Why K-12 403(b) Plans Stink 💩
October 2, 2019
The K-12 403(b) plan is confusing even to financial professionals. Compounding the problem is the segregation of the plan into ERISA and non-ERISA buckets. The Employee Retirement Income Security Act of 1974 (ERISA) set minimum standards and protections for employer based retirement plans. Despite pre dating the 401(k) by 20 years, ERISA doesn't apply to public K-12 schools and public universities, but it does to private universities and private K-12 school plans. This leads to generally excellent plans at ERISA institutions and long K-12 403(b) vendor lists stocked with mostly-high fee products pushed by non fiduciary sales agents. I have first hand experiened with both kind of 403(b) plans.
Previous Employers and Their 403(b) Plans (Clearly I am not able to hold a job!)
- Non-ERISA 403(b): Corona Norco Unified School District had close to 100 vendors when I worked there in the early 1990s. They now have 36 vendors (35 of them are crap)
- ERISA 403(b): The Bosque School had one vendor (TIAA)
- Non-ERISA 403(b): University of New Mexico had and to date has 4 vendors. Public universities don't fall under ERISA but generally, their plans are solid. Are you listening K-12 benefits officials?
- ERISA 403(b): University of Redlands had and to date has one vendor (TIAA)
Lawsuits Against Higher Education ERISA 403(b) Plans
The great irony is that 403(b) lawsuits have been filed against major private univeristies. The reason? Their already really good plans aren't good enough. You can't make this stuff up. If K-12 403(b) plans fell under ERISA, there wouldn't be enough lawyers to handle the lawsuits that would ensue.
Solutions for Public K-12 Plans
The financial services industry exploits this lack of ERISA protection. School districts and unions largely fail to protect teachers. So what can be done?
- In a 2016 research paper titled How 403(b) Plans are Wasting Nearly $10 Billion Annually, and What Can Be Done to Fix It, AON Hewitt suggests putting K-12 403(b) plans out to bid to reduce vendor list to a single provider. They suggests the benefits include lower administrative costs, improved regulatory compliance, and a more effective plan governance structure. Additionally, "Effective plan governance and oversight have the potential over time to increase participant satisfaction and improve retirement readiness for participants." NOTE: Montgomery County Public Schools, located just outside of Washington, DC, put their plan out to bid and has one vendor: Fidelity.
- Teach teachers about the 403(b) before they enter the classroom. 403bwise.org stands ready to educate teachers in training with free on site presentations or via video conference. If you work for a teacher education program, contact us to set up a 403(b) education session.
403(b) Fact Sheet
For more information on the 403(b) see our new 403(b) Fact Sheet, a document we will continuously update.