Attention Georgia Politicians, Superintendents, Principals, and School Board Members: Here is How to Improve Educator Retirement Plans at No Cost

Greetings to everyone reading this article. This article is an earnest attempt to show Georgia’s educational and political leaders how they can improve 403b and 457 plans free of charge. This article is not a sales gimmick, and I do not work for any of the companies mentioned. I am a Spanish teacher at LaGrange High School who would simply like to see better retirement options available to all my colleagues in Georgia.

The Problem

• The majority of educators have their 403b/457 investments invested in insurance-based annuity products. These financial products usually have annual fees of over 150 basis points (1.5%); many have fees that are much higher. These fees are a constant drag on the investment’s return. Just how high are these fees? Ridiculously high! The Thrift Savings Plan, the federal government’s 401k plan, carries fees of 3 basis points (.03%) on its investment offerings. The Peach State Reserves, the State of Georgia’s 401k and 457 plan has solid fund offerings charging as little as 6 basis points (.06%). Finally, the Vanguard Group, whose 403b(7) plan could be offered at any school district, has many excellent investment choices charging less than 30 basis points (.30%). When compared to these three options, most 403b and 457 plans in Georgia come up short.
  

• To make matters even worse, most insurance-based annuity products also impose surrender charges on investors who wise up and decide to move their investment elsewhere. In other words, many educators are penalized for moving their money to better themselves. It is a classic scenario of "tails-I-win-heads-you-lose." Investors can leave their money in the investment and get killed by the annuity’s high fees or they can move their money and get savaged by the annuity’s surrender charges.

• Usually 403b and 457 plans using insurance-based annuity products are serviced by company sales representatives carrying job titles such as “financial advisor” or “financial consultant”. Many educators erroneously assume that these “advisors” and “consultants” are impartial investment fiduciaries. Unbeknownst to most educators, these “advisors” and “consultants” do not have a legal fiduciary responsibility to do what is in the best interest of the investor. In reality, these individuals are legally held to a much lower standard known as the suitability standard. In other words, if the product is “suitable” for the investor the advisor has done nothing wrong legally (ethically and morally, now that is another issue). There is a huge difference in the fiduciary standard and the suitability standard. The end result is often a worst case scenario: investors believe they are dealing with an objective fiduciary when they are actually dealing with a salesman who is beholden to his company.

Two Simple Suggestions and Why They Are Urgently Needed

In order to improve the 403b and 457 plan options in Georgia, I suggest that the following two plans be added to each district’s 403b/457 options. First, every district should add a Vanguard 403b(7) plan. The Vanguard plan would result in huge savings by allowing teachers to invest in low-cost mutual funds rather than high-cost annuity products. In February of 2007 my district, Troup County School System, added the Vanguard plan; we paid nothing to add it. This could and should be replicated in every school district in Georgia. Second, every district should make the Peach State Reserves 457 a retirement savings option. Like Vanguard’s 403b(7) plan, the PSR’s 457 plan would allow teachers to invest in low-cost index funds and age-based lifestyle funds. These two simple additions would improve teacher retirement options for every teacher in Georgia.

Notice that in the previous paragraph I suggested that two retirement plan options be added. I did not say that any retirement plans from other companies should be removed. This statement will undoubtedly be mischaracterized by many in the financial services industry. These individuals usually feel threatened by low-cost competitors since such plans often cost them business. If the Vanguard and the PSR are such good plans, why haven’t you heard much about them until now? The truth is that no one, other than educators, has anything to gain by advocating the inclusion among retirement plan options. Since neither plan employs a battalion of sales reps to push their product, you will never encounter a Vanguard or PSR representative in the teacher’s lounge or at the county office. To emphasize, I am not advocating that any service provider be removed from any district’s offering; I am only advocating that Vanguard and the PSR be added.

Thus far, you have probably noticed the emphasis I place on low-cost investment options. Why am I obsessed with adding low-cost investments among teacher retirement plan options? Simple, low-cost investments pass the cost savings onto the investor while high-cost options divert money (via fees) away from the investor’s account and into the service provider’s account.

How much does your current retirement plan cost? How much do comparable plans cost throughout the country? Most people cannot answer these two simple questions. Let’s begin by looking at some retirement plans around the country. The federal government’s 401k plan, the Thrift Saving Plan (TSP) is probably the most cost-effective retirement plan in the country. It offers five basic funds and a series of Lifecycle funds that have an expense ratio of only 3 basis points. What does this mean? Simple, for every $1,000 invested TSP investors are charged 30¢ in fees.

According to a series of articles by W. Scott Simon at Morningstar, most 403b and 457b plans using annuity products offered by insurance companies charge expense ratios ranging from 200 to 500 basis points. In other words, for every $1,000 invested an investor will pay $20 to $50 in fees. Let’s compare some retirement plan options:

Thrift Savings Plan: 3 basis points / 30¢ per $1,000 invested / $30 in fees on $100,000 portfolio

Peach State Reserves: 6 basis points / 60¢ per $1,000 invested / $60 in fees on $100,000 portfolio

Vanguard Group: 20 basis points / $2 per $1,000 invested / $200 in fees on $100,000 portfolio

Most 403b / 457 products: 200 to 500 basis points / $20.00 to $50.00 per $1,000 invested / $2,000 to $5,000 on a $100,000 portfolio

Go back and look at those numbers again and let them sink in. In summary, most Georgia 403b and 457 options cost much more than the Peach State Reserves 457 plan or the Vanguard 403b(7) plan. Remember these are fees that are assessed annually. It is no wonder that high-cost plans almost always under perform more cost-effective plans.

Summary: By adding a Vanguard 403b(7) plan and the Peach State Reserves 457 plan to Georgia school districts, two low-cost options would become readily available throughout the state. These additions would inject needed competition into the Georgia's 403b and 457 marketplace.