Tricking Teachers

Some of the worst retirement plan investments are those offered to teachers. Who is to blame? The identity of one of the culprits may surprise you.

I have never spoken with a fiduciary investment adviser who believes that variable annuities have any place as an investment inside a qualified plan like IRAs, 401ks, or 403bs. Yet, one of the most heavily sold products within teachers 403b plans are, in fact, variable annuities. What’s wrong with them: 

First, they are tax-deferred on their own, without the retirement plan wrapper. Congress gave them preferential tax status because the investments are attached to an almost worthless death insurance policy that typically just guarantees the return of your initial investment if you die. So, for this tax deferral, you pay a ton of extra fees. Where a no-load index fund might cost 3/10th of 1 percent per year variable annuities can cost more than ten times that amount.

To make matters worse, those selling variable annuities collect sizable commissions - around 7% - that don’t have to be disclosed. If you want to know how large the commission might be, take a look at the first year surrender charge. Yeah, if you want to take your money out within the first 5 to 10 years you must pay to do so.

It’s not just crooked or clueless school administrators offering the terrible plans to teachers; teachers own national union, the National Education Association (NEA) has attached its name to some extremely pricey variable annuities for which it probably collects a substantial fee. 

Over the past few weeks, the New York Times ran a compelling five-part series on the huge disservice being done to America’s teachers by an industry that cares more about its profits than in doing what’s best for its clients.

If you are a teacher or know one, you need to read these reports.