Are Fees Killing Your Teacher Retirement Plan? | A Must Read for Educators

You could end up losing out on hundreds of thousands of dollars by being in the wrong retirement plan. This is my account of a hard learned lesson in teacher retirement investing. #thewealthmap #money #personalfinance #education

Foreshadowing

This story begins with a question.

When I was in my first session of New Teacher Orientation, I received a packet full of information about the state pension program for teachers.

Defined benefit plans, such as a pension, were starting to disappear in other industries. I knew the plan would be a great portion of my overall retirement plan, but that's just it...

I knew it would only be a portion.

"Is there any further information on retirement options?" I asked.

A woman at least thirty years my senior replied, "Oh, you're young. You don't have to worry about that, yet."

I looked at her like she had just spit in my cereal. Maybe I looked at her like she had nine heads.

Either way, she knew her answer sent me spinning. I knew time was on my side, and i wanted to get started as soon as possible.

As Einstein once said, "Compound interest is the 8th wonder of the world. He who understands it, earns it... he who doesn't... pays it.

Getting a start

A month or so later I went around my new school and asked about retirement plans. One of my new colleagues put me in touch with a financial planner.

We met the very next week and laid out a plan.

The plan was to fund a 403(b) account, which would defer pre-tax monies and be actively managed by the firm's fund managers.

I felt pretty good about this - I have to admit. We looked at projections as I started setting aside $125 per paycheck.

This money would grow and be able to supplement my pension money, which was only projected to be around $2,200 a month at the time.

I don't know about you, but $2,200 a month doesn't excite me.

Even $1 million dollars with a $4,000/month draw might only last 25 years.

I wanted financial security, and the 403(b) plan would augment my baseline pension.

---

Self-education reveals some concerns

After a few years of investing and feeling only a small pinch out of every paycheck, my subscription to Money Magazine and consistent research of Kiplinger and Investopedia really started to pay off.

Soon, I was asking myself some important questions about my retirement plan.

I've listed them below, and I suggest you also investigate these for yourself.

• Am I investing enough out of each paycheck to meet my ultimate goal?

• What are my account fees and can I bring them lower, while achieving the same or even better returns?

• Does my financial advisor have my best interests in mind or his/her own?

• Am I with the right financial firm and are they providing me with enough investment options?

Let's dive into these a little more, and I'll share my story along the way.

---

Investment Amount

I was 24 years old when I initially signed up for my 403(b), so the examples below represent my ideal career length with a 7% return and 2% salary increases each year - neither of which are guaranteed.

I just wanted to get started, and I knew my workplace pension plan was already setting aside roughly 8% of my salary, so I figured with the 6% it was a great start to be at 14% total.

Scenario 1: Investing 6% with a 7% and 0% fees.

Account Fees

Here's where the real bite took hold. Unfortunately, I had invested into this plan for three years before I truly knew the answer to the second question - "What are my account fees?"

The answer: 1.83%

This doesn't sound like a lot, but look at what happens to the total once I've paid my financial advisor and the firm he/she represents.

Focus on the amount with fees.

Scenario 2: Investing 6% with a 7% return and 1.83% fees.

That's right. That's a difference of $310,187.

One more time. Three hundred and ten thousand, one hundred and eighty seven dollars.

I knew it wasn't possible to have an investment account without fees, but I knew I didn't want to lose out on over $300 thousand.

Scarier yet, Aon, a retirement consultant, recently determined that across the nation teachers have lost out on nearly $10 billion in fees associated with annuities.

Here's the kicker.

Active investment managers have historically performed worse than the overall market. That means no one single person can, year after year, predict what the markets will do and invest in a way that beats the natural market returns.

Is it even close? Not really.

Equity fund managers have returned an average 4.79% over the past 20 years, whereas the S&P 500 has returned 7.68%.

So why was I going to have an actively managed fund that would cost me over $310 grand!?

---

Back to the Well - Does My Advisor Have My Best Interests in Mind and Am I With the Right Firm?

I dove into this issue in a big way. Everywhere I turned I found investment options with institutions that were posing as investment firms, when in reality they were insurance brokers bundling annuities.

Here's a quick brush up on annuities from Investopedia:

An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income stream for retirees. Annuities are created and sold by financial institutions, which accept and invest funds from individuals and then, upon annuitization, issue a stream of payments at a later point in time.

The only true financial firm offering low-cost investments I preferred was Fidelity.

No matter what, I wanted to continue investing pre-tax money, which meant I needed to work with the firms provided by my county.

Once again, Fidelity was the only true financial institution. The rest were wolves dressed as sheep, pitching packaged high-cost insurance products as investments.

No thanks!

Scarier yet, Aon, a retirement consultant, recently determined that across the nation teachers have lost out on nearly $10 billion in fees associated with annuities.

Is this you?

I'm Out, But There's More

I started working the phones and put my financial advisor in check. It was confirmed that I was being charged 1.83%.

The insurance firm made me aware that I would be charged 5% of my account total if I wanted to move out of the annuity investments.

I understood what the cost would be now in comparison to the cost over the lifetime of my account, and I knew there was no turning back.

I'd lose that 5% forever.

Fortunately, my account had only been growing for a few years and I wasn't $100,000+ invested.

So I lost $1,000 early.

Not $300+ thousand at the end.

Brighter Days

Thankfully, Fidelity is a phenomenal institution. I spoke to a real person that handled my 403(b) rollover with ease, and I'll never look back.

It took a month or so to get the fees completely transferred, settled and invested; however,my fees are now at a staggeringly low 0.19%.

It's not the 0% I referenced earlier, but it's much, much closer.

Now, I've grown outward from the pension and 403(b) and have invested even more money in other vehicles, as well. This has diversified my tax basis at retirement, and should allow me to live more than comfortably.

Teachers are strapped for cash, right? So how can you afford to set aside so much? I'll elaborate more on that in another post.

Where the Problem Lies

The truth is most of us don't want to worry about money. Our work lives are hectic, and we don't have the energy to track our investment accounts.

School districts partner with these wolves, set up your pre-tax deductions, and you go on about your merry way.

It's a shame that, at least for me, only one option out of six was a true financial firm.

Teachers do not have access to 401(k) plans that can offer, often, better investment options. If your district offers a 403(b) plan through a true financial institution, see what you can do in regards to those questions above.

Every situation is different. So don't pull the trigger without doing your research.

If needed, look into hiring a fee-only financial planner.

You can find a registered list through the National Association of Personal Financial Advisors. They do not have any stake in your retirement monies, and will be able to provide unbiased advice to better your financial picture.

Feel free to reach out at wealthmapblog@gmail.com, and I'd be happy to answer any further questions you may have related to this article.

It's your future. Take hold of the reigns!

---

For more follow @thewealthmap on Instagram and Facebook.

You can message Adam at wealthmapblog@gmail.com.

*Graphs via www.bankrate.com