What do the “Higher-Ed” 403(b) lawsuits mean for the K-12 space?

The financial media has recently been covering multiple lawsuits brought to suit by a lawyer named Jerry Schlichter. (To read the details of the suit, you can read about them here or here). To briefly catch you up, Mr. Schlichter is representing the plan participants from various universities with suits claiming the 403(b) plans have overcharged participants to invest. He is claiming due to the excess fund choices and record-keeping fees, that the cost to manage these plans and ensure the plan is kept in compliance is too high and could be brought down. He takes it one step further by claiming the plans should have known this, reduced the fund choices or made them more appropriate and passed the cost savings on to participants.

This is coming on the back of a recent Department of Labor ruling outlining how advice will need to be changed regarding retirement accounts, and what type of products can be sold and advice given when advisors are working with clients.

While the result of these suits would be great progress in the world of retirement planning, I’m left scratching my head and pointing to the elephant in the room: What about the 3.5 million K-12 teachers and their 403(b)’s?

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In comparison

To compare teachers to higher-education employees, teachers mainly have a selection of 403(b) vendors in their district. The vast majority of these vendors are annuity salesman hocking products that have all-in fees going over 3%. Some districts only have one vendor available – most likely an annuity product – meaning teachers don’t even get a choice of the product they are using for retirement savings. They are also led to believe that as their district has allowed these vendors to advertise to them, that they have been vetted, whereas many investigations have shown this is not the case. In many cases, annuity companies sponsor union events in order to get first-right-of-refusal in offering 403(b) products to teachers.

For higher-ed employees, they can use non-annuity 403b’s like Fidelity, Vanguard and TIAA, which provide an open platform to build a suitable portfolio. For those not knowing how to do this, an advisor can be hired to build a portfolio and put it into place. It’s no wonder that myself, other advisors serving K-12 clients, and those educators themselves aren’t really feeling much sympathy for higher-ed employees. When you compare a Fidelity 403(b) with Fidelity index funds (all-in-fee ~1%) versus an AXA annuity with AXA proprietary products (all-in-fee ~4%) – who’s the real loser here?

 

 

 

How will these lawsuits impact the K-12 space

One thing that’s important to note about these 403(b) lawsuits is that they are 403(b) plans covered under ERISA (Employee Retirement Income Security Act of 1974) so they have some legal protection around them. The “world of K-12 403(b)s” does not fall under ERISA as they are not offered by the school district, but are made as options available to the employees, and offered by the specific companies.

 

This minor distinction means a lot.

 

It means that there is no rule in place to determine what can and cannot be offered as a alternative retirement plan to a K-12 teacher. There is no legal statute in place to say “No, your offering is not suitable and is laden with fees. No entry for you.” And that is shocking.

For the 3.5 million teachers (and administrators above that), we do not have a mandate in place that makes sure the retirement savings options are suitable and vetted, and that is shocking. The level of education that exists – outside of blogs like this and 403bwise.com – is minimal, and sometimes the education comes from the 403(b) providers themselves, leaving it tainted at best.

One thing that angers me the most is I get 20-something year old teachers call me and ask me what my opinion is on their retirement plan options. Some of them haven’t started yet, but others have opened annuities with 403(b) companies. For those who want to change providers, they will have to pay potentially thousands of dollars to transfer their accounts to a better provider. This is because they were sold into a plan, instead of being educated as to which one will be the best for them. For teachers who have been saving for decades, they can wake up to find that thousands of their dollars have gone into fees and trivial insurance costs.

 

What do I hope the lawsuits will do?

My hope is that these lawsuits will have a trickle-down effect into the K-12 403(b) space. Seeing these educators time-and-time-again get angry that they were sold an inappropriate product as they were hounded on their lunch break needs to stop. Districts need to be put on notice that this is happening in their schools – even without them being aware.

  • I hope it will make participants take a second look at the plan they are considering or already in.
  • I hope it will encourage teachers to get a second opinion of their current retirement plan and have the courage to question any product that is suggested to them.
  • But most of all, I hope it will scare some providers into making their products better and treating our educators with the dignity they deserve.

That’s right AXA, I’m talking to you. It’s time to shape up, or ship out. (Take a look at page 12-13 where the expenses can be over 3.5% to invest in an AXA Equitable 403b)