Quick, get out your No. 2 pencil: What are three great reasons to be a teacher? (No, not “June, July, and August.”) For most teachers, despite the mountains of tests to grade, the chalk dust as a constant clothing accessory, and that freckled kid who just threw up on his spelling book again, there are many good reasons–but you can bet “fabulous 403(b) plan options” won’t top the list.
Why? Because, for the most part, their plan options stink, says planner Scott Dauenhauer, of Meridian Wealth Management in Irvine, California. Most of the investment choices in teachers’ 403(b) plans are annuity-oriented, which can frequently sport hefty costs, long surrender periods, and surrender charges as high as 15%. The cost structures are nearly impossible to decipher, and busy teachers rarely realize that buying a tax-deferred annuity product inside a tax-deferred retirement plan is like wearing scuba gear inside a submarine: You don’t need both layers to get the full effect, and the extra layer just means added expense.
Worse yet, says Dauenhauer, there are too many choices, at least in California, thanks to an old law stating that anyone who wants to offer a 403(b) plan can do so as long as they sign an agreement with the school district. Thus, when a teacher calls up the payroll department and asks to sign up for the plan, they receive a lengthy list of dozens of “approved vendors”–the vendors’ names, that is, but no company information, no addresses, not even phone numbers. When Dauenhauer’s wife, a junior high school science teacher, wanted to sign up in the Orange County School District, there were 22 vendors on the list; the Los Angeles Unified School District has a bewildering 140 vendors, according to 403bwise.com. And “even if there were no-load companies on the list, the teachers wouldn’t have any way to find out which ones they were,” says Dauenhauer. “They just get this list and the payroll office says, ‘Okay, go for it!’ They’re feeding them to the sharks.”
And the sharks are having a field day, particularly when they can earn big commissions. One teacher Dauenhauer worked with had been sold an equity-indexed annuity that would have returned less than 4% a year, and would have required a 15% surrender charge if she took her money out any time within the next 15 years. “I see a lot of equity-indexed annuities being sold, and I don’t think they’re good for anybody,” he says. “The insurance company has way too much control over the return of the product, and they make them extremely complicated so that it’s hard to know how each product will work.”
You won’t find Dauenhauer railing indiscriminately against all annuities, however. “If it’s a low-cost, no-load annuity, doesn’t have surrender charges, and has decent managers, I don’t really have a problem with it, at least in qualified accounts. TIAA-CREF and Vanguard have good annuity products,” he says. “The problem is when you start adding all these bells and whistles and baloney that some of the insurance companies are pushing. And that’s what I see being sold.”
Given the confusion and lack of reliable financial guidance available to teachers, Dauenhauer decided to make it the mission of his firm to help teachers navigate the shark-filled waters of 403(b) and retirement planning, providing fee-only advice to educators on an hourly basis. He takes his mission seriously: He has lobbied to get no-load, low-cost investment options on school districts’ lists of approved investments, writes articles on the topic for the Orange County Register, and recently self-published a book he cowrote with teacher and 403(b) activist Dan Otter, called The 403(b) Wise Guide. In addition, he runs a Web site called www.403bretire.com, publishes a newsletter especially for teachers, and helped to craft legislation in California that in its original form would have replaced districts’ lengthy lists of “approved providers” with a single plan provider that wins the position through competitive bidding. (The eventual law didn’t go that far, though it did create a database of providers listing their expenses and surrender charges to help teachers in the selection process.) Not too shabby a resume for a guy who’s only 27 years old.
Reading, Writing, and Lots of Arithmetic
Dauenhauer concedes that some teachers will be able to rely entirely on their pensions in retirement, which reduces the need for advice on 403(b) plans. But, as with so many issues in financial planning, it depends. How many years has the teacher been teaching? How old will the teacher be at retirement? Is there a spouse who is receiving other retirement income? What kind of retirement lifestyle does the teacher have in mind? “The pension will take care of some teachers, but I think a lot of them have a false sense of security about their pension plans,” he says. “They think that it will take care of them no matter what, and don’t consider contributing to a 403(b) or 457 or IRA plan.”
To determine whether a teacher can rely solely on his teacher’s pension at retirement, Dauenhauer helps calculate the amount of pension benefits the teacher would receive by retiring in various years. “We’ll estimate what would happen if you retired at age 55 versus age 60 versus age 62, and look at what bonuses you would qualify for in California if you worked longer,” he says. In California, he points out, teachers get different bonuses for working 30 years, 31 years, or 32 years or more. To add to the confusion, the California state retirement system’s inflation benefits change depending on a variety of factors. “It makes for some weird calculations, and most financial planners don’t really understand it. Not that they couldn’t, but they don’t really want to take the time,” he says. “Reading the whole state pension handbook is not exactly riveting reading,” he adds with a laugh.
For clients who need a 403(b) to supplement their pension, Dauenhauer evaluates the plan they’re currently contributing to (if any), and, if it fails to measure up, recommends another vehicle from their district’s approved list. Since many of his clients teach in the Orange County School District, it’s often simply a matter of having the teachers switch into one of the low-cost 403(b) options that he lobbied to have put on the list in the first place. And if this makes your conflict-of-interest antennae start waving wildly, you can relax: “I just get paid for the time that I spend with them,” he says. Dauenhauer charges $150 per hour for all clients except teachers, who receive a slightly lower rate of $125 per hour. “It’s just my way of thanking them for the work they do for the community–work that is often under-appreciated and underpaid,” he says. Another pension supplement option for teachers is the 457 plan, which has become significantly more attractive since the advent of the Economic Growth and Tax Relief Reconciliation Act of 2001, says Dauenhauer. Starting this year, teachers (and other state and local employees) can contribute to both a 403(b) and a 457 savings plan up to the plans’ limits. “You could literally contribute $11,000 to a 403(b), and an additional $11,000 to a 457 plan,” says Dauenhauer (see “Teachers and the EGTRRA” sidebar, right). What’s more, “there’s no law saying that you have to offer multiple 457 plans, so districts are bidding it out and, in many cases, getting one really good plan with low costs.”
I’m Telling the Teacher!
Getting the word out to teachers about his hourly, fee-only financial advice would seem an easy task: Just troll the teachers’ lounge and haunt the hallways for a few days, and he’d have a whole list of names, right? Not quite. “The districts do a very good job of keeping people out because of the problems they’ve had with salespeople sitting in the lunchroom or going door to door, bothering teachers while they’re trying to work,” says Dauenhauer. “You can certainly see their point, but one of the biggest challenges of working with teachers is just getting access to them.”
The fact that his wife is a teacher has provided some leads, as have the articles he’s written in the Orange County Register and for his Web site. A number of referrals have also come from accountants, attorneys, and other teachers who are clients, and he receives a few leads a month from the NAPFA referral service (although with several other NAPFA members in his area, there is competition). He also makes an effort to attend functions that involve teachers.
As for workshops, the expense of one giant “dinner-and-a-workshop” for 100 people was enough to make him rethink his strategy; since then, he’s hosted smaller workshops and provided only dessert. “If it had been for high-net-worth clients, or if I were a commission planner and had a wholesaler paying for it, that would have been different,” he says. “But the big-dinner thing doesn’t lend itself well to an hourly, fee-only practice for middle-income clients. It was fairly expensive for the return it provided.”
Dauenhauer also receives “great exposure” through his association with the Garrett Planning Network (www.garrettplanningnetwork.com), a nationwide network of planners founded by planner Sheryl Garrett that provides fee-only financial advice on an hourly, as-needed basis to middle-income clients. He became a member soon after founding his firm. Besides the publicity, “I think the greatest benefit of being associated with GPN is that nobody feels alone,” he says, noting that its hourly planners particularly appreciate feeling connected because they are still few and far between. He’s also taken advantage of the network’s access to discounts on certain software, a frequently-updated Intranet, and a hefty collection of sample documents and questionnaires. “I don’t use all of their materials,” he says, “but I have incorporated a number of things into my business, specifically many of the forms [network founder] Sheryl Garrett put together.”