Episode 4: Why Can’t We Do This?
DANIELLE GRECO (00:03):
I went to my business administrator at school and I asked if we could get a lower-fee company. And I felt like he basically just like patted me on the head and sent me on my way and just told me to, you know, not to worry about it.
STEVE SCHULLO (00:16):
They accused me of being a rep for that vendor. I'm a teacher and they knew that I'm not a rep for any of these vendors. And it got pretty heated. The treasurer and I had feud.
JEFF YORK (00:27):
Was told, oh no, you can't get Vanguard. You have to have a salesperson. Everyone in the district kept telling me that, oh, you can't do it. But one of my skills is I'm very tenacious. I don't give up until I get it.
DANIELLE GRECO (00:39):
I decided to on my own, just let other people within my school district know about these plans. I spoke at a faculty meeting at my school and I gave lunch and learns at two other elementary schools. And I let people know I'm not a financial advisor. I'm just someone who thinks that we all deserve to put our money in the best possible plan.
Welcome to learned by being burned teachers and the K through 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.
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. In our first three episodes, we learned about the K through 12 teacher retirement plans known as the 403(b). We heard from teachers who were horrified to learn about the high fees built into the insurance products, typically sold through such plans. We learned how paying such fees over the lifetime of a plan and often paying a whole set of extra costs to get your money out of such a plan can have devastating effects on a teacher's retirement savings. And we learned how far too many teachers are left to navigate these challenges on their own.
In the fourth episode, we focus on the grassroots national movement to reform the 403(b) landscape. We learn about the reasons that teachers all over the country have become activists to improve the quality of their investments, but we'll hear how many of those pioneering reformers encountered obstacles from school districts unions and the insurance industry. Episode Four: Why can't we do this?
ADAM HOLY (03:50):
I was standing there and monitoring and talking with students and a colleague actually of mine brought one of the 403(b) reps from AXA. I think they go by Equitable now and said that, you know, you need to sign up for it, kind of explained this is something they need to do to help supplement your retirement. This gentleman can help you out with that. And I trusted the teacher.
That's Adam Holy, a science teacher in his 16th year in the Pittsburgh public schools.
ADAM HOLY (04:15):
I jumped in both feet and I was maxing out at, you know, my first year of teaching because I was working for my landlord. So I was basically almost living for free. So I had this, I guess, income that I could stash away somewhere. So I put it in a 403(b) and I got into it and just kind of took off from there. And then I was looking at my Roth and I started comparing it to the growth of the Roth versus a 403(b). And I had this guy, he was a financial advisor telling me what to pick and I, I kind of listened to him and I'm looking at the funds and I'm seeing all my statements. There's not much growth.
Holy eventually learned that there were much better ways for him to save for his retirement, such as in low-cost mutual funds from a company like the Vanguard Group, Fidelity or T. Rowe Price. So he started pushing for such options in his school's 403(b) plan.
ADAM HOLY (05:07):
I approached my union president, you know, in October of 2019. And I showed her the data. I showed her the information and she kind of looked at me like sideways a little bit. Like, what's your goal here? I don't think she understood what I was trying to do. She thought I was trying to sell her 403(b) plan with Vanguard. Like I was a rep or something, you know that you see in the, you know, the teacher lounges or in the hallways lurking around. So she thought I was a rep like, are you trying to profit from this? I'm like, no, no, no. This is for a benefit of all other teachers trying to explain how fees just destroys our investments and our retirement in terms, potential growth.
The official eventually handed off Holy to someone else. The person in charge of benefits for the union.
ADAM HOLY (05:49):
He didn't really know a whole lot. He thought that everything was good, like kept emailing em and saying, well, these are some other options. Like van look at the fees. And I don't think the concept of compound interest and fees never really hit home with them. And so actually what they ended up doing in January, they brought in their own independent fiduciary at the time to review our plan and the guy that they brought in said, we need to take this whole plan and blow it up and light it on a flyer. And the union leaders were like, they didn't like that. They didn't want to have to start from scratch. The representative wanted to put it out the bid, you know, for these companies to compete, to give lower fees and they didn't wanna do that.
So the union consulted a second outside expert, this one from his union's national parent, the American Federation of Teachers that union expert rejected the original consultant suggestion that the school district start over from scratch; basically endorsing the low quality plans that were already available to teachers. Holy wasn't happy with that. So he kept pushing. Eventually he convinced his local union to schedule a, between him, the national union consultant and financial advisor, Scott Dauenhauer whom he had met through the nonprofit advocacy group, 403bwise.
ADAM HOLY (07:08):
We finally probed him and asked him, well, why can't we do this? And he kinda of beat around the bush. And so I asked him, well, what did you invest in? I kind of did some background research into him and, and he actually, you know, admitted that he had Vanguard and that the university that he actually worked with at community college. That's what they used for their 403(b)s. And so I'm like, well this is in Pennsylvania. This is one of the best ones that we have. Why can't we get this? And he kind of came up with these, you know, excuses and reasons. And the union officials didn't really have a reason.
In other words, the union leader had a low-cost Vanguard investment account in his own retirement plan, but he wasn't willing to endorse such a plan for Holy and the union members who worked alongside him at Pittsburgh Public Schools.
There is a warm up question on the board. Please find a partner and discuss.
Adam Holy is far from the only teacher to become alarmed by the high fees associated with the investments available in his school's 403(b) plan. The often poor quality of such plans has prompted an army of teachers like him to become activists on behalf of better K through 12 retirement plans. retired Los Angeles teacher, Steve Schullo, a pioneering 403(b) activist, found himself invested in two separate annuities with high fees to get his money out of those plans. He had to pay approximately $8,000 in surrender fees. But when he set out to help improve the quality of investment options available to teachers in his union, he first encountered nothing but resistance.
STEVE SCHULLO (08:55):
They were always leery that I was out to make money. They had an approval vending process. I wanted them to get Vanguard on the 403(b) and they got a motion pass, but they never followed up on it. And then TIAA that's the Teachers Insurance Annuity Association signed onto the 403(b) and which was very good. And I wanted my union to interview them to be on the approval process. That's where I got push back. They accused me of being a rep for that vendor. I'm a teacher and they knew that. I'm not a rep for any of these vendors. And it got pretty heated. The treasurer and I had a feud for awhile. He would have nothing to do with. He was convinced I was out to benefit from the union approving TIAA. I mean that's how bad it got.
New Jersey teacher, Danielle Greco joined the nationwide reform movement when she got the brush off from an official with her school district.
DANIELLE GRECO (10:04):
I went to my business administrator at school and I told him what I found. And I asked if we could get a lower fee company and he didn't take me seriously. I was still in my twenties when I had approached him. And I felt like he basically just like patted me on the head and set me on my way and just told me to, you know, not to worry about it. I had a long time until retirement. So I decided to on my own, just let other people within my school district know about these plans. So I spoke at a faculty meeting at my school and I gave "Lunch and Learns" which are like a half hour talk during our lunches at two other elementary schools. And I let people know I'm not an expert. I'm not a financial advisor. I'm just someone who thinks that we all deserve to, you know, put our money in the best possible plan. So that's how I really got in some 403(b) advocacy.
Retired custodian and bus driver, Jeff York joined the movement after receiving some advice from 403bwise that made him want to move his money out of a high-cost insurance annuity.
JEFF YORK (11:11):
In 2002, I said, well, I need to get out of these annuity products in, and at the time at my school district, there was no vendors and offered mutual funds at a low fee. And at that time, very few school districts in California or even in the United States had Vanguard on as a vendor. So I called up Vanguard and they said, yeah, you need to get $5,000 in the plan before will come on your vendor list and you gotta get your district to sign all these hold harmless agreements. And I was told, oh no, you can't get Vanguard. You have to have a salesperson. Everyone in the district kept telling me that, oh, you can't do it. I mean, it was kinda like a shot in the dark, but one of my skills is I'm very tenacious. I don't give up until I get it.
New Jersey business teacher, Chris Nye became an activist after reaching out for assistance about the costly insurance annuity that he had been sold.
CHRIS NYE (12:08):
I talked to some people, I talked to the union and they sent me a list of different and vendors that are approved. And I'd started to do some research and found out that they're all not good. They're all insurance companies that are trying to sell you variable annuities that teachers just simply don't need to be in. And those variable annuities come with high costs. So I decided, you know what? Like I need to get something better. So at that point, that's when I approached payroll and actually my principal initially about trying to get something better. And his first response was no. You're wasting your time, man. It's not gonna happen. And I thought, well, why, why? Like, why can't we get a Vanguard? Why can't we get a T. Rowe Price? And all their responses were well, it's just not gonna happen. Well, I decided to try to go out there and make it happen.
Just like Jeff York, Danielle Greco, Steve Schullo, and Adam Holy, Chris Nye had discovered just how little he could rely upon his school district or union for answers or assistance.
CHRIS NYE (13:05):
What I've learned in my 403(b) journey here is no one knows anything. Nobody from the unions to the school district administration. And that's fine. They're just there to provide options and I get it. But you know, to provide absolutely no education and information about a product that most people have is just insane to me.
Such resistance is far too common all across the country. And in some cases shocking. Here's 403bwise founder, Dan Otter.
DAN OTTER (13:38):
I wish I could say that all unions were fighting the good fight on behalf of teachers when it comes to the 403(b). Unfortunately, historically they have not. In one of the worst examples of this is the National Education Association. For years they have sold their name to a super expensive company called Security Benefit. And for a long time, they offered a product called the NEA Value Builder. We found out that the NEA at the time was getting about $2 million (annually) for endorsing this product. Now think about this. You are a teacher. You might have heard about the 403(b). You think that could be something that I should look at investing in and you look at a list and you see NEA attached to the name of the product. Oh, it's endorsed by the big national union. Surely they would have my best interest in mind. So I'm gonna go ahead and sign up for this NEA product. Just unconscionable that the NEA would do this and we've blasted them for years on this.
The NEA was actually sued over the NEA Value Builder product. Otter mentioned one of the lawyers behind that lawsuit was former securities and exchange commission attorney Edward Siedle back in 2007, Siedle and other lawyers argued in court that the national education association had failed its members by accepting millions of dollars from two financial firms in exchange for recommending their high-cost 403(b) plans to union members. The suit claimed that fees in one of the plans reached over 10%. Siedle's lawsuit advanced the novel legal theory that because the NEA received a fee for recommending the plan to its members, it had a legal obligation to act in the best interests of its members. That's a legal standard that applies to certified financial planners, as well as the people who run 401(k) plans. But because governments are exempt from the federal law known as ERISA, the Employee Retirement Income Security Act of 1974, the people who run K through 12 403(b) plans have no legal obligation to act in the best interests of their clients. Siedle's lawsuit was unsuccessful. And to this day, the NEA continues to make money by recommending the costly Security Benefit plan to its members. Here's Siedle:
EDWARD SIEDLE (16:15):
The NEA today. As I sit here discloses in its SEC filings, that it receives an annual base fee from Security Benefit for the last year was $3.57 million. And that the base fee increases between 5% and 10% a year based upon whether the NEA achieves certain mutually agreed upon marketing goals.
The union discloses this conflict of interest to its members and the SEC, but Siedle believes the typical investor does not possess the expertise to understand why it's in their best interest to avoid a vendor or with such conflicts.
EDWARD SIEDLE (16:55):
Even if you disclose that this arrangement creates a potential conflict of interest and gives the NEA an incentive to steer teachers to Security benefit for better or for worse in these financial arrangements, it is very difficult for an investor to what the potential harm is related to this conflicted compensation arrangement. When you're talking about steering people into a retirement plan for the next 30 years, the wrong decision can easily result in you having half or less than half what you would have had if you had made a prudent decision.
Can you wait to go to the bathroom until we finish this section?
One of the main ways that 403(b) plans differ from their better known sibling, the 401(k) is in the number of separate vendors and products often found in such plans. Unlike 401(k) investors, teachers typically are with dozens of separate investment options. That only serves to make an already confusing process, even more confusing. At one time, teachers in the Los Angeles Unified School District had to choose between more than 200 vendors, many of which offer dozens of separate products. Here's Dan Otter again:
DAN OTTER (18:31):
Imagine this, if you work at an employer that has a 401(k), you have one low-cost vendor that's been vetted, but teachers at Los Angeles Unified School District, one of the biggest school districts in the country, have to choose among 200 vendors. Insanse. 99% of them were high-cost products.
It is accepted wisdom in the financial services industry that the more complicated a retirement plan becomes, the less likely it is that people will participate. In California this problem is enshrined in state law.
DAN OTTER (19:10):
When we launched 403bwise in 2000, we learned that in California there was this Nixon era insurance legislation. So the early seventies, it might even been the late sixties called seven 770.3 written by the insurance industry that says if a school district allows one vendor to sell 403(b) product, they have to open up the platform to any willing provider. And that's why in 2000 in the Corona-Norco Unified School District, there were 100 vendors. It's why in Los Angeles Unified at the time there were 200 vendors. So the insurance industry banned putting plans out to bid.
In the year 2000, the company TIAA, a low-cost leader in the higher education retirement, market made a push to reform California law. The idea was to let school districts put their 403(b) plans out to bid so that investment firms would agree to cut their fees to the bare bones in exchange for the promise of managing 100% of the retirement accounts in a district.
DAN OTTER (20:28):
And it was called AB 2560, I believe. And TIAA was behind this. TIAA has been a long time, low-cost leader in the higher ed market. And they were looking at getting into the K12 market in a substantial way. And they saw a barrier to entry. They didn't want be one of 100, one of 200. So they looked at the legislation and thought, well, maybe there's a way we can change that to allow competitive bidding. So we got involved with messaging and I was so naive. I thought, you know, who could be against this?
The founder of 403bwise was about to find out. The opponents of reform launched two websites using the name 403bwise designed to mislead teachers into believing that his organization was on the other side of the debate. Amidst this wave of deceptive lobbying the reform legislation eventually died. Several years later, another effort was launched to permit competitive bidding in California.
DAN OTTER (21:32):
And wouldn't, you know, the CTA, the California Teachers Association, helped squash this effort. Again, this infuriated me. If you are a union, your number one priority is your membership. And this was not what their priority was. You see the CTA at the time was creating their own 403(b) product. And I would say, all right, that's fine. You do that. If your product's so good, then it should win in a competitive bid. So they wanted to, you know, keep the market open for themselves. And it was enormously frustrating. The average teacher would be much better off in California if competitive bidding was allowed.
Then in 2011 word got around that the Los Angeles Unified School District, the nation's second largest district by enrollment was considering reducing its sprawling 403(b) plan down to a single vendor. The idea was to mirror the way that a typical 401(k) plan operates, where multiple companies bid for the right to be the plan's sole provider, thereby driving down the fees, paid by investors. The industry group that lobbies on behalf of the companies that sell 403(b) plans and is now known as the National Tax Deferred Savings Association sprung into action to stop the proposed reform. The association threatened to sue the LAUSD if it attempted to restrict the number of companies that could pitch their plans to teachers. Scott Dauenhauer of 403bwise recalls one discussion during an LAUSD committee meeting about the proposal in 2011. Association lobbyist Brian Graff was urging the committee not to select a single vendor for its 403(b) offerings. One committee member asked Graff whether his association had a single vendor for its retirement plan. He replied that his plan was provided by Vanguard.
SCOTT DAUENHAUER (23:33):
Here this guy is threatening to make a ruckus over the fact that retirement plans should be multi vendor. When in fact they only had a single vendor and it was a good vendor and it was a low-cost vendor. So it was just hypocrisy at its worst.
At that same meeting Graff is captured on tape, explaining this contradiction by noting the difference between the typical K through 12 403(b) plan and the typical employer managed 401(k) plan.
BRIAN GRAFF (24:02):
There's a difference between a very heavily involved employer walking hand-in-hand with their employees on what to do and a situation where you've got, you know, a school district building and a rural part of a state where there's very little, uh, employer involvement with those employees.
In fact, that is a very relevant point. In a 401(k) plan. The employer has a legal fiduciary duty to act in the best interest of their employees. The managers of K through 12 403(b) plans, and the people who sell the plans have no such obligation. But that's precisely why allowing school districts to engage in competitive bidding is one of the holy grails of 403(b) reform.
We think school districts should put their plans out to bid. This is what the 401(k) world does. And when you go to one vendor, you get rid of the sales environment. There's no more competition among vendors at a teacher level. At the employee level. The competition occurred in a structured process run by the employer, the school district. So now the single vendor can do education. Now the single vendor could get all the new teachers together and say, look, this is a benefit you have. This is how this works. So that is the model we want to see.
Why is a properly vetted single vendor plan, beneficial for teachers and school employees? And why is it the model for a type of reform that ought to transform the entire 403(b) industry? In the final episode of Learned by Being Burned: Teachers and the K-12 403(b). We'll hear about some of the successes of the 403(b) reform movement. We'll learn how school districts should manage their 403(b) plans and what role unions and government should play and we will discover why supplemental retirement plans are more important than ever before and why all K through 12 teachers and employees deserve the best possible options to help plan for their retirement. We'll answer all those questions in the final episode of Learned by Being Burned: Teachers and the K-12 403(b). I'm your host Barb Besal see you next episode.
Neal Weiss (Producer) (26:50):
"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.
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