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There is Still a Fishy Smell in the Teachers' Lounge 🐟

August 20, 2019

One of my first and most popular blog posts, What’s That Fishy Smell in the Teachers' Lounge? — written way back in Spring 2000 — is sadly still fresh as line caught salmon. The post detailed the dangers of the 403(b) sales agent provided "free" meal in the teacher's lounge. With school starting across the country, teachers are as vulnerable as ever. And it's not just in the teachers' lounge that they need to be 403(b) aware. Insurance companies are providing "education" about the 403(b) at mandatory new teacher and back-to-school workshops. Please share the following with new teachers, those unfamiliar with the 403(b), benefits officials, union representatives, and school board members.

Free Lunch!

For years we've read about the heaping servings of bad nutrition cooked up in America's grade school cafeterias. Reports of pizza in a cup and meatloaf Monday can conjure up painful lunchtime memories. But what about that fishy smell emanating from the teachers' lounge? You know the routine: smartly attired "financial planner" sets up a meeting with the staff to chat about finances — food and refreshments provided.

It's easy to be seduced by the aroma of "investing" and "securing your financial future," but what's really on the menu?

What's Really on the Menu?

How about an appetizer of high fees, followed by a healthy serving of average performance and then washed down with a bottle of expensive surrender fees. The meal? The dish that has made more than one insurance salesperson fat with commissions: the high fee annuity (fixed, equity indexed and variable).

What might you ask is so unappetizing about the heavily promoted product? The same thing that's wrong with the double bacon cheeseburger and fries: fat.

Bacon has nothing on the annuity when it comes to pork. Annual operating expenses can tip the scales at more than 3%. To add indigestion to injury, most annuities contain tasteless surrender charges. Participants often must wait five to seven years before removing contributed monies without penalty. Most egregious of all is the fact that many of these companies assess surrenger charges on a rolling basis, meaning each new contribution is locked into a new five to seven year penalty period.  

403(b)(7) Bistro 

Next time your school, hospital or non-profit organization hosts one of these smorgasbords of bad information, you might want to say "thanks, but "no thanks," and instead make dinner plans at the 403(b)(7) Bistro. That's the increasingly popular investment eatery that takes its name from the 1974 amendment (paragraph 7) to the 403(b) which allows participants to contribute directly to mutual fund companies through 403(b)(7) custodial accounts.

At the 403(b)(7) Bistro you can graze on a salad bar of choices including lean meat-and-potato investments like the popular S&P 500 index funds. Feel free to add side dishes of small-cap, mid-cap, and international funds to your meal. Afterwards, if you still have room for dessert, you may want to nibble on a sampling of sector funds that invest exclusively in technology, science, health care, and financial firms, among others.

Upraded Menus

Of course to get a seat at the Bistro, your employer must first include no-load mutual fund companies (like Fidelity Investments, T. Rowe Price, USAA, and Vanguard) and low fee variable annuity companies (TIAA-CREF) on their menu. It should be noted that since this post first ran in 2000, Aspire (which offers affordable access to quality vendors), Fidelity Investments and Vanguard have become bigger players in the K-12 market. If you teach in California, the state pension ageny CalSTRS makes available a tasty 403(b) dish called CalSTRS Pension 2. This meal was created to ensure that every California teacher has access to at least one quality, low-cost 403(b). If you teach in California and your district doesn't offer CalSTRS Pension 2, call (888) 394-2060 to have it added to the menu. Happy dining.

Note: This post has been updated most notably to include some good news: better providers have entered the 403(b) market.