We made an exciting announcement this week regarding the latest addition at RWM. I wanted to expand on what Josh wrote, and what we are hoping to accomplish with this new offering.
When it comes to saving for retirement, teachers at public and private schools (K-12) and colleges find themselves in a very unique situation. What was once a career with a simple and effective way to plan for retirement has become a morass of complications, confusion, and conflicts of interest.
A quick explainer:
In days of olde, teachers may not have been especially well paid, but the job came with a well-funded, generous pension plan. It varied from state-to-state, and district-to-district, but after you put in your 25 or 30 years, you got to retire at 80% pay, usually with health insurance included. It was a sweet deal in exchange for what was typically low to modest salary but reasonable hours and summers off. (Of course, the low pay was why so many teachers took summer jobs, but that’s another story).
The once-generous pension plans have slowly become a lot more mediocre. 403(b)s were introduced — they are a version of 401(k)s for nonprofit firms – with teachers making their own contributions (often without a match). Some teachers pay into Social Security; some do not. Hence, teachers find themselves in a situation that should be simple, but isn’t — it has become much more complex than it ever was.
And it gets even more complicated: Teachers are employed by the local school district, but their 403(b)s are managed by Third Party Administrators on behalf of the school district. The State also administers 457 plans — better and cheaper than 403(b)s — but there are incentives for the districts to go elsewhere. This makes teachers’ situations unique – since their employer (the district) is not the one who runs these retirement plans, there is no fiduciary obligation on the part of those who do. It has become an arms length transaction. Whether this was a legislative drafting error or an oversight or done on purpose I cannot say. However, it has created a situation that is conducive to bad, conflicted, financial advice and planning. TPAs are where the serious conflict of interest arises; the TPAs have no fiduciary obligations to either the teachers or the districts.
It is a part of the financial services industry that is bad and getting worse. Several of us at RWM have spouses who are teachers, and we have all seen first hand the crap that passes for advice to teachers. There are horror stories of the worst sort of predatory offering and firms that leech off of educators. The sort of bucket shop shit that is thrown at teachers is astounding, and my wife has come home with papers from work that made me want to strangle these bastards. It can get THAT bad.
We will be detailing some of the worst offenses and calling out people in the future about this, but if you want to get a hint of what’s coming, read Tony Isola’s Revenge of the Teachers and Dina’s When Business Dares to Get Personal.
Tony was a teacher with a background in finance, who knows where the bodies are buried. Dina’s background in finance also gives her a unique insight. Together they will be running our educator division.
I want to welcome both of them to RWM. They are on a mission, and there are few things in the world more dangerous than an angry individual motivated by a burning desire to right the wrongs and do things the correct way. It is the most righteous kind of revenge there is.
I know Tony and Dina are going to fit right in with our crew . . .
i doubt it was a drafting error. it was by design
Good to hear you are moving into this sector.
My spouse is a teacher. Initially, she could just sign up with Vanguard directly for her 403b which we did in one of their inexpensive TD funds. They changed that a few years ago. I went to the information day where the school district selected 403b providers could present their wares. I went looking for the cheapest company that offered record-keeping only and provided access to Vanguard funds. There was really only one of those, a lonely looking guy sitting at a table with just a few cheap looking pieces of paper in front of him. We ended up signing up with them for 0.35% annual fees plus the Vanguard TD fund expenses (so about 0.55% total, significantly higher than we had before they “improved” their 403b).
Almost everybody else in the room was clustered in front of the tables with the glossy brochures and free pens (like moths to a candle) where the companies offered “advice” for 1%+ per year and their advice was to put you in their funds and variable annuities at fees of 1%-3% per year. When I had looked at some of their info on-line, even many of their S&P 500 Index funds had annual expenses over 0.5%.
TSP – Federal Government 401k, is amazingly good. Expense ratios LOWER than Vanguard.
There are some inflexibility issues [withdrawals are always pro rata from all the funds you own, not selectable], but they can be worked around.
See if you can get that introduced into the nation’s school districts.
I think you are really on to something here, Barry. I have experienced first hand the pathetic handling of 403b’s within public schools. My favorite was being limited to, in effect, an annuity scheme that was already in a tax advantaged account. Fees were outrageous across the board.
A large part of the problem are school superintendent’s, treasurer’s (and school boards) who have no business/financial acumen making decisions implementing these type of retirement programs. I’ll go a step further and state that they generally have a mighty poor pedigree for prudently running a school system – I am a firm believer that all, and especially the superintendent, should have had successful private sector business experience.
Teachers generally are easy pickings for financial shysters. Providing some hand holding along with a menu of prudent investment options will do them a great service.
‘TPAs have no fiduciary obligations to either the teachers or the districts.’
Sounds like a great job for wirehouses! Who says dinosaurs can’t find an ecological niche?
Barry, Thank you for doing this. Contrary to the press, the Illinois TRS is doing quite well currently, but, as soon as political forces can get the State Constitution changed, the pensions are up for grabs. I work as the head custodian in my school and converse with the teachers on all facets of their careers. I look forward to getting more detail so I can spread the word.