November 19, 2017

Public Sacrifice: How to Fix a Retirement Plan at a School or Nonprofit

I don’t have a 403(b) plan, but I want one. How do I learn enough to get started?

For public schoolteachers, the first stop should be 403bwise.com, which has basic educational materials and a forum where others may be able to help you. Dave Grant, a financial planner in the Chicago area who works with educators, has good advice on his website, too.

Photo
Mark Eichenlaub, left, sprinting against a student. A teacher in Flossmoor, Ill., he put together packets of materials to educate his colleagues on why they needed to lobby administrators for a better retirement plan.

Credit Alyssa Schukar for The New York Times

A few teachers have created their own resources as well. We have linked to informative packets from Mark Eichenlaub, a language arts teacher in Flossmoor, Ill., who used the materials to educate his colleagues on why they needed to lobby administrators for a better plan.

For more general 403(b) advice, turn to the Bogleheads forums and search for related discussions. There, followers of the cheap-and-simple investing philosophy of the Vanguard founder John C. Bogle can help you plot a course to starting a plan or fixing one already in place.

I’m going to need to talk to my boss. How should I handle that delicate conversation?

It is fraught. Nonprofit administrators may be excellent at running programs for the needy and keeping old church buildings functioning — but they are not retirement experts. Also, conversations about money often make people nervous, especially if they have a hunch that they themselves may be heading for an uncomfortable retirement.

When Lisa Kenney moved from the business world to a job running Gender Spectrum in Oakland, Calif., she started quizzing fellow executive directors about retirement plans. “It didn’t take more than a couple of questions until someone was clearly uncomfortable,” she said.

Any question to a boss could sound like a challenge. So be careful with the phrasing. Everyone in your organization wins if you have a decent, low-cost plan, including your boss. People who teach, preach and help others for a living should understand that innately.

Can’t we just get a company like Vanguard or Fidelity to set a plan up for us, the way it happens at for-profit employers?

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It isn’t so easy. One reason insurance companies are so entrenched in the 403(b) industry is that they have so many local sales representatives standing by to help employers (and collect commissions). Fidelity and Vanguard do not focus on smaller 403(b) plans as much.

The 403(b) Story

The higher education and health care sectors make up 70 percent of the assets held in 403(b) plans.

403(b) assets and market share

by sector, 2014

in billions

Higher education

Large universities, both public

and private

$399.6

(45.9%)

Health care

Large hospital systems

and organizations

$209.9

(24.1%)

Other

Includes nonprofits, churches and

other religious organizations

$137.8

(15.8%)

K-12 education

Large, mostly public, school districts

$123.7

(14.2%)

403(b) assets and market share by sector, 2014

Other

in billions

Includes

nonprofits,

churches and

other religious

organizations

Health care

K-12 education

Higher education

Large hospital

systems and

organizations

Large, mostly

public, school

districts

Large universities,

both public and private

$123.7

$399.6

$209.9

$137.8

(14.2%)

(45.9%)

(24.1%)

(15.8%)

By The New York Times

School districts often want plan providers to pay the cost of administering the programs, something Vanguard refuses to do but insurance companies are happy to take on. Some districts, counties and states, however, have managed to create low-cost plans, so it is not impossible.

Consider North Carolina. After a laborious five-year process led by Janet Cowell, the state treasurer, the state created a central 403(b) plan run by TIAA for its public schools, adding community colleges in October 2015. Total costs are 0.78 percent annually, the state said, a figure it considers competitive, considering other providers were charging upward of 2 percent.

Can I retain a financial adviser to help my employer start a plan?

Sure, but advisers do not work free. Try to pay by the hour for advice or pay the adviser later, either a flat fee per year for helping run the plan or a percentage of the money you and your colleagues have invested as an annual fee. Even with the fees, an adviser’s solutions could easily cost a lot less than an insurance company’s 403(b) plan would.

Be wary of any adviser who takes commissions of any sort from investment or insurance companies. Ask whether any adviser your organization hires will be on call for one-on-one advice, too.

Finding advisers with the right expertise isn’t easy. Start at the websites of the National Association of Personal Financial Advisors and the Garrett Planning Network. Both organizations allow you to search for people with expertise in workplace retirement and employee benefit plans.

John Sparks, who teaches Japanese and world geography in Chesterton, Ind., played a big role in persuading his school district to adopt a single plan — run through a third-party platform called Aspire — which is managed by a certified financial planner.

His school system joined forces with seven others; together, employees pay 0.49 percent of their balances annually for the adviser and other administrative fees. They have access to, among many other investment options, target-date funds that cost 0.16 to 0.18 percent of assets annually. Another $35 a participant annually goes to Aspire.

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What kind of plan will be easiest to set up and cost my employer the least?

Probably a 401(k). While 403(b) plans have been the traditional choice for nonprofits (and may be necessary for public school employees and religious leaders, because of various laws and regulations), there are no rules that keep nonprofits from adopting 401(k)’s instead. Our colleague Stacy Cowley wrote last year about a number of services that can set up a cheap, simple plan. Ron also featured some of the providers in a 2011 column, and Tara wrote about Betterment and others last year.

The truly determined can just start their own plan. Jeremy Hockenstein, the husband of a rabbi, and Rabbi Van Lanckton did this in 2012. Their Rabbis and Cantors Retirement Plan serves two purposes: It is a model for those who are unhappy with the fees and investment choices in their current plan, and it allows others to get a plan where they previously had none.

Mr. Hockenstein said the process probably took a few hundred hours over several years, but the pair have not had to spend much money on their nonprofit operation.

I’ve already got a plan, and I’m worried that it’s bad. How can I sort it out?

Start with the company that runs it. If it’s an insurance company, your plan may include annuities. Annuities have their place. But it is a rare one, inside a retirement plan that is both low cost and offers a payout that would beat a basket of simple index mutual funds over long periods of time.

Gather any documents you can. If a representative is available, start asking questions.

Here are some good ones: Can you please tell me every single fee I’m paying, regularly or irregularly? What are each mutual fund’s expenses? Are they higher than what I would pay in a normal brokerage account? If so, why? Is there a wrap fee or any other account management fee on top of the fund fees? Any mortality charges? Surrender charges? Sales charges? Loads? Distribution fees? 12-b1 fees? Shareholder service fees? What about any other fees that go to intermediaries?

If you pay a total of more than about 1 percent annually in fees — so that a $50,000 balance costs you more than $500 — then you probably could be doing better.

Document

Retirement Tips for Teachers From a Teacher

Retirement strategy advice from Mark Eichenlaub, a language arts teacher in Flossmoor, Ill.

This is confusing. Can an adviser help here, too?

Yes, though again, finding a specialist isn’t easy. Still, if you are inclined to pay for a second opinion for important things in your life, this is a pretty good place to follow through with that instinct.

“Even if you move forward, you have someone other than the Ford dealership telling you to get the Ford,” said Mark Cortazzo, a financial planner in Parsippany, N.J., who reviews annuities for clients.

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If you have like-minded colleagues, perhaps they could split the cost with you. Your boss, too, may be willing to spend a bit from your organization’s budget.

How am I going to get my school district’s administrators to add better 403(b) choices without being labeled a malcontent?

It can be done. Mr. Eichenlaub, the teacher in Illinois, knew from his investment research that many of the people who retired early did so through steady contributions to index funds. Also, the state is a fiscal basket case, which puts the long-term health of its pensions at risk.

While some school districts give teachers the runaround, many are willing to add new investment options to their 403(b) plans, though the procedures will vary. In Mr. Eichenlaub’s case, he needed to find 10 like-minded colleagues to move their money to a new provider, Fidelity. He eventually did this, in part through an education campaign on just how much money the district’s other offerings were costing them.

“This has been very stressful and very time-consuming,” he said. But he was determined to do it, in part because he knew this was a way to help others without having to ask taxpayers for additional matching funds or pension contributions.

Some public school employees may find that their district handed over the task of administering their plan to third-party administrators like Omni. In some cases, these firms may serve as gatekeepers, determining which investments employees have access to. Sometimes, they may only accept 403(b) providers that will absorb administrative fees; not surprisingly, the higher-cost purveyors are the most willing to cover them.

If you find yourself in this situation, ask the administrative firm or your school’s business administrator if it is possible to add lower-cost vendors like Aspire to the lineup. In other instances, you may have to enlist some co-workers, as Mr. Eichenlaub did.

Don’t teachers have options other than these 403(b) plans?

Maybe. In some states, including New York and California, they may be able to set money aside in a 457(b) plan, which is like a 401(k) for state and local government workers. The Los Angeles Unified School District offers one as well. Ask the business office of your school district about this and lobby for it if you cannot get access now and the plan is a good one.

Photo
Kristen Gartman Rogers, a lawyer at a nonprofit law firm in Mobile, Ala., spent years trying to fix her employer’s 403(b). Now, her boss signs a check each quarter to pay for its expenses. Credit Jeff Haller for The New York Times

What about my TIAA plan?

Many employees of private schools and universities have a 403(b) through TIAA. Often, the plans have a good lineup of reasonably priced mutual funds. Some people, however, have complained to us about the complexity and rigidity of the TIAA Traditional annuity. Be sure to ask plenty of questions about how the payout will work and how easy it will be to have access to your money once you retire.

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I’m convinced I have a problem. But what will it take to move money from my old 403(b) to my new plan?

If it’s an annuity-based plan, you may be in for trouble. Often, the contracts entitle the insurance company to charge something called a surrender fee. As a result, anyone moving money from one account to another may have to do so in dribs and drabs over many years to avoid paying some or all of the fees.

This is another area where an adviser can help smooth things over. Good ones can sometimes talk higher-ups at the insurance company into waiving some or all of the fees.

Shouldn’t there be a law against putting low-paid, public-minded workers like me through all of this? What gives?

Kristen Gartman Rogers, a lawyer at a nonprofit law firm in Mobile, Ala., spent years trying to fix her employer’s 403(b). Now, her boss signs a check each quarter to pay for its expenses, which has the tendency to focus attention on such things.

But to her mind, it just shouldn’t be that hard. Her proposal? Something like the truth-in-lending statement a borrower gets when taking out a mortgage. Homeowners have had access to such statements for years, and we all ought to demand the very same disclosure from the companies that manage our retirement accounts, whether there’s a law or not.

More in the Public Sacrifice Series

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Article source: http://www.nytimes.com/2016/11/05/your-money/403-b-retirement-plan-tips.html?partner=rss&emc=rss

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