Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

Barry Ritholtz: Teachers Deserve Better From Retirement-Plan System

FYI: How is it possible that two variations of tax-deferred retirement accounts, born of similar ideals and motivations, have evolved into shockingly different animals?

I refer to 401(k) and 403(b) investment accounts. Despite being part of similar tax codes with nearly identical goals, in practice the portfolios of each bear little resemblance to each other. As a result, millions of American teachers, among others, are retiring with less in savings than they deserve.
Regards,
Ted
https://www.bloomberg.com/opinion/articles/2019-03-15/teachers-deserve-better-from-retirement-plan-system

Comments

  • This is a bunch of BS. My wife has a 403(b) that is much more attractive than my 401(k).
  • @JoJo26: Is your wife's 403(b) a variable annuity ? If so is there a early surrender penalty?
    Regards,
    Ted
  • Judging from the above comments, the components of a 403(b) must depend upon the individual school district. We maxed out my wife's 403(b) every year. The SF "United" School District's plan offered a very wide array of mutual funds and other options, but there was no matching contribution from the SFUSD involved. For some reason American Funds was not on that list, so we maxed out her IRA, and mine, with purchases of various American Funds.

    In addition to those tax-sheltered retirement funds we purchased additional shares of both American Funds and American Century funds with whatever we could afford each year.

    Both of us also contributed to our respective defined benefit pensions, and Social Security. Thanks to all of that saving we are in very good financial shape now.

  • edited March 2019
    Old_Joe said:

    Judging from the above comments, the components of a 403(b) must depend upon the individual school district.


    (Shooting from 20 or 30 year old memories here.)

    - The 403 B preceded the 401 K by a number of years.

    - The IRS 403 B provision was originally intended to allow certain public employees (including teachers) to shelter from taxes a portion of their pay in annuities. In my early years the plan was often referred to by colleagues as a TSA (Tax-Sheltered Annuity) as that was the original scope of these plans.

    - At some point early on it was expanded to allow these employees to invest in mutual funds. (Employees had pushed for this.) Haven’t time to check, but either by adjucation or legislation that change occurred in the early 70s.

    - OJ is correct (as pertains to where I worked and perhaps more generally). The school district or other employer had control of which fiduciary (and fee based advisor) could handle their workplace account. At first only one fund company was allowed where I worked; and there was a 4+% front load on everything. A few years later the employees organization pushed the employer to include no-load T. Rowe Price as a second option. With Price there were no restrictions as to which funds we might purchase.

    - There was a convenient IRS loophole that lasted until at least the late 90s. It wasn’t widely known. It allowed employees to do 403 B transfers from the plan’s designated fiduciary to any other fund company of choosing while still working / contributing. The transfers could be partial. There was some basic paperwork, but no harder than moving an IRA from one custodian to another would be today.

    - The above loophole was plugged (either by the regulatory authorities or legislation) sometime after 1998.

  • Ted said:

    @JoJo26: Is your wife's 403(b) a variable annuity ? If so is there a early surrender penalty?
    Regards,
    Ted

    No, and they never should be. Annuities are a joke. The hidden costs in these are ridiculous.
  • edited March 2019
    @JoJo26: It's really quite arrogant to assert that the article "is a bunch of BS." Just because our wives happened to luck out with relatively decent 403(b) plans in no way invalidates the points made in that article. It's going to be difficult for you, but try thinking of someone other than yourself for a change.
  • @Old_Joe, I'm actually thinking of everyone else out there and not myself at all. I use my situation because that's what I have to go off of, anecdotally, however, it is to everybody's benefit to know that annuities are a huge rip off.
  • edited March 2019
    I babysit a colleague's money, and his wife's. After the initial move in 2010, there's hardly been a need to touch it. She's a teacher in Ohio now, which wasn't the case in 2010. Don't know a thing about her 403b, or whether she's contributing. My colleague trusted a professional broker who also happened to be an ordained Minister. That "Minister-broker" had him in Oppenheimer funds carrying a 5.75% front-load--- in a 403b. That's just criminal, though (apparently) it is perfectly legal. Now he's in no-load TRP. No financial literacy in schools very often leaves the average guy and gal at the mercy of predators--- ordained or not. Outrageous. He'll have a rare traditional defined-benefit pension to go along with his 403b, and hers. He's lucky, that way. But he was being robbed.
  • @Crash- Absolutely nothing personal intended, but I regard almost any religion as "predatory". If there is some sort of "higher being" that set up the rule sets for Earth I have a few questions for him/her/it.
  • @JoJo26- Well, OK, but most everyone here at MFO is well aware of the annuity scams. That's also one of the main points in that article, so why is it "BS"?
  • Old_Joe said:

    @Crash- Absolutely nothing personal intended, but I regard almost any religion as "predatory". If there is some sort of "higher being" that set up the rule sets for Earth I have a few questions for him/her/it.

    Hey, Old_Joe. No offense taken. You refer, no doubt to institutionalized iterations of religion. I'm retired from it all now, and haven't been asked to substitute on a Sunday since last April. I guess I wore out my welcome at the local congregation. ... Fundamentalism is flawed, by definition. "Prosperity Gospel" types are whores. "Mainstream" congregations these days are too preoccupied with institutional survival. A lot of internal bullshit is tolerated because no one wants to upset the apple-cart--- except a few brave pastors, who quickly get sidelined. And what is a pastor's job, but to be an agent of change? Because, after all, the status quo really, really SUCKS. I have a thing for you, which I'll send to you privately. Thanks for your response.
  • Old_Joe said:

    @JoJo26- Well, OK, but most everyone here at MFO is well aware of the annuity scams. That's also one of the main points in that article, so why is it "BS"?

    If all MFO were aware, then we wouln't need to see any posts about it. Sometimes I feel some of the MFO clan here feels holier than thou. Hate to break it to y'all, but sliced bread is better.
  • Thanks, Crash- I was pretty sure that you would know that I wasn't including folks like you in that.
  • edited March 2019
    “This explains why three-fourths of non-Erisa 403(b) holdings in portfolios are these expensive annuities. There are practically none in 401(k)s.”

    Something doesn’t compute here that 75% of 403-B holdings are in annuities. Teachers aren’t dumb. They’re not going to sit idly by and allow their school board or state to push them into annuities during their working years.

    Would be nice if Rithholtz could be a lot more specific? What age group? What state? What professions? Were this written 30 years ago I would have surmised these folks went into those annuities prior to the law being changed around ‘74 and held onto them. But today?

    Now, there’s a move in Michigan and elsewhere to get rid of DB pension plans. In some cases they’ve been replaced by matching contributions into 403 B plans. I suppose that such a setup might possibly give both parties some incentives to go with traditional annuities - especially the employer.
    -

    Racking my brain on this one. Maybe in some lower education, lower skill-set public sectors there’s a feeling among workers that stocks and mutual funds represent risk, whereas they may view annuities as safer. Don’t know. Just trying to make sense of that 75% figure.
  • @JoJo26- let's try this one more time:

    That's also one of the main points in that article, so why is it "BS"?
  • Old_Joe said:

    @JoJo26- let's try this one more time:

    That's also one of the main points in that article, so why is it "BS"?

    Let's try THIS one more time. 403(b)s are not dominated by these garbage annuities. It really is a total misrepresentation.

    I'll reiterate that the quality of the MFO board has really declined. IMO, there are many solid contributors with true investment acumen. However, there are also a whole lot of "contributors" (I use quotes because they don't MEANINGFULLY contribute) with hubris because they're qualified purchasers or accredited investors. I hope you all know that all that means is they have money. It means absolutely nothing when it comes knowledge investment knowledge.

    Peace out.
  • "there’s a move in Michigan and elsewhere to get rid of DB pension plans. In some cases they’ve been replaced by matching contributions into 403 B plans."

    @hank- Yep, a tough call on this one. Which is more dependable- an underfunded DB pension relying on unrealistic rates of investment return, or a matching contribution 403(b) which has a lower but probably reasonable rate of return? Present retirees are most likely OK, but what about those still working?
  • @JoJo26- I guess it's what you choose to believe. From the article:

    "Comprehensive research [5] on the topic has been published by Aon Hewitt, which concludes that 403(b) customers waste $10 billion dollars per year in excess fees."

    Note [5]: "There are lots of anecdotes about how teachers’ 403(b)s participant-borne costs are far in excess for services than comparable 401(k)s – see for example this or this – but I want to focus instead on the hard data. For the mathematically minded, it paints a picture of public servants not being served by their own school districts."


    In any case it appears that we are quibbling. On the main point, all are in agreement that the annuities are a bad deal. The question seems to be what percentage of 403(b)s actually are invested in annuities.
  • I have not looked at this site for about 10 years; but it appears the discussion board is available to read without any registration, for those inclined to discover more. One will also find various internal links for other information.

    https://403bwise.com/
Sign In or Register to comment.