By: Mychal Eagleson, CFP®, AAMS®
Have you ever been in your classroom and had a student do something that made you say, “did he really think he’d get away with that?!” I’m guessing you probably have, maybe several times. And it’s frustrating because for that thought to come to mind, it usually means you know the student knew what he was doing was wrong, but did it anyway.
It’s the same feeling I have when I look around the financial industry and see the things many companies and others do to try to make as much money as they can off of teachers. They know you rely on them for guidance and use that trusted position to their advantage, all while you believe they’re looking out for you and giving good advice. And the worst part is they know what they’re doing isn’t what’s in your best interest… it’s what’s best for them but they keep on doing it anyway.
As a Certified Financial Planner™ who works with teachers, I’m proud to be bound by a fiduciary duty to always put your best interests first. Unfortunately, there are many more in my industry who are not and peddle inferior products and services that do a better job of enriching them than they do benefiting you. So today, I want to make you aware of the three ways I see teachers get fleeced by financial providers all the time, so you can have the knowledge to protect your money from the greedy hands that want it for themselves. (Plus, don't miss out on a special offer at the end of this article)
1. Bad 403(b) Vendors: Unnecessary Annuities & Expensive Funds
If you’re like most teachers, your district offers the option to participate in a 403(b) plan to save for retirement. When you want to sign up, you’re provided a list of “Approved Vendors” and then you’re on your own to choose one. But you’re still in good hands because all of the vendors to choose are “approved”, right? Unfortunately, it’s not that simple and many teachers actually end up in pretty bad situations without even knowing it.
In most districts, the approved vendor lists are full of providers that are just plain crummy. Many of them aren’t truly knowledgeable professionals with a fiduciary duty to look out for your best interests, they’re sales representatives with the goal to get you to utilize their company’s financial products. For teachers, this generally leads to unknowingly choosing between one of two subpar options for their 403(b).
Option 1 is a 403(b) invested in an annuity. Why is this a bad thing? Because annuities make saving for retirement way more costly than it needs to be. Basically, they’re an expensive wrapper that charges an additional 1%-2% of your account balance annually in fees. Many of them also put you at a further disadvantage by limiting your investment options and locking up your money in “surrender periods” where you could end up having to pay them a fee of up to 8% of your account balance if you decide you want to change providers or have an emergency and need to make a withdrawal.
There’s a private school 403(b) plan I recently reviewed that’s a perfect example of how this hurts teachers. The school’s plan is with a large firm that is a 403(b) provider to thousands of districts across the country (I won’t mention the name because they become quite litigious when called out). The representative from this company sells an annuity including expenses around 2% annually, a restricted number of mainly proprietary funds, and a 5% surrender fee to every teacher who signs up for the school’s plan.
When we ran the numbers for an average teacher’s career savings between the annuity and a non-annuity option the outcome was astonishing. All else equal, the teacher who invested in the annuity ended up with over $60,000 less in her 403(b) than a counterpart that utilized a non-annuity option!
Annuities do have their place in financial planning and can be great tools in terms of providing a steady retirement income stream. However, that place shouldn’t be in your 403(b) because when it comes to accumulation of retirement funds, they do a lousy job.
Option 2 is a 403(b) that’s not invested in an annuity, but is still pretty bad. This option manifests itself in one of two ways. The first being a structure where whenever you contribute money you pay a sales charge called a “load”. Why is this a bad deal? Because in 2017, no one should ever pay a load! There’s no reason to pay up to 6% of your balance to buy mutual funds because what the people who are selling these funds don’t tell you is that mutual fund families almost always have “no-load” versions. That’s right, you can get the exact same thing for a lot less money through another financial professional or on even on your own.
The second way this option shows up is in certain share classes available in your 403(b) plan. The way you’ll see this is you’ll read the names of your mutual funds and they’ll have a letter and number behind them, like “R3”. This is the share class designation and drives how high the annual expenses for the fund will be. These range from the most expensive, R1, to the least expensive, R6, and the difference between them is huge.
Looking at a common mutual fund utilized by another large 403(b) vendor (that will also have to go unnamed but has a yellow logo and ironically cutesy commercials about how their advisors really look out for clients) the R1 class has annual expenses of 1.43% while the R6 class has annual expenses of 0.33%. That’s over a 1% annual difference and please tell me why they won’t offer the R6 to everyone! Stack that up over a career of saving and it adds up to thousands of dollars lost out to a fee that should have been lower if the vendor was really looking out for you and your district’s plan.
These methods of extracting a disproportionate share of money out of teachers’ retirement accounts have been brought to light ,most prominently by the New York Times; however, we have to continue to push for better alternatives. They do exist (A Better 403(b) Plan) and there are people fighting to continue to shine the light and education on them (403bwise). Without a continued push for better the companies who currently make billions from these methods will keep up status quo and continue to financially disadvantage hard working teachers.
2. Sloppy Insurance Recommendations
Let me take you into a world driven by the pursuit of the almighty sale. People live and die by how many and what type of policies they sell, with the winners earning six and seven figures in annual commissions and being heralded as “Top Producers” while the losers make little to nothing and are pushed out of the industry. The world I’m talking about is the world of life insurance, and for most agents it’s an “eat what you kill” situation with conflicts of interest abound that can hurt you.
Now I’m not against people making a good living, but I am passionately against the way many people in this industry go about doing it. Why, because they focus on the policies and not the people they’re supposed to protect. And that negatively affects many teachers in serious ways. When it comes to financial planning, insurance is an incredibly important foundation necessary to protect you and your family. It’s crucial that the time is taken to do it right and some agents do that. However, many agents don't because the incentive structure in this industry runs completely counter to this.
What this mean is that many teachers end up working with insurance agents that sell them life insurance policies that either aren’t right for them or aren’t very good policies in the first place, just to get the sale. And the more these agents sell, the more in commissions, recognition, and incentives (like fancy trips) they earn, which means the trend then spreads to more teachers to keep it up.
There are two particularly egregious ways I see this happen that you need to be aware of.
The first is how many insurance agents either fail to recognize or willfully ignore the fact that in most instances teachers have the option of obtaining life insurance coverage through their district. Typically, this coverage is at a group rate and is the most cost-effective option available. Instead of bringing this up, they’re happy to sell you an individual policy with their company, that’s more expensive, without asking questions or speaking a word that another option might leave you better off.
The second, is the push for teachers to buy whole life or universal life insurance policies. Now don’t get me wrong, these policies aren’t inherently bad and have their place when planning for certain circumstances. But because of their design, their premiums are much higher than term insurance, which for most teachers to be properly protected is usually the best option to utilize. So why then would an agent sell a whole life or universal life policy instead? Because it will make them more money.
The commission payout to agents and the money made by the companies for whole and universal life policies is much higher than it is for term policies. For example, one large financial company (named after a historic education figure) trains its agents to push these policies first. When their agents come into schools, the teachers believe they are getting good advice, so they end up with expensive policies they might not really need. This can also lead to you either paying too much for not enough coverage or not having the money available to buy the coverage you really need to be protected because you're already paying too much for a whole or universal life policy.
3. Shady Student Loan Advice
Many young teachers know all too well about the burdens of student loans. Starting out, student loan payments can eat up a significant portion of your discretionary income, making it difficult to live on a new teacher’s salary. Finding relief typically sounds like some of the sweetest music you’ve ever heard and there’s companies who know that and work to take advantage of it. What this has led to is a dangerous situation that I can only describe as predator and prey. And it’s important to know what to look out for because you’re the prey.
In the many cases when this starts, you’ll receive an email that looks official, like it’s from your district or student loan servicer. The email will tell you that as a teacher, you’re eligible for special loan relief or loan forgiveness programs and will include contact information to learn more. From here, a lot of bad advice and shady services can end up happening, from loan consolidation at private lenders that nullify your opportunity to ever take advantage of legit loan forgiveness, to being charged hundreds to thousands of dollars for them to complete simple tasks that you can do on your own for free, like applying for lower payments or consolidating with your current loan servicer.
Bad advice on student loans can cost you big both now and in the future, and the worst is when it comes to student loan forgiveness programs. There are two legitimate and very beneficial forgiveness programs for teachers, Teacher Loan Forgiveness (up to $17,500) and Public Service Loan Forgiveness (up to 100%). Each has different timelines and criteria for qualifying, but one thing they do share is that you must have federal student loans to be forgiven. However, bad student loan advice has led many teachers to consolidate their federal loans into private loans. Once that’s done, the chance of ever utilizing either of those programs and the benefit of having thousands forgiven goes out the window!
Now, if you look at your situation and your will neither qualify for these programs or it makes more sense to not use them, student loan consolidation can be a great strategy to explore. There are several companies out there that do a fantastic job. But, more and more companies continue to pop up in this space and that leaves the opportunity for you to potentially run into one that’s not so good. So, it’s important to do your homework before signing (or e-signing) on the dotted line. The difference between a good and bad consolidation can be either thousands of dollars staying in your pocket or having to be paid out to them.
There are many strategies available to navigate this space but to utilize them properly and follow the rules takes time, planning, and the ability adapt it all to your unique situation. If you seek out assistance and hear it will be “quick and easy” or it seems like a one-size fits all approach that “they’ve done with lots of people” you might end up not getting very good advice and worst case could create a big mess to deal with down the road.
We’ve covered a lot here and I truly hope I’ve been able to provide you with valuable insights so you’ll be able identify the red flags and avoid these pitfalls in your finances. Doing so can serve to keep tens of thousands of dollars in your pocket, and out of the pockets of the financial companies whose products and services are designed to take more than their fair share. The purpose of my firm, An Exceptional Life Financial, is to help teachers make the most of their money and utilize their finances to live exceptional lives. We’d love to hear from you and provide more information on how we can help with your financial planning whether it be retirement, insurance, student loans, or other important financial matters.
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Mychal Eagleson, CFP®, AAMS® is the President of An Exceptional Life Financial, a firm that specializes in financial planning for teachers and families with special needs. He frequently writes and speaks on personal finance topics relating to these clients. Mychal also serves on the board of the Financial Planning Association of Greater Indiana as the Director of Public Relations & Social Media. To read more of his articles or learn about An Exceptional Life Financial please visit: www.anexceptionallifefinancial.com.