California teachers and school workers may be paying thousands more in retirement accounts

Some teachers felt warned when they read their monthly statements from SchoolsFirst Federal Credit Union and Nationwide, with a page proclaiming “National Administration Expenses: $0.00.”

However, “gross expense ratios”, which are the annual cost of investing in a mutual fund, and “asset fees”, the amount charged to recover expenses, are not totaled in bold. .

Many public school employees have paid thousands of dollars more in tuition than they realize on Supplemental Retirement Accounts because options have been hard to find and total fees hard to piece together.

SchoolsFirst/Nationwide ranked 30th on fees for 403(b) retirement accounts – $146 per year for every $10,000 invested, while CalSTRS, ranked #1, charged just $54 for every $10,000 $ invested, according to 403bcompare.com. SchoolsFirst/Nationwide includes a salaried advisor to help teachers select investments; CalSTRS does not.

This means that a teacher with $500,000 in a mutual fund with SchoolsFirst/Nationwide led by an adviser would pay $4,600 more in annual fees than a colleague investing through CalSTRS “simple” – $7,300 versus $2,700 $.

Studies have shown that, over the long term, funds led by advisers do not significantly outperform index funds without advisers, primarily due to the higher fees charged, state Securities and Exchange Commission officials said. -United.

The money paid in higher fees is not invested and does not grow, so the loss accumulates over time. Dozens of mutual funds offered to California teachers charge far higher fees than SchoolsFirst/Nationwide — the most expensive was $831 for every $10,000 invested, offered by Equitable Financial Life Insurance Co.

“Teachers don’t understand that they’re getting hosed or don’t want to rock the boat,” said a lawyer who asked not to be identified for fear of repercussions. “It’s a captive audience.”

Securities and Exchange Commission officials have likened teachers to financial servicemen, often believing that brokers trying to sell them investments — who can come to campus with donuts and coffee — have the best interest at heart. teachers. This exposes teachers to high fees, abuse and even outright fraud, officials said.

“Our goal at the SEC is to empower Main Street investors,” Jina L. Choi, then regional director of the agency’s San Francisco office, said at a seminar on the issue in 2018. way to protect teachers is to hold them accountable. . They should ask about fees. They should ask about any financial incentives sales reps might have in the investment choices they offer.”

The SEC, along with many other financial regulators and teacher groups, has launched the “Teacher’s Initiative,” an educational effort to equip teachers with knowledge to protect themselves. In 2020, the SEC accused Houston-based VALIC Financial Advisors of failing to disclose that its parent company paid a company owned by Florida teachers’ unions to promote VALIC, which generated millions for VALIC. . VALIC also failed to disclose conflicts of interest regarding the millions it has earned by offering investments in more expensive mutual funds, rather than low-cost investments. VALIC agreed to pay some $40 million to settle the charges.

Golden years

California public school teachers receive a guaranteed pension when they retire — an average of $57,756 a year for teachers who retired in 2021, according to data from CalSTRS, the state teachers’ retirement system. .

But California teachers don’t receive Social Security benefits, so many also open supplemental retirement accounts, such as 403(b) and 457(b), to make sure they have enough money to their golden years. They don’t pay tax until the money is withdrawn, usually when they are retired and in a lower tax bracket.

School districts have enormous power over who runs these programs and what products they offer. Districts choose a finance company as the “third-party administrator” of these supplemental retirement programs, but generally do not pay for these services; teachers who use them do so, for a fee.

More than 50 companies are licensed to be third-party administrators in California and can offer more than 120 different financial products for teachers, according to 403bcompare. Companies can offer all of them or only some of them. This varies from district to district, and there are over 1,000 districts in California.

SchoolsFirst, one of those third-party administrators, is California’s largest credit union and the nation’s fifth largest, with 1.2 million members and more than $25 billion in assets. Founded in 1934 by educators who pooled their pennies and created the Orange County Teachers Credit Union, it is headquartered in Tustin with a mission to serve school employees and their families.

More than 300 California school districts use SchoolsFirst. This includes 95 districts in Los Angeles County, 47 in Orange County, 47 in San Bernardino County, and 25 in Riverside County.

Teachers who began posting fees to their accounts — expressed as percentages rather than dollars on statements — were stunned. They asked about lower-cost vanilla mutual funds like Vanguard and Fidelity, but said they weren’t given those options. However, since the Southern California News Group began asking about it in January, those teachers have been told that those options are indeed available.

“School employees can contribute payroll deductions to any of the 38 approved 403(b) providers who have signed an information-sharing agreement with the SchoolsFirst plan administration and who have been authorized through 403bcompare. com,” said a written response from SchoolsFirst/Nationwide. “These vendors actually include CalSTRS, Vanguard, and Fidelity; these available options have been available for many years and have always been communicated to participants as part of the investment options available to them.

SchoolsFirst’s review

Businesses don’t believe fee statements are misleading. Plan fees can be collected either as an asset-based fee or as a fee charged directly to the participant’s account, SchoolsFirst/Nationwide said in a statement to SCNG.

Asset-based charges are shown in the fund performance table and in the footnotes to that table on statements; fees billed directly to the account can be found in the section titled “Your information about fees and expenses,” the companies said.

“When this section says $0.00 for administrative expenses, it means that no fees were charged directly to the participant’s account or, in other words, only asset-based fees were taken” , said SchoolsFirst/Nationwide.

Additionally, the 403bcompare website uses the highest possible fee that might be charged rather than the average — which it said was $106 for every $10,000 invested for SchoolsFirst/Nationwide, the companies said.

“While we don’t know the specific situation or the teachers involved, our communication regarding their retirement fund options has always been open and transparent, helping teachers make the right decisions that are in their best interests to help them achieve their specific retirement goal. This includes all options available from Fidelity and Vanguard.

The union’s choice

There are over 300,000 public school teachers in California, making it an attractive market.

To that end, the giant California Teachers Association addressed the issue more than a decade ago, when new IRS regulations required school districts to assume significant oversight of 403(b) plans. Since most did not have such expertise on staff, they hired these third-party administrators to do the job.

“CTA understands the importance of each district selecting a reputable, inexpensive, independent administrator,” the union said in a 2009 membership update. “CTA has approved the CalSTRS 403bComply program as a than TPA.”

CalSTRS is inexpensive, offers open access to investment offers from dozens of providers, does not receive payments from providers, and does not give preferential treatment to any of them, the CTA said. Some companies may claim to offer “free” 403(b) administration, but they get money back in other ways, he warned.

The CTA remains a strong administration supporter of the CalSTRS plan, spokesman Ed Sibby said.

Teachers – and all investors – need to ask not just “What are you charging me?” but also, “How else do you get paid?” said the experts at the SEC seminar.

The Financial Industry Regulatory Authority’s 403bcompare and Fund Analyzer sites are good places to start doing your homework, Lori Schock, director of investor education and advocacy at the SEC, said at the seminar.

It’s essential that people understand the impact of fees, she said. Although the difference between a 0.25% annual fee and a 1% annual fee may seem small, it is.

Over 20 years, a $100,000 investment with the lowest fees would grow to nearly $210,000. At the highest price, it barely exceeds $180,000.

“It’s not just that $30,000, but what that $30,000 would have made up,” Schock said. “I don’t know about you – I’d rather the money be in my pocket than someone else’s pocket.”