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Dan's Blog

Thrown to the 403(b) Wolves 🐺

May 25, 2021

It’s no secret that 403(b) sales agents trawl classrooms and teacher lounges looking for new victims, err clients. But did you know that in order to keep the pre-tax status of their contributions for medical, dental, and vision coverage, many school districts force teachers to meet with a high-cost 403(b) vendor? 

Email to Employees from a Northern California School District (5.19.21)

This message comes from the School District...

Staff must meet with American Fidelity Assurance during this open enrollment period in order to keep their pre-tax status for medical, dental, vision coverage (unless they already met with AF last year and do not have a 125 flex or dependent care plan).  Certainly all PV staff will not be able to meet with them on the one day they are on campus, but virtual appointments are available anytime.

There are three ways to do this.

First, they can call 1-800-365-8306 to schedule a virtual appointment at their convenience.

Second, there are LIMITED appointments available at the school sites.  If there is more interest in school site appointments than appointments available I can contact American Fidelity Assurance to inquire about getting another date, if that is the desire of the school site principal.

Third, American Fidelity Assurance will be available for many appointments in June and July at the DO and the BSSP office. So if someone really wants an in-person appointment they can go that route.

American Fidelity Assurance (a.k.a. American Infidelity)

This company makes available a variable annuity product that charges a 1.25% mortality and expense fee even before the underlying investment is included. Costs for the mutual funds available in this product range from 0.13% to 0.85% which means investment costs range from 1.38% and 2.10%. Yikes! Plus, AFI imposes an 8-year, 8% surrender penalty. Double yikes! The firm also sells the dubious equity indexed annuity, and other insurance products at inflated prices. 

Section 125 Cafeteria Plan

Available since 1978, this provision of the IRS tax code allows employees to deduct the cost of items like medical, dental and vision before taxes are paid. It also allows employers to save on payroll taxes. Investopia estimates that employees can save between 28% and 48% in combined federal, state and local taxes while the employer can save 7.65% in payroll taxes. It’s a nice employee benefit. But not if the plan is managed by a high-cost 403(b) vendor. And not if the employer requires employees, who are largely uninformed about 403(b) plan investment costs, to meet with that vendor in order to access the benefit. 

Thrown to the Wolves

Put yourself in the shoes of a teacher or school employee. Most have no idea about the workings of the 403(b). All will want to save as much as possible on their taxes so they will take that meeting. This makes them ripe pickings for 403(b) sales agents. 

What Are Schools Thinking?

So why do school do this? To save on the cost of managing the Section 125 Plan. Who ultimately pays? The teachers and school employees. 

What is the NEA Thinking?

Guess who has a financial arrangement with American Fidelity Assurance? Remember this is the union that has long endorsed high-cost vendor Security Benefit. 

Stay wise and well (and demand that the NEA and your school district cease this pay-to-play Section 125 scheme).