Schoolteachers cope with two major problems: low salaries that make it difficult to save in the first place, and cost-ridden savings plans that can make their work life look like Fat City compared to their retirement income. Now there are glimmers of hope for the savings plan part of the problem. If you’ve never heard of 403(b) plans, don’t worry. They are similar to 401(k) plans, but for nonprofit institutions. Unfortunately, the plans are rooted in insurance-based products that tend to be burdened with high commissions, high redemption penalties and high operating costs. While expenses for employer-sponsored 401(k) plans are relatively low and falling with many large plans well below 1 percent a year the typical variable annuity sold to people eligible for 403(b) plans has annual expenses of more than 2.0 percent. Worse, much of the investment money goes into fixed-income annuities that have significantly lower returns than equity funds have had over the last 15 years. So where are the glimmers of hope? In lawsuits and in the development of Web-based information on the products being sold to teachers. One example of legal action comes from Martin, Drought and Torres, a San Antonio law firm that started to take insurance companies to court in the early ’90s. According to attorney G. Wade Caldwell, the firm has filed and settled one suit, has five pending, and will soon be filing another two suits. All the suits are in Texas. In a recent telephone interview, Caldwell explained that the situation was particularly bad in Texas because the Legislature had passed a law prohibiting school districts from limiting 403(b) vendors. Aimed at protecting teachers from sweetheart deals that could enrich a school superintendent or board member, the law worked to allow a proliferation of vendors. “It prevented school districts from protecting employees,” he said. “So teachers are offered expensive and sometimes fraudulent products. We’ve seen cases of 23 percent commissions.” I asked what kinds of problems he has seen. “There are a lot of product and conduct issues. One (product issue) is called Tax Sheltered Life. It has a large premium with a small death benefit. Another is Equity-Indexed Annuities. In the ones we’ve seen, the salespeople don’t understand that the product isn’t invested in the stock market.” Another is Old Money/New Money contracts. The teacher gets credited 6.5 percent on new deposits, but money that has been invested 12 months or more only earns 4.5 percent. Still another is the two-tier annuity. These are sold as rollover products where the teacher is told that the seller will compensate the teacher for the withdrawal penalties on the annuity being redeemed. The teacher sees two account balances, the 100 percent balance plus interest, and the second-tier balance, which is the actual deposit less surrender charges. There is a gap between the two amounts that never disappears. The only way to get the upper-tier amount is to stay with the company and annuitize giving up the principal for a lifetime monthly income. When that was done, the company paid zero interest on the amount annuitized. Beyond that, there is the basic problem of the use of variable annuities inside 403(b) plans and the expense of the death benefit. Caldwell also said some insurance companies go to great lengths to look as if they are sponsored by teacher organizations or the school district. One company the firm is suing, he said, formed a cafeteria plan administration company and then offered to do benefit administration for the school district for free in exchange for being allowed to sell variable annuities during enrollment periods. While Texas may be one of the worst states for major abuses and deceptive marketing practices, it is not unique. So what can teachers do? Get educated about investments and the choices available for 403(b) plans. Where do you start? On the Web. Caldwell’s firm offers basic reading and helpful links on its Web site (www.mdandt.com). For a more ambitious effort, visit www.403bwise.com, a site operated by two former California teachers. Like fundalarm.com, this site carries no advertising and is supported only when visitors buy books and other products on linked sites. If you are a teacher, think of these sites as your summer reading assignment. Question: I am 59 and my wife is 55. We are planning on retiring sometime within the next three to five years. I am presently employed (annual salary $124,500), and I have a retirement of around $30,000. She is also employed (annual salary $110,000), and she will have a retirement of around $32,000. Add in Social Security, and it is quite a tidy sum, around $90,000 a year. Also, we probably have $800,000 in 401(k) plans. The equity in our current home is around $125,000. We are planning on selling it and building one on the coast for around $275,000. Should we pay off the new home with the equity from our current home, plus draw down on my 401(k), or should we do the 20 percent down with the monthly payments, which will be around $2,400 per month, or something in between? B.M., by e-mail Answer: Something in between. As a practical matter, I prefer looking for ways to avoid mortgage payments after retirement. Much of the interest paid will not be tax-deductible because of the standard deduction, and it can commit you to a relatively high rate of withdrawal from your IRA or other tax-deferred plan, something that can endanger a nest egg. In your case, there is another way to look at things. With Social Security and pension income of $90,000 a year, you can easily support $150,000 of mortgage debt in retirement without considering your nest egg. At 8.5 percent interest, the monthly payment on a 30-year loan would be $1,153, or about 15 percent of your Social Security and pension income. That’s not a big burden. Basically, your home mortgage will serve to add some leverage to your overall portfolio. Your actual investment fund can be set for a low withdrawal rate of, say, 3 percent, and it will still provide an additional $24,000 a year of income. Questions about personal finance and investments may be sent to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; or by fax: (214) 977-8776; or by e-mail: [email protected]. Check the Web site: www.scottburns.com. Questions of general interest will be answered in future columns.
Columns & Features — Personal Finance — Actions on Several Fronts Could Help Teachers Save
