Like many other educators, Robert Curtis, a high school science teacher in Dearborn, Michigan, thought investing in his school district’s 403(b) retirement plan was the right thing to do. Federal regulators later charged the company handling Mr. Curtis’ investments with fraud.
In July 2022, the Securities and Exchange Commission announced that Equitable Financial Life Insurance Company misled investors, primarily public school employees, about the amount of their investments. According to the SEC, Equitable often issued quarterly financial statements showing zero fees when in fact the costs were much higher. Equitable has agreed to pay a civil penalty of $50 million to harmed investors.
After hearing about the fine, Curtis learned that his retirement investments were costing him two to three times what a typical 401(k) investor would pay. It would cost even more money to withdraw his funds. The investment, known as a variable annuity, has a surrender charge of 5% to 6%.
“It was very frustrating,” Curtis said. “If I had known sooner, I wouldn’t have put the money there in the first place.”
Not all retirement plans are created equal
Like a 401(k), a 403(b) is an employer-sponsored retirement plan to which workers can make pre-tax contributions through payroll deductions. However, 401(k)s are typically offered by private sector employers, and 403(b)s are sponsored by schools, universities, religious organizations, and certain other charities.
The type of 403(b) available to public school employees often has fewer consumer protections than 401(k)s in the private sector, says former school teacher and co-founder of nonprofit education and advocacy site 403bwise. says Dan Otter,
Employers offering 401(k)s must adhere to the fiduciary standard, which means they must act in the best interests of their employees. As a result, 401(k)s typically offer a variety of investments at a reasonable cost. Employers typically choose a single investment company, called a custodian, to manage the plan and keep records.
Otter said the fiduciary rule generally does not apply to public school 403(b) plans. He said districts could contract with dozens of companies to provide retirement investments while refusing to provide any guidance or advice to employees. This is where insurance companies that sell high-value investments such as variable annuities and high-value investment trusts step in.
“Who do you think is sending emails to teachers? Who do you think is going to school districts and offering free lunches? It’s high-cost companies that are doing this,” Otter explains.
And costs make a big difference in how much wealth an investor can accumulate. For example, a person who contributes $500 per month and pays a fee of 1% per year could accumulate about $1 million after 40 years, assuming that the average annual return is his 7% . An investor who pays a 2% annual fee could end up making him $230,000 less.
Lower cost options are often available
Otter’s site evaluates public school 403(b) plans and rates each vendor according to the traffic light system. Low-cost investment providers are green, providers with at least one low-cost option are yellow, and high-cost providers to avoid are red.
Additionally, the site provides a complete list of letter grade and 403(b) plan vendors for more than 4,800 school districts, representing about half of the nation’s public school teachers, Otter said. Employees in these districts can use this site to review plans and find lower-cost investment options.
People who live in other school districts should request a list of vendors in their district and look for providers rated as green, Otter said. If none are available, lower-cost options from yellow-rated providers may be your next best choice.
This site and its associated Facebook group provide step-by-step instructions on how to move money from one option to another.
make the most of bad choices
Unfortunately, there are still some 403(b)s that only have high-cost investments, Otter says. In that case, the employee may consider funding his Roth IRA himself instead. Contributions are not tax-deductible, but withdrawals after retirement are tax-free. Another option he has is a 457 plan. These tax-deferred accounts are often offered to government employees and may come with more oversight and better investment options, Otter said.
Employees can also lobby districts to add better options. This is something that Curtis pulled off late last year.
But moving their $90,000 nest egg came at a painful cost. Curtis says he paid more than $4,500 in delivery fees. Mr. Curtis had the option of waiting for the surrender charge to expire and moving the funds slowly, but rather than continue paying Equitable’s high fees for years, he decided to “strip the Band-Aid off.” I chose that.
Curtis said he received a check equal to his fair share of the fine. It was $33.93.
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This column was provided to The Associated Press by personal finance site NerdWallet. The Content is for educational and informational purposes only and does not constitute investment advice. Liz Weston is a NerdWallet columnist, certified financial planner, and author of Your Credit Score.
Email: lweston@nerdwallet.com. Twitter: @lizweston.