The High Fees and Commissions of 403b plans for Teachers

During the course of my 30+ years as a teacher, I have found that many of the 403b providers that are in our schools try to sell you annuities that are high in fees and commissions which can be a drag on your investment returns. This has now been corroborated by the New York Times in a series of articles titled, “Public Sacrifice”. What most educators don’t realize is that they already have what amounts to a very low-cost annuity that is guaranteed to them at retirement. It’s called their state pension plan. Many educators could save over 100K in fees and commissions during the course of their career and even more when you factor in their retirement years. Had some teachers been able to choose a simpler, less expensive plan instead of the broker’s costly offering, they could have approximately 20 percent – 50% more in savings, according to an analysis performed for The New York Times. I can definitely corroborate this with many of my clients that have made a switch to lower-cost funds that are not part of annuities.

“Teachers are still being preyed upon by salespeople,” said Dan Otter, founder of the advocacy and educational site 403bwise.com.

In fact, millions of people who save in 403(b) plans may be losing nearly $10 billion each year in excessive investment fees, according to a recent analysis by Aon, a retirement consultant.

At Axa, now called Equitable their main performer is the Equi-Vest variable deferred annuity. It isn’t simple: To get the full rundown on how it works, people must sift through a document that is 460 pages long.

Then there is the surrender fee. An Equi-Vest annuity owner who wants to transfer savings into another 403(b) product or roll it over into an I.R.A., for example, would pay 5 percent to Axa on any of the withdrawal that was contributed in the previous six years. You can usually make up for this fee if you transfer to a low-cost provider that uses index funds in about 2 years.

Beyond Axa/Equitable, other large players in this market include Voya, Valic, Lincoln Financial Group, MetLife (whose retail adviser force was recently acquired by MassMutual), New York Life and the Legend Group according to the retirement industry publication PlanSponsor.

The charges for such complex annuities are intended to provide plenty of incentive for sales representatives and their managers. At Axa/Equitable, for example, a broker can earn roughly 5 to 7 percent of the total amount teachers deposit in their 403(b)’s for the first year (though some pocket only half that amount, a former broker said, depending on their pay structure).

Selling annuities also creates a continuing income stream for the brokers. Axa pays a commission of 1.5 percent to 2 percent on every future dollar an employee contributed to a 403(b) annuity. The annuity sold to the teacher, in a sense, becomes an annuity for the sales rep and the company’s managers.

This can translate into a healthy living for some brokers.

Many of these practices are plainly stated on Axa’s website, including the fact that brokers are paid more to sell annuities than to sell mutual funds. Axa said that reflected the complexity of selling annuities.

Karen S., is a 62-year-old widow nearing retirement who agreed to discuss her situation if her last name was not used to protect her family’s privacy. At the end of 2015 she would have had an additional $113,000 in savings — or nearly 50 percent more — had she not paid approximately $37,500 in commissions and various fees over the previous eight years and had instead invested in a simpler mix of low-cost stock and bond funds.

Ms. Jusinski, a colleague of Karen’s paid more than $15,000 in fees and commissions over the previous eight years on an $87,000 account. She would have had almost $105,000 at the end of 2015 if she had been invested in a standard mix of low-cost stock and bond funds, according to Mr. Dauenhauer’s analysis.

Craig McCann, a former economist for the Securities and Exchange Commission has employed close to a dozen people with Ph.D.s in math to dissect indexed annuity products as part of his firm’s work, which provides analyses for regulators and litigators representing investors. He said it took years for his team to master them.

“No agent selling these or investors buying these has the foggiest idea of how these work,”

But indexed annuities have to make sense for at least some investors, right? Perhaps for the incredibly risk-averse? “No,” he said, without hesitation. “Never.”

Though it appears that investors have some exposure to the stock market, he says many are left with a return they could have achieved with a supersafe bond portfolio, without paying an obscured 2.5 to 3 percent annual fee charged by the annuity provider. “They are all Rube Goldberg machines,” he said. Please remember the management fees for the annuities are in addition to the fees in the mutual funds that can be found in the subaccounts. Those mutual fund fees can be around 2% as well – ouch!

Here are the links to the NY Times articles: https://www.nytimes.com/2016/10/27/your-money/403-b-retirement-plans-teachers-brokers-fees.html