsin Superintendent shares how he uses his A-rated 403(b) plan to recruit teachers.
In this episode from Learned By Being Burned: Teachers and the K-12 403(b) a benefits official describes how he helped take the plan from multi vendor to single vendor (view transcript).
More Advantages of Single Vendor Plans
Astute readers of this post might have noticed that Corebridge Financial (formerly AIG/Valic) is part of a multi-vendor plan that we give an F-rating but is also part of another plan that gets an A-rating. Why? In Denver, Corebridge was forced to compete to be the sole vendor so it offered a superior product. When vendors are forced to compete, districts can demand better pricing. Single vendor plans also reduce employee plan confusion. No more wading through dozens of companies before having to wade through dozens of investment options.
Stay wise and well (and give teachers and all school employees a $360,000 bonus)
Related Podcast:
Super Superintendent Terry Slack is a Superintendent (known as District Administrator in Wisconsin) who gets the importance of offering a low-cost 403(b). His district's A-rated single vendor plan has a 75% participation rate. We talk with Terry about why and how he prioritizes employee wellness. Listen Now »