The 403(b) world really is like the Wild West with different providers all jockeying to try to get their hands on your retirement savings. Unfortunately, even with districts creating approved vendor lists, many of the vendors working with teachers' 403(b) plans are taking more than their fair share in high and/or hidden fees, undermining your retirement savings.
It's important to know what to look out for in a 403(b) vendor, especially in regards to these costs, because they can really cost you BIG TIME over the course of your career. In one recent plan I reviewed, the difference between the current high fee vendor and my firm's low fee platform for an average teacher added up to over $60,000! That's right, this plan's teachers can end up with potentially $60,000 more at retirement just by picking one vendor over another.
So today, I want to focus on making you aware of things you should avoid and how you can avoid them when it comes to selecting a 403(b) vendor. Because your choice of vendor really makes a big difference.
What traps to avoid:
- Large financial firms named in this article: "Think Your Retirement Plan is Bad? Talk to a Teacher". They are the worst offenders of taking advantage of teachers through their 403(b).
- Any financial provider who tries to sell you an annuity for your 403(b) plan. This is one of the most common ways teachers get fleeced by financial providers! Annuities are an inherently bad choice for accumulating retirement saving compared to just about every other option available and will kill you with higher than necessary fees and restrictions.
- "Loaded" mutual funds as a 403(b) investment. If any financial provider tells you it will cost a percentage of your funds each time your purchase a mutual fund in your account, run far away. It's 2017, no one should pay mutual fund loads because almost all of them offer no-load versions of the same funds.
- Financial providers who are not CERTIFIED FINANCIAL PLANNER™ Professionals (CFP®). If they're not a CFP, they're probably not a fiduciary with a duty to always place your best interests first. Many in the financial industry are simply sales people for their firms disguised as "Advisors" that are held to a much lower standard.
How to avoid these traps:
- The first and most important question to ask is "are you a fiduciary?" and their answer should be a definitive "yes". If the person mumbles around or begins talking about how for retirement accounts they're a fiduciary or that the new fiduciary rule makes all advisors for retirement accounts, blah, blah... they're not really a fiduciary and don't have a duty to always put your best interests first.
- Look at their business card and see if they're a CFP®. If they're not, I'd carefully consider if you really should with them because they're probably just a sales person for their firm. The old adage goes "every problem looks like a nail when your only tool is a hammer" and that rings true for these sales people and their company's options. What you really deserve is someone who utilizes an entire toolbox, which is what most CFP® Professionals do. Plus, the CFP® is the highest standard in the financial industry. When it comes to putting your retirement in someone else's hands, don't you want the best?
- Before signing anything, ask for a plain-English explanation of all fees in writing and don't sign anything until you get it and understand every last penny you will be charged. The large companies mentioned earlier and their representatives are notorious for glossing over their fees, burying them in fine print, and deducting them in ways you don't see on your statement. If they can't or won't provide this to you, or you get one and the annual fees are higher than around 1%, you need to find a better option.
- Make sure you do not sign-up for an annuity for your 403(b). Ask the vendor directly "is this an annuity?" The answer should be simple "yes or no." If you find you already have one, you need to talk to another vendor about better options. Personally, I believe the selling of annuities in 403(b)s is criminal because of how egregiously it disadvantages teachers. They can be useful tools down the road, but avoid them at all costs in your 403(b).
- If your district's 403(b) plan doesn't have a match, ask whether or not a Roth IRA might be a better option for your retirement savings. Someone who is truly looking out for you will help you evaluate this and give you an honest answer. A salesperson will insist you need to sign-up for the 403(b) with their firm, which is a major red flag.
- Look for low cost, value-added options like A Better 403(b). They are beginning to take hold in some districts but there are still many that don't have them. If your district doesn't, talk to other teachers and together go to your district administration to demand better for your 403(b) plan.
- Utilize online 403(b) advocacy websites to learn about how to protect yourself. 403bwise.com is one of the best resources available and include an online discussion board that has been very helpful for many teachers.
We’d love to hear from you and provide more information on how we can help with your 403(b), planning for retirement, or other important financial matters.
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.