Episode 3: I Just Couldn’t Stomach It
Transcript
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DAN OTTER (00:04):
Sales professionals have no fiduciary duty to act in their client's best interest, so they sell them the products that benefit the sales agent. I wanted a product that had no surrender cause, which I specifically asked for. She put me into a fund that had a surrender cost. I was so livid, my ignorance was fully taken advantage of, and that's not right.
CRYSTAL MENDEZ (00:29):
I remember being angry and just thinking, I don't care if I lose this 10% fee right now. I want to be done with these people and I really just want to move on.
SCOTT DAUENHAUER (00:37):
The most egregious structure is what we call rolling surrender charges. It's a charge that applies to every single contribution made into your 403(b).
DANIELLE GRECO (00:49):
By then I asked my local union, but they said, you know what? We're fighting the good fight with our pension. We don't even want to think about 403(b)s. That's not something that we are concerning ourselves with.
NARRATOR (01:02):
Welcome to Learned by Being Burned Teachers and the K-12 403(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'll want to do it forever. In 15 more years, I want the freedom to be able to choose whether I stay in my classroom or 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 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 sales agents who masquerade as advisors, but with early access to proper 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 (02:38):
In episodes one and two, we learned about the K through 12 teacher retirement plans known as 403(b)s. We heard from teachers who were horrified to learn about the high fees built into the insurance products typically sold through such plans. We discovered that such fees are often intentionally hidden from planned participants, and we learned how paying such costs over the lifetime of a plan can have devastating effects on a teacher's retirement savings. In episode three, we will look at the games that some investment plans play to make it hard for teachers to withdraw their money, and we'll learn how far too many teachers have to navigate these challenges on their own with little to no assistance from their own school districts. The companies offering the plans, the federal government, or even the unions supposedly advocating on their behalf. Episode Three: I just couldn't stomach it. New Jersey educator, Chris Nye, still recalls the reaction of his broker when the high school business teacher said he wanted to move his money out of an annuity and into a Vanguard mutual fund.
CHRIS NYE (03:57):
It wasn't a sales blizzard. It was more of like a, Whoa, where you going? I thought we were in this together. Come on now. Like I know a lot of friends of mine, a lot of teacher friends of mine that have gotten out of AXA and into better accounts, they usually use the scare tactic. Well, they'll say, whoa, you wanna do this on your own? You think you can go out there and do this on your own? How do you think rising interest rates are gonna affect your portfolio? What about international diversification? Do you know anything about that? You really think you can do this on your own? They give you that whole spiel. It's really pathetic, but that's usually what they go with is the scare tactic, and it works.
NARRATOR (04:29):
Once Nye got his salesman to take him seriously. He learned the big secret about trying to get your money out of an insurance annuity. There often is a substantial penalty for moving it to another account.
CHRIS NYE (04:41):
You don't know it at the time, but you signed a contract. I know with Acts equitable, for example, the minute you sign in that dotted line, you are committing your money to a 12 year insurance contract. So at the time, I think my money was in there for six years, something like that. So because I didn't fulfill my 12 year contract, I had to pay a surrender fee for six years worth of me not fulfilling that contract.
NARRATOR (05:06):
Fees of this type are standard across the industry. Here's financial advisor, Scott Dauenhauer, of the nonprofit investment advocacy group, 403bwise.
SCOTT DAUENHAUER (05:16):
Those surrender charges, generally I'd say are in the five to 8% range, but with the indexed annuities that are sold, you can have surrender charges that are in the 7, 8, 9, 10, 11, 12% range, and those surrender charges can sometimes last up to 14 years. So it comes as a pretty big surprise.
NARRATOR (05:38):
Even investors who have been in their plans for decades can be penalized for trying to move their money. Such fees can be structured in a number of ways.
SCOTT DAUENHAUER (05:47):
The most egregious structure is what we call Rolling Surrender charges. And what a Rolling Surrender charge is, is it's a charge that applies to every single contribution made into your 403(b). So let's say day one, you start at your employer, I don't know, you're 25 years old and you make a contribution of $250. That $250 contribution is subject to say, a seven year surrender charge, and then the next month you make another contribution. That contribution is subject to seven years starting the day that a contribution hit your account. So you worked with this employer for 30 some years, go to retire, you wanna take your money out. Well, of course there's a lot of money that isn't subject to surrender now, but significant portion of those contributions that you made over the last seven years are still subject to surrender charge. What's worse is most teachers don't start contributing to these 403(b) plans until their last years, their last five, 10 years. So they retire and have a substantial portion of their account still subject to surrender charge.
NARRATOR (07:01):
Some companies even have created products to take advantage of investors who want to move their money, but are disturbed by their surrender fees.
SCOTT DAUENHAUER (07:10):
So an agent comes in, sees you in and a product somewhere that has a surrender charge. They say, Oh, you got a surrender charge. Well, we have a product that will pay your surrender charge for you. We're gonna give you a bonus to cover your old surrender charge. It's kinda like when you, uh, you go to get a, a new car and you come in with a used card that you owe more than it's worth. They just roll your old loan into the new loan, so you owe more on it than when you left. Well, you end up with this bonus annuity, and all it really is is this. They're just fronting you the money for to pay those surrender charges, but you're gonna pay them back through higher fees and higher surrender charges within that product. So you end up finding out that there's lower cost product available, but in order to get your money out, you have to pay the surrender charges and you have to pay that bonus or at least a portion of that bonus back, and it can be pretty hefty. Um, I've had clients who are looking at 10, 11, 12% of their account balance, and this is account balance that's probably never gonna earn more than two or 3%.
NARRATOR (08:13):
Some brave teachers bite the bullet anyway and pay the fees to withdraw their money. Here's Los Angeles teacher Crystal Mendez.
CRYSTAL MENDEZ (08:21):
I knew there was a penalty involved. I think it was like a 10% fee. Some other people kind of advised like, Well, if you wait over time there's, you know, there's, there's a rolled over period where every year I could take out 10%, something to that effect. And I remember being angry and just thinking, I don't care if I lose this 10% fee right now. I want to be done with these people and I really just want to move on. It was just around a thousand dollars and as a 22, I think it must have been 23 at the time, it was a little bit of a, a hit in the gut, like, I'm paying a thousand dollars to get my money out of this. But again, my, my anger was quite motivating at that, that point.
NARRATOR (08:55):
And the surrender fees paid by some teachers make 10% seem like Trump change. One former colleague of Mendez, longtime 403(b) activist Steve Schullo, paid more than twice that amount.
STEVE SCHULLO (09:08):
I wanted to get out of those annuities and I had to pay these, uh, hideous surrender costs, $6,000 on 27,000 that I had saved from 1984 to 1992. And I wanted a product that had no surrender cost, which I specifically asked for. She put me into a fund that had a surrender cost. I was so livid. So on the second annuity, I had to pay another two grand of surrender cost to get my money out of that horrible product. My ignorance was fully taken advantage of, and that's not right.
NARRATOR (09:51):
Anger often motivates such teachers to pay the surrender fee, but most also end up concluding that it is a financially prudent decision.
CHRIS NYE (09:59):
When you call up the phone number, they'll tell you exactly what your surrender fee was. I was willing to pay mine just out of spite just to get out. So for me, it was more of a spite thing. I gotta be honest than anything else cuz I knew I was also going into a product that wasn't a variable annuity. So I was saving money there and I was getting into two row price at the time, which had significantly lower expense ratios. So I knew that it was a home run. You know, leaving my money with AXA over the next six years would've continued to pay those fees year in and year out and thus eroding the compound interest even further. So even paying whatever the surrender fee was, was gonna be worth my money at that, at that point,
NARRATOR (10:38):
Still with many teachers, the surrender fee accomplishes its objective, discouraging them from moving their investments anywhere. Here's Summit New Jersey teacher Danielle Greco, who has been on the job for 20 years.
DANIELLE GRECO (10:51):
I couldn't roll my 403(b) into an IRA without heavy fees. I don't remember what the percentage was, but I figured out that it was going to be more than a year's worth of contributions and those fees that was just too high for me to pay. I think that I had been putting in $250 a month at the time. So I think that my fee would've been at least, you know, $2,500 and I didn't have a big balance at the time. I, I'm pretty frugal. I don't like paying fees for anything. So to pay a fee to get my own money out, I just couldn't stomach it. I know that there's some people who say in the long run might have been worth it. I fell right into their plan.
NARRATOR (11:34):
But even agreeing to pay surrender fees doesn't ensure that a teacher can get their money out of a bad plan. Once retired New York school teacher, Nancy Bachety realized how much of her savings was being lost to fees. She decided to move her money. That's when she learned about the “b” in too many 403(b)s bureaucracy.
NANCY BACHETY (11:55):
It was a form that you needed to fill out, not a paper form. It had to be mailed to you, it couldn't be emailed to you. Then it would go back and it was wrong or they sent it back and they said, No, you missed the spot. You have to sign it here. No, we sent you the wrong form. And it was all deliberate. And I, and I felt at the time like, come on, can't you guys figure it out? This is not right.
NARRATOR (12:16):
The company kept producing new justifications to hold on to back's money. At first she thought it was just an aptitude. Then she began to understand what was really going on.
NANCY BACHETY (12:27):
Like, I'm gonna give up. This is I, I quit, I'm not gonna wanna do this. But I knew that's what they wanted. I realized that's what they wanted and I was not gonna let that happen. I was persistent and I did ultimately get it done and it was just ridiculous. I had to get my new vendor to approve that they would accept the transfer in who has to sign that you're gonna accept money to receive it. And then I had to send that form back to access. So they knew that there was approval. It was just any which way, just to try to discourage you in speaking with some people afterwards. Recently it's like, yeah, that's just, it's set up intentionally just so the teacher will stop.
NARRATOR (13:07):
Teachers might not be so anxious to move their money if they thought they were actually receiving valuable guidance from the people who sold the investments. Here's Dan Otter of 403bwise.
DAN OTTER (13:18):
It's not like they're doing holistic planning and providing all these services. We joke, it's almost like a one day stand. They're in the staff lounge, they sign you up and teachers barely hear from them again. So it's not like some kind of service is being provided. That's not the case at all. And we are not against advice, we're just against the wrong kind of advice. Sales professionals have no fiduciary duty to act in their client's best interest. So they sell them the products that benefit the sales agent.
NARRATOR (13:54):
Pittsburgh science teacher, Adam Holy remembers what happened when he sought financial guidance from the company that sold him his 403(b).
ADAM HOLY (14:03):
I tried reaching out to him to see, you know, what can the else, can you offer me? Can you ask me some type of like tax advice or, you know, tax planning or financial planning for the future to try to figure out how to allocate the 403(b) my Roth ira, you know, should I put it in a traditional ira? Like what kind of strategies can you give me? And he said, his brother's a, a CPA and he could give me his information. I'm like, well what, what are you doing for me?
NARRATOR (14:28):
That commission sales people are mostly interested in making sales may not come as a surprise that the nation's school districts often do. Little or nothing to prevent their employees from being taken advantage by those salespeople is entirely another matter. Steve Shoh remembers the resistance that he encountered the first time he tried to get help from officials with the Los Angeles Unified School District
STEVE SCHULLO (14:56):
Guidance from the district. Are you kidding? We got nothing. No guidance, no information. Only the sales people are allowed on school campuses. You know, that's how the system worked In those days.
NARRATOR (15:12):
Many if not most districts not only failed to regulate who can come on campus to pitch their products, but they also don't help teachers learn how to separate the good investments from the bad ones. Here's Massachusetts math teacher, Eddie Boynton.
EDDIE BOYNTON (15:28):
I mean it's almost laughable how little I knew I had never heard of a 403(b) until that orientation. My first year teaching, there's no mention of it in my teacher prep program and I had to do a lot of digging just to kind of figure out what I got myself into.
NARRATOR (15:43):
But Boynton didn't just get victimized once.
EDDIE BOYNTON (15:46):
When I got burned the second time is when I felt like the district hasn't been looking out for us as far as at least providing us with solid options to invest in. Because there's so much information out there that says you shouldn't do a whole life insurance policy. But in my building alone, I know three people that signed up for the same plan that I did.
NARRATOR (16:05):
The challenges that Boynton faced are hardly unique to his school district. Dan Otter of 403bwise.
DAN OTTER (16:12):
A lot of teachers go to the benefits officials and ask them, who should we invest with? What do you know about these companies? And the benefits officials often say, Look, I'm not allowed to give you any advice. I can't suggest what companies or products to invest with. Here's a piece of paper listing the vendors. And back in the day, especially the paper listing the vendors was often well photocopied. Some of the phone numbers were sort of blotted out. Often they were sales agents and their phone numbers. This is how teachers would learn about the 403(b).
NARRATOR (16:47):
If those lists consisted of just a few investment plans handpicked by district officials in the best interests of their employees, far fewer teachers would be unhappy with their 403(b) plan. But such fender lists often include the names of dozens of separate companies, all apparently indistinguishable from one another except for the likelihood that few or none are low cost mutual funds. So teachers typically end up buying the bad plans touted by the sales people who visit their classrooms. Scott Dauenhauer of 403bwise.
SCOTT DAUENHAUER (17:23):
They are unaware that there are good investment options because the employer is so hands off. The employer doesn't wanna have anything to do with the plan other than to make sure the IRS does not audit. Or if they do audit that they don't get in trouble and have to pay fines. They don't really care about the underlying investment options. And so the way the incentive system works for these products is such that the only products that are going to be brought in front of teachers are the products that pay the best compensation or the have the best incentive structure.
NARRATOR (18:00):
Even when low cost mutual funds are available, teachers may never find out that they exist.
CHRIS NYE (18:06):
Lincoln Investments in the state of New Jersey has what they call a participant direct plan. It was negotiated between NJEA, the New Jersey Educators Association and Lincoln Investments where they offer Vanguard funds. There are no fees attached to it. It's an incredible account. The only thing is it's a $35 fee, you can't find it, but it was, from what I understand, uh, basically a secret account. You would never know this cuz there's never gonna be any advertisements about it. It's not on Lincoln's website. These sales people would never talk about it because this account you do completely on your own.
NARRATOR (18:40):
New Jersey teacher, Danielle Greco remembers all too well how difficult it was for her to learn about that very same Lincoln plan. Her experience demonstrates how hard it is for teachers to get good advice, whether it's from their sales people, their school districts, and the third party investment plan administrators. They often use even their unions.
DANIELLE GRECO (19:02):
So I called my original advisor, the one that I had used in the early two thousands and I said, Listen, fees are really important to me. I want the lowest possible fees. And he told me, of course he was giving me the lowest possible fees and I said, Well, I want Vanguard funds. And he told me if I wanted Vanguard funds, I would have to pay to go onto a separate platform that they offered, which was really pricey. So I spoke to him, asked him for the lowest fee option. I emailed him, asked him for the lowest fee option, and he told me I was already in it. Well, I remembered that I had looked up a website called 403bwise when I was frustrated in 2007. So I went back and to see if that website was still there and I found out it was, and they had a Facebook group. I joined the Facebook group and I told them my , my very long drawn out story. And someone on the Facebook group said, Well wait a minute. You're in New Jersey. You can get the Participant Directed Plan through Lincoln Investment. You can bypass the advisor. And I thought no one ever told me this.
NARRATOR (20:07):
That prompted Greco to do some research.
DANIELLE GRECO (20:10):
So I looked on the Lincoln Investment website and it's not there anywhere on the website. I called the one 800 number and I spoke to someone there and they had given me, um, all the information I needed for a low cost 403(b) with Vanguard funds in a matter of 10 minutes. Now my advisor, when I had originally asked him, I said, Hey, I heard about this thing called the Participant Directed Plan or platform. He sent me a PDF of why you need an investment advisor and never gave me the directions of how to access the participant directed platform. And when I asked the man who I was speaking to on the one 800 number, I said, Why is this not on the website? Why is this so difficult to find? And he said, Oh, this is just an unadvertised plan that Lincoln Investment offers to certain areas.
NARRATOR (21:04):
Frustrated by her experience, Greco became determined to make it easier for her fellow teachers to learn about the existence of such investment options.
DANIELLE GRECO (21:14):
So I went back to the business administrator and I told him about this problem and I said, you know, what can we do? How can we let people know about these better plans? And he said, Well, we use a third party administrator, we use Omni, you know, they can find all the information they need on the Omni website, which doesn't talk anything about fees. It doesn't tell anybody the difference between a mutual fund and an annuity. So it didn't seem like Omni was very helpful to me. So he was not helpful.
NARRATOR (21:43):
Eddie Boynton, whose school district also uses Omni says that teachers in his district don't even receive a complete list of plan options from the third party administrator.
EDDIE BOYNTON (21:53):
I went to Omni's website for my town and I found a list of additional vendors that are available to us. But the email that we get every year detailing out when these vendors are available, that list only contains four. And I wanna say on Omni's website, we're looking at 12. Granted they are 12 bad options. At least they're 12 options.
NARRATOR (22:14):
Many districts employ third party administrators such as Omni to manage their plans for them. But instead of actively providing teachers with investment education, they just handle IRS compliance for the district without providing school employees with any meaningful guidance.
DANIELLE GRECO (22:32):
Omni for us at my school district, it's just a website where you go and that's where you sign up for the 403(b). They give like a little quarterly newsletter, you know, showing you why you should invest. But it doesn't talk anything about the fees, doesn't tell about the problems with 403(b)s. It just tells people why they should invest for retirement, which of course they should. But I wanted our business administrator, you know, the person who works in my school district to help our own employees and I don't know why he's not interested. One of the principals that came to my lunch and learn said, You should talk to, you know, central office. You should let them know about this problem. And I told her I did. They just, no one seemed interested in taking it on.
NARRATOR (23:19):
Greco couldn't even get any satisfaction from the union that represented her and fellow teachers.
DANIELLE GRECO (23:25):
They were nice about it, but they said, You know what? We're fighting the good fight with our pension. We don't even want to think about 403(b)s. That's not something that we are concerning ourselves with.
TEACHER (23:41):
Remember to read the question and read through all of the answer choices Before you pick your answer.
NARRATOR (23:51):
Teachers naturally assume that they can count on their union to advocate on their behalf, but Danielle Greco is far from the only teacher to realize that their union knows next to nothing about their 403(b) plan. New Jersey's Chris Nye.
CHRIS NYE (24:06):
Unions know a lot about a lot of things. They know a lot about contract language, they know a lot about, you know, what can and can't be done in schools. They are extremely knowledgeable in certain things, but when it comes to 403(b)s, unfortunately they don't know anything. I've talked to a lot of union presidents around Ocean County and when I'm done talking to them, their eyes are usually pretty wide open and thinking, Wow, I had no idea. I had no idea that this was what was going on to the members. And then usually that motivates them to try to do something and learn a little bit more about it because you know, you only know what you know and there's no retirement savings course that you're gonna take in college for teachers.
NARRATOR (24:44):
Some unions even endorse the low quality investment plans that are pitched to their members. Los Angeles teacher Crystal Mendez.
CRYSTAL MENDEZ (24:52):
I think that when I initially started my career and started to learn more about the 403(b) in our investment options, I definitely felt as though teachers were being taken advantage of and for several different reasons. Obviously the union, you know, sponsoring certain companies without actually making sure that these companies were were good in any kind of way. So I think, you know, having a union backup kind of created a an issue there and really did take advantage of teachers because we're super busy and I don't wanna say gullible, but you know, if there's somebody on campus that kind of has a little bit of sense of authority, like you're backed by the union, we're gonna think, hey, this is probably a great option for us. And then of course, just the 403(b) options that were available to us, um, was basically a huge pile of garbage. So yeah, we were taken advantage of because we really only had garbage available to us and this garbage was literally served right up on our lunch plate in the lunchroom.
NARRATOR (25:50):
If school districts plan administrators, and even unions don't have teachers backs, surely they can at least count on the government, right? Sadly, that's not the case either. Pensions and 401(k) plans are covered by a federal law known as ERISA, the Employment Retirement Income Security Act. However, that law does not apply to government run retirement plans such as public school, 403(b)s, Scott Dauenhauer of 403bwise.
SCOTT DAUENHAUER (26:20):
That law required the employers to put the best interest of the participants in their beneficiaries ahead of themselves. In other words, it created a fiduciary responsibility on behalf of the employer for that plan on behalf of their employees. And that is not something that ever applied to public school. 403(b) plans. That doesn't mean that sometime in the future they couldn't attempt to make governments, uh, subject to erisa, but they are not at the moment. And so that is sort of a big difference between the two plans because it throws it to the state to create their own set of laws. Subjecting State 403(b) plans to a fiduciary standard. Many states do subject certain retirement plans that they offer to a fiduciary standard. And generally that fiduciary standard looks very similar to ERISA, but very few states. In fact, I can't think of any, have laws on the books that require school districts who offer 403(b) plans to be fiduciaries or to run their plan in a fiduciary manner.
NARRATOR (27:38):
What can be done to improve the quality of K through 12 403(b) plans? Why were so many early reform efforts thwarted by disinterested school districts? Why do some unions take money to recommend substandard investment products directly to their members? And how has the insurance industry fought to prevent states and school districts from improving the rules and regulations that govern 403(b) plans? 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 Besal. See you next episode.
NEAL WEISS (PRODUCER) (28:27):
"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 (29:49):
Slow down, please don't run in the halls.