Homework for Teachers: Their Investment Plans


The New York Times
Published on March 7, 2012

By FRAN HAWTHORNE
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WHEN Dan Otter started teaching in 1992, an insurance agent walked into his fourth-grade classroom in Southern California after school to try to sell him an annuity.

That was hardly unusual. Back then, people who worked in many schools, church offices and other nonprofit institutions could set up retirement accounts in almost any financial vehicle they could find. Their employers offered little guidance, and local insurance agents wooed teachers in the lunchroom with pizza and sandwiches.

In 2009, however, new federal regulations required employers to be more directly involved in running these programs, known as 403(b) plans for the section of the tax code authorizing them. To make that task easier, the nonprofit institutions began culling the numbers of managers and using more widely available mutual funds.

Today, the streamlined 403(b)’s look more like the private sector’s 401(k) retirement plans, with employees putting part of their paychecks into individual accounts, sometimes with matching amounts from the employer, and choosing investments.

Still, important differences remain. Workers in the nonprofit sector cannot simply follow the advice in the ubiquitous “how to invest your 401(k)” books and articles because many of them also have pensions, annuities or other retirement investments.

If your 403(b) is undergoing renovation, “it’s a good opportunity to assess your position and your long-term goals,” said Bruce Corcoran, vice president for institutional sales and services for the K-12 educational market for the money management firm TIAA-CREF.

Mr. Otter did just that. He rejected the annuity pitch and later co-founded a Web site, 403bwise.com, that provides advice on these plans.

Total 403(b) assets are about $750 billion, according to the financial research firm Cerulli Associates, less than one-fourth the amount of 401(k) plans. The largest segment is higher education, followed by health care, K-12 school systems, charitable organizations and religious and other institutions.

The first change that employees will probably notice when their plans reorganize is a drastic reduction in the number of companies allowed to pitch services. At the Los Angeles Unified School District, for instance, that number has shrunk to 27, from 127, said Alan Warhaftig, who teaches English and algebra and is on the school board’s retirement investment advisory committee.

That does not necessarily mean fewer investment choices, experts say.

“What’s lost is a lot of redundancy,” said John Ragnoni, executive vice president for tax-exempt markets at Fidelity Investments. “The investment lineup still covers the complete spectrum of what a participant would want.” And it has become common for managers to allow access to one another’s products.

Moreover, new choices and services are often added, including lower-cost mutual funds and target-date funds — premixed portfolios based on the investor’s age. In a survey of 80 403(b) plans published in January by the consulting firm Aon Hewitt, 72 percent offered target-date funds, 67 percent provided online tools to help employees make investment decisions and 62 percent were “very likely to perform a comprehensive review of fund offerings” this year.

Mr. Corcoran and others say the newer funds’ fees are typically about 1 percent of assets, which is half or less than those of traditional annuities.

That leaves employees trying to figure out what to do with the annuities.

Annuities often charge surrender fees for withdrawals, typically 1 to 2 percent of assets but sometimes up to 8 percent. A percentage of holdings can generally be withdrawn without charge each year for a rolling period — perhaps 10 percent annually over 10 years.

Participants need someone like a financial adviser to sit down with them, said Marina Edwards, a Chicago-based senior retirement consultant at Towers Watson.

It may also be worth a penalty to switch to a lower-cost mutual fund. “If you’re paying two points higher, then a 2 percent surrender charge isn’t a problem,” said Mr. Warfhig in Los Angeles.

When employers do make significant changes, employees will usually get one to six months of advance notice.

The investment choices and online advice may sound a lot like the world of a 401(k) in the private sector.

The key difference, however, is that most people with 403(b)s can also look forward to a traditional defined-benefit pension, even if many states are trying to reduce the amounts. Those in the corporate world probably cannot.

Of the respondents in Aon Hewitt’s 403(b) survey, 73 percent also provided a pension plan. In a survey by the firm of 500 private companies, 60 percent offered both a pension and a 401(k).

Experts say that a pension’s steady income can play a role equivalent to that of bonds in a 401(k) or 403(b). Thus, Mr. Ragnoni of Fidelity said, “we generally can use that to say there could be more allocation to stocks,” depending on other factors like age and medical expenses.

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