Episode 2: My Plans Don't Have Fees Do They?
Transcript
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NANCY BACHETY (00:05):
I was eager. Now I say gullible. I didn't have much. We had debt. I was home raising four children. And when the 403(b) was offered to me by the first person that came into my classroom, I said, Oh, I've been wanting to see you sign me up.
LISA MCEVOY (00:21):
I went back and I added up all of just the fees, how much we overpaid. That just infuriated me that this was not disclosed.
CHRIS NYE (00:30):
What you actually have is an insurance product, and that comes as a huge surprise to most teachers. They don't even understand that aspect of it.
ED SIEDLE (00:35):
It's like running a race with a bag of sand tied to your ankle. You could run the race, you could win the race, but you'll have to run that much faster than anyone else in order to do so.
SCOTT DAUENHAUER (00:47):
Exxon, Apple, Time Warner, or you know, name any major company that has a big 401(k). You don't find equity indexed annuities, and it's because they're run by people who don't want to end up in jail.
NARRATOR (01:02):
Welcome to Learned By Being Burned Teachers and the K12 403(b), the short series that explores the dysfunctional world of supplemental retirement plans, the maddening industry behind them, and the growing movement to fix what is broken.
NARRATOR (01:23):
I'm your host, Barb Besal. I teach high school chemistry in Virginia Beach city, public schools. I'm 15 years into my teaching career and I truly love what I do, but that doesn't mean I want to do it forever. In 15 more years, I want the freedom to be able to choose whether to stay in my classroom. Take my hard earned retirement. When I look around, I see too many of my friends and colleagues who are at or near retirement age, but don't seem to have that choice. Is that my future too? When I found out that some of my well-intentioned financial decisions could actually be robbing me of my freedom to choose my future, I realized what I, a massive problem. We educators and public servants are facing when it comes to preparing for retirement at best, we get too little information too late at worst. We are actively pushed toward manipulative salespeople who masquerade as advisors, But with early access to opera information, through grassroots advocacy, I'm regaining my freedom to choose my future. And I'm hoping to empower you to do the same.
NARRATOR (02:39):
In episode one, we learned how K through 12 teachers are served by a type of retirement plan, known as a 403(b). We heard from teachers who were shocked to discover the high fees built into the insurance annuities typically sold through these plans, and we were introduced to 403bwise, a nonprofit advocacy group set up to help teachers save properly for retirement. In the second episode, we'll explain how those high fees are often intentionally hidden from participants and how paying such expenses over the course of a career in education can have a devastating impact upon a teacher's retirement savings. Episode Two: My plans don't have fees, do they?
NARRATOR (03:48):
Nancy Bachety was a public school teacher on Long Island for 16 years. Like most teachers who come face to face with someone selling a 403(b) retirement plan, she assumed that the salesman she encountered on her campus was endorsed by the school District. When I first started teaching, I had not contributed to a 401(k) or a 403(b) in about 20 years before that. So I was eager. Once I started teaching, I was eager to start saving for my retirement. I didn't have much. We had debt. I was home raising four children, and when the 403(b) was offered to me by the first person that came into my, the building and my classroom, I said, Oh, I've been wanting to see you sign me up. I can't wait. I'm free, whatever. He said, Okay, when are you free? He came into my classroom right after that. I said, I have 45 minutes. My kids are coming in, but I really wanna get started. I wanna start contributing. I need to catch up. And that was how it started. I was eager, um, now I say gullible, but I was eager because I wanted to do it. And if he was in my building, he was legit.
NARRATOR (04:42):
Because Bachety had not been contributing to her retirement she began setting aside as much money as she could.
NANCY BACHETY (04:49):
My paycheck was new for our household, so I figured the more I save, the less that's available because we're gonna spend it all anyway to recover from not working. So I did save a lot and whatever 2003 maximum was, was what I started saving. There were times when I lowered that after that, when, when I needed to, but for the most part, I contributed the most I could until I realized what a bad plan I was in.
NARRATOR (05:19):
Bachety aggressively set aside money for retirement for more than a decade. But one day she began discussing her plan with a fellow teacher. She was troubled by what she learned.
NANCY BACHETY (05:31):
So when he started telling me about fees in the plans, and I knew we had a lot of vendors available to us, so I said, Well, my plan doesn't have fees. And he said, Yes, they do. I said, No, I, I looked at the, at my statements, I called the sales rep and I don't have fees. And he explained to me that they're embedded fees and they're not going to be on your statements. They're not going to show. And of course, I thought that was incredulous. That couldn't happen. If there are fees, it's going to be identified as a fee. So I had a little disbelief on that.
NARRATOR (06:06):
Bachety and her colleague also reviewed the returns on their investments.
NANCY BACHETY (06:10):
The current market at that time has been increasing and the returns were, I'm not going to say a number, but they were X, but the returns on his statement and my statements were X minus Y. So they were lower than what the market returns were.
NARRATOR (06:26):
So Bachety began to do some research into 403(b) plans. Along the way, she discovered the informational website maintained by 403bwise.
NANCY BACHETY (06:35):
I went back to 403bwise and I looked into all of all of those hidden fees, and I examined that and I could only surmise that that's what made the difference. And those were the fees and they were indeed hidden and they were disguised. I couldn't believe that the person that my school district vetted and allowed into my school would sell such an inferior product, and I didn't believe that the school could do that.
NARRATOR (07:00):
After 25 years of paying into her 403(b) plan, New York teacher Lisa McEvoy first became aware that she might be paying high fees. When she received some guidance from a husband and wife team of investment advisors who advocate on behalf of teachers, they provided McEvoy with a list of questions to ask the person who had sold her an AXA Equitable 403(b) plan.
LISA MCEVOY (07:24):
By that point, I still just was hearing that AXA Equitable was one of the highest fee companies, and I had been contributed to it for since 1994. You know, so I could only imagine how much of my money was, you know, taken and I, I couldn't see it either, because, you know, the invoices that I would get monthly didn't say anything about fees. And when I had less money in there, there was like a $30 maintenance fee charge that I saw. But other than that, there was nothing on there about any fee. So, so when she told me that I needed to call the 800 number and ask them specifically about these fees, I was very grateful because I had not had the vocabulary or the understanding about it enough to even know to do that, to protect myself, you know? And now I have mine and my husband's accounts that I'm looking at. So when I called, I did find out that I was paying a 2.5%.
NARRATOR (08:26):
This information prompted McEvoy to calculate how much money had been diverted from her retirement savings.
LISA MCEVOY (08:32):
I don't teach math, but I know how to crunch numbers. So what I did was I went back and I found all of my statements that I could find, and then I estimated, and what I did was I took the amount that was invested and I multiplied it by the fees, and I started adding it up. And, you know, went back in 1994 when I only had $4,000 invested, which is still a lot of money for a 24 year old, You know, it was a very low fee of $106, you know. But fast forward when we have close to a hu$100,000 there, the fees that we were paying were, let me see, $1,875 and understand that while we were paying $1,875 between the two of us, we were only contributing about $4,400 a year at that point. So half, almost half of our contributions were going towards fees, or maybe, you know, at least a third of them.
NARRATOR (09:36):
McEvoy was not happy with her discovery.
LISA MCEVOY (09:39):
I went back and I added up all of just the fees, how much we overpaid, and that was even taking out the 0.6% that I'm now paying at another company, figuring, okay, well every, every company is gonna charge you something. It was in excess of $10,000 and that's just the fees. And that's not counting all of the interest that my 410,000 plus could have made, you know, being in the market still with the rest of my money. So that just infuriated me, infuriated me that this was not disclosed. That it takes me, you know, doing research at the level I, you know, wound up doing it, immersing myself in readings and listening to podcasts and getting in touch with fiduciaries learning what a fiduciary is. You know, all of this stuff, and this is not how it's pitched to you in the faculty room of the school when these people approach you.
NARRATOR (10:44):
McEvoy and Bachety had each learned one of the great secrets of the 403(b) market. Many of the insurance annuity products featured prominently in such plans are set up so that the people selling them can claim that they come with no fees. Financial advisor, Scott Dauenhauer of the non-profit investment advocacy group, 403bwise says this is no accident.
SCOTT DAUENHAUER (11:09):
I think to an extent the industry is happy for people to be confused between indexed annuities and indexed funds. One of the issues with indexed annuities, and the thing that I think the agents love about them, uh, is the ability to say that there's no fees. And it's true that there are generally no fees in an indexed annuity, which is different than in a variable annuity or in a mutual fund. Mutual funds and variable annuities have explicit fees and it's easy to look up their fees, but index annuities are different. They're a form of a fixed annuity. There's no explicit fee, but there is a cost, and that cost is what the insurance company essentially pulls out of that product. It's referred to as a spread,
NARRATOR (12:00):
Regardless of whether they're called spreads or fees or expense ratios. Those costs can add up quickly. New Jersey teacher and investment advisor, Chris Nye explains how this equates to a guaranteed loss.
CHRIS NYE (12:14):
What you actually have is an insurance product, and that comes as a huge surprise to most teachers. They don't even understand that aspect of it. So because it's a variable annuity and it's an insurance product, there are guarantees when it comes to insurance. And the fee that every variable annuity has with it is called a mortality and expense fee. Now, that can vary from company to company, but I know access, for example, is 1.2%. So every single year you can lock in a guaranteed loss of 1.2% of your money simply because you're in a variable annuity. Then you have what's actually inside the variable annuity is what's called a subaccount. Those are the investments that's actually inside your account. That's what makes your insurance contract grow, is their performance of those mutual funds. The mutual funds that I had had expense ratios of almost 2% across the board. So you're losing 3% of your money before anything's even said and done. Like my 403(b) balance right now is, is in the six figures and just right off the top, I mean, 3% of that is a minimum of $3,000 that you're gonna, is a guaranteed loss every year. That equates to about $250 a month just in fees. So your account has to eclipse $250 a month basically in stock market returns just to break even. It's a tall hill to climb.
NARRATOR (13:29):
Nye eventually concluded that he would earn a much greater return on his investment if he moved his money to a low cost mutual fund from Vanguard.
CHRIS NYE (13:38):
Now, when I got my money over to Vanguard, you're not in a variable annuity, so you're not paying any percentage right there, and all you're paying is the expense ratios, which with someone like Vanguard is 0.04%, um, $4 for every $10,000 that you have invested. And T. Rowe Price has very similar expense ratios as well for their index funds and their target date retirement funds. So, all said and done, I mean, I'm saving a tremendous amount of money every single year just in those fees that I'm no longer paying.
NARRATOR (14:10):
Fees are not the only difference between indexed annuities and index funds. While indexed annuities can be invested in the very same stocks held by index funds, they differ in their handling of quarterly dividend payments. Index funds pass along the dividends to the investor. Annuities do not. Here's 403bwise's Scott Dauenhauer again.
SCOTT DAUENHAUER (14:35):
The return of the market is made up of two things. The growth of the market during the year, plus the dividends that are paid by the stocks in that index. Right now, the S&P 500 has a dividend yield of a, I think 1.88%. So if the market was up 3% this year and you had dividends of 1.88%, your total return for the year would be 4.88% before fees. So you know, close to 5%. The indexed annuity excludes dividends. You don't receive any dividends.
NARRATOR (15:10):
And dividends comprise a big part of the typical investor's earnings.
SCOTT DAUENHAUER (15:15):
Historically, dividends have been a big portion of your total return. The receipt of a dividend and the reinvestment of a dividend over time has made up a pretty large portion of the total return of the stock market, somewhere around 40%.
NARRATOR (15:32):
Over a lifetime of investing. Such differences are quite significant.
SCOTT DAUENHAUER (15:37):
We have a graphic that we run on our website that shows the average variable annuity charging somewhere around 3% in fees. And if you were investing $250 a month in that over a 35 year time period, you'd have $185,000. That sounds like a lot of money. And then we also have a graphic for how much money if you were to invest in the average mutual fund. Well, the average mutual fund has a little bit lower fees, so instead of $185,000, you'd have probably around $240,000. That's a lot of money. That's great. However, if you had put that money into a balanced index fund, and again, if you're taking the risk, you would end up with around $345,000. Let's just say $340,000. That is a substantial difference from the person who has the high cost option at $185,000. That is a huge difference.
TEACHER (16:44):
Boys and girls. It's time to put your math stuff away and take out your writing journal.
NARRATOR (16:54):
If mutual funds are so much more cost effective than annuities, how did those high cost insurance products come to dominate this market? It helps to understand the history of the 403(b) retirement plans. The 403(b) investment plan was first created back in 1958, a full 20 years before the birth of its more popular sibling the 401(k) plan. At that time, 403(b) plans were known as tax sheltered annuities or TSAs after the only type of investment then available under such plans. It wasn't until 1974 that 403(b) plans were allowed to invest in mutual funds, but by then, a whole industry had grown up around the sale of tax sheltered annuities, Scott Dauenhauer.
SCOTT DAUENHAUER (17:44):
Mutual funds, they weren't as popular. They, they hadn't really become democratized at that point in time. Whereas a few insurance companies like TIAA and at that time, Valic had really created the infrastructure for an annuity product that could be distributed to a number of people at an employer. So like this infrastructure had been built around the annuity and not around mutual funds.
NARRATOR (18:14):
The point is not that annuity products are inherently bad or that mutual funds are inherently good, but annuities are an investment product designed to prioritize safety and steady income over riskier investment products that focus on long term growth. For a 65 year old veteran teacher who wants to safeguard their life savings upon retirement, an annuity might make great sense, but for a 22 year old rookie teacher looking to build up some savings over the next half century, not so much, Los Angeles teacher, Crystal Mendez.
CRYSTAL MENDEZ (18:47):
A lady who I spoke with, had me take this risk assessment, I guess is what it was. I remember really thinking like, Oh, risk is okay because I'm super young. So whatever assessment I took said, you know, that I'm, I'm, I'm willing to, uh, be in riskier investments. So she seemed like she understood that portion of it and was going to take care of me, so to speak, and, you know, guide me and put me in whatever was the proper fund or investments for, for what I had stated. But it turns out that's not exactly what happened. So it turns out she had just placed me in a fixed annuity, which wasn't necessarily a bad product. It was just simply not the best investment for someone that had, you know, 30, 40 years until retirement. It wasn't designed to grow. It was, to me it seemed more like a very safe investment maybe if I'm already retired.
NARRATOR (19:37):
Indeed, Safety is a part of the marketing pitch for fixed annuities, which are designed to produce a guaranteed interest rate over a specified period of time. But in exchange for the safety of a guaranteed return, investors trade some of the long term growth typically associated with conventional stock index funds. Here's Scott Dauenhauer again.
SCOTT DAUENHAUER (19:58):
The first time that I was reviewing them was a little different, is positioned as you get the upsides of the market, but without the downsides. So if the S&P 500 is up 20, 30%, you can potentially get that return, but if it goes down, you don't have any losses. Obviously there's not a product where you can get all of the ups of the market and not experience the down. That's where the details really come in.
NARRATOR (20:28):
Once you understand the differences between mutual funds and indexed annuities down, Hower says it makes sense that large corporations with well run HR departments don't offer the latter investments to their employees in their 401(k) plans.
SCOTT DAUENHAUER (20:43):
When you look at 401(k) plans, they don't have indexed annuities. They don't exist not in a good fiduciary based 401(k) plan. You don't go to Exxon, you don't go to Apple, you don't go to Time Warner or you know, name any major company that has a big 401(k). You don't find equity indexed annuities, and it's because they're run by fiduciaries and they're run by people who don't want to end up in jail. That's not to say that a reasonable indexed annuity product couldn't be developed and offered within a retirement plan. It's just that as of right now, it hasn't. And the ones that are sold to teachers are just especially egregious.
NARRATOR (21:25):
Former Securities and Exchange Commission lawyer, Edward Siedel puts it another way. Given the high fees charged by some of the more egregious annuity products, it's almost impossible for investors to actually make any money.
ED SIEDLE (21:39):
It's like running a race with a bag of sand tied to your ankle. You could run the race, you could win the race, but you'll have to run that much faster than anyone else in order to do so with that kind of a load. The fees in variable annuities are so significant that I consider them toxic. It's inconceivable that the investor will have any gains over time and they'll be, most investors will be lucky to even have their principal intact when they retire. When the fees are this high if there is any gain, it's typically because money is constantly going into the retirement plan. When I take clients out of these variable annuity arrangements, their employees are pleasantly surprised and notice immediately that their retirement account is growing for the first time.
NARRATOR (22:31):
It's no coincidence that the investments with the highest fees are typically the ones sold by on campus salespeople. It costs the insurance industry money to compensate their Salesforce low cost investment. Companies such as Vanguard, Fidelity or T Rowe Price can't afford to employ such tactics. Dauenhauer explains.
SCOTT DAUENHAUER (22:52):
They don't have the money. They, they're not charging high enough fees to put a workforce out there who's gonna go school district to school district and, and send agents out there because then their products would suddenly become expensive. And so that's why the average teacher is in a bad product because the system is set up in a way that there's really no oversight on the product level.
NARRATOR (23:18):
The people selling annuities even have strategies for how to hang on to those customers who eventually realize how much of their retirement savings are being eaten up by fees.
SCOTT DAUENHAUER (23:29):
I think there are some people out there who have been getting wise to the 403(b) and deciding to move their money from a high cost vendor to a low cost vendor. And when they go to do that, the salesperson whispers in their ear, 0h, we have index funds too, and they're no cost, yay. But what they are really putting them into is sort of a hybrid between a, a mutual fund and an indexed annuity. You don't want to be in that high cost variable annuity. They charge all these fees. Why would you put your money into that? You need to take your money over here to this indexed annuity. We don't have any fees and it's a great pitch. Think about it. We don't have any fees. You get to participate in the upside of the market and there's no risk. There's no downside risk. I mean, who wouldn't want that product?
NARRATOR (24:27):
But of course there is a cost. Once again, it's just been camouflaged.
SCOTT DAUENHAUER (24:33):
The costs are actually hidden in the return. You actually end up with a reduced return for investing in what they call these buffer annuities. You are not actually invested in the stock market. You're not actually invested in a low cost index fund, but they make you think that you are in order to keep your money there.
TEACHER (24:59):
Now remember, the grade on the quiz is not the grade in this class.
NARRATOR (25:08):
Much of this system is set up to intentionally confuse people. So it's no surprise that many teachers find themselves victimized by the industry more than once. Meet Massachusetts Teacher Eddie Boynton, the 31 year old, describes himself as the math teacher who got burned twice.
EDDIE BOYNTON (25:25):
I was first introduced to a 403(b) plan when I was attending my new teacher orientation nine years ago. There was a small presentation on how to start saving 403(b) and why it would be important. I knew I had a pension. I didn't know much about the 403(b) until this particular orientation. Uh, and in fact, this orientation was actually run by one of the vendors in my district. So at the time, they were trying to get people to sign up, not really knowing a lot about what a 403(b) was. I hesitated a little bit. I waited just to kind of make sure that I was making a smart decision. But about a few months into school, I was sent an email just kind of detailing the availability of these different vendors. So I figured that at this point the district was reaching out, they're kind of pushing this. I kind of trusted my district and I chose to sign up with one of the vendors. And to be honest, uh, I chose AXA just because it fit with my schedule. The agent that I was working with said that I should be saving above and beyond my pension, especially now when I'm young. And this was the best time to start investing. So she set me up in an aggressive allocation portfolio, and that was the last interaction I had with her for, was probably about seven years.
NARRATOR (26:40):
That's when Boynton was approached by a competing salesman from New York Life.
EDDIE BOYNTON (26:44):
Life. He knew I had an AXA product and he was working with a couple other teachers in my building, setting them up with different retirement options. He approached me to discuss how the AXA 403(b) was riddled with fees, fees that I wasn't aware of. So that caught me off guard. I was under the impression that my district had, uh, were only giving us good options to invest in. So that was concerning. So I heard him out and I listened to what he had to say. He informed me of the fees. He helped me dive into the prospectus, the 70 plus page prospectus, where it in a one small sentence on page 40 something it details what the expense ratio is, what the mortality charges are, what the surrender fees are. So he helped me kind of decipher it and I look at that as a way for him to kind of earn my trust a little bit. But unfortunately, he started to steer me towards a whole life insurance policy instead.
NARRATOR (27:43):
Boynton was initially skeptical about the agent's pitch.
EDDIE BOYNTON (27:46):
I had hesitations about it and in my gut, I felt like it wasn't the best decision. However, I did some research on it and everything I read online was, don't do whole life insurance to term instead invest the rest. But still, he built that trust. He kind of got me in a situation where I trusted what he was saying. So I signed up for a small whole life insurance policy, stopped my contributions to the 403(b), and instead put that money into a whole life policy.
NARRATOR (28:14):
Eventually, Boynton did listen to his gut by seeking help from an outside expert, one whose advice would not be tainted by the sales commissions he hoped to earn.
EDDIE BOYNTON (28:24):
I decided to reach out to a, uh, fee only certified financial planner just to kind of help me out with, with my questions. At this point, I was looking for someone that was unbiased because unfortunately, the people that were being introduced to us in the school, into our, in our teacher room, a lunchroom, those people had some things that they were trying to sell us, whether it be a high cost for a 403(b) or a whole life insurance policy. So I thought it was best to finally reach out to someone who didn't have any stake in the game, someone who could gimme some unbiased opinions.
NARRATOR (28:58):
After meeting with that planner, Boynton replaced his costly whole life insurance policy with a much more affordable term life policy, but he still has his high cost AXA 403(b) plan due to the surrender fees that such companies use to keep investors from moving their money. Why can't teachers like Eddie Boynton get their money out of bad retirement plans? Why do most school districts take such a hands off attitude regarding the quality of the investments being pedaled in their classrooms? And why do the unions that represent teachers often ignore these issues or sometimes even endorse their own bad investments? We'll answer all those questions in the next episode of Learned by Being Burned Teachers and the K through 12, 403(b). I'm your host, Barb Beasel. See you next episode.
NEAL WEISS (PRODUCER) (30:03):
"Learned by Being Burned: Teachers and the K through 12 403(b)" is created by fuzzyville industries in Culver City, California in partnership with 403bwise.org. The series is produced by Neal Weiss. Research, reported and written by Stephen Buel. Hosted by Barb Besal. Mixed and mastered by John Adams. Assistant audio editing, Jesse Mechanic and Kai Grady. Music by Neal Weiss and Brad Richard. Teacher voiceovers by Colleen Morrisey. The non-profit 403bwise.org is funded by the generous support of Tim Ranzetta, co-founder of Next Gen Personal Finance. Find out more about 403(b) advocacy 403bwise.org. Find out more about fuzzyville industries at thisisfuzzyville.com. Thanks for listening.
TEACHER (31:27):
It's time for recess. Please push in your chairs before you leave.