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.”
At present Dauenhauer has an office in his home, and uses an executive suite service to handle his mail and receptionist duties and to provide him with access to a professional conference room. By the time this magazine goes to print, however, he will have just moved into an office of his own. The more clients he attracted, the more frequently he needed the executive suite service’s conference room; since he was paying by the hour, it finally got to the point where it was cheaper for him to rent a full-time office than to pay piecemeal for the conference room. An added perk of the full-time office will be the high-speed Internet access that he can use while the client is present. “One of the financial planning programs I now use is Money Guide Pro [www.moneyguidepro.com], which is purely an online program, so this will allow me to make changes right in front of the client, and we can work together a little better,” he says.
Dauenhauer says he’ll miss working from home, but he thinks the move is for the best. A CPA with an office near his new location plans to begin referring him more clients once he moves into the new office, and he says the mere existence of a full-time office will also put some of his higher-net-worth clients’ minds at ease. “Some of my clients, particularly the ones I’m providing asset management services for, had expressed to me that they wanted me to have a full-time office, and I can understand that,” he says. “When it’s their retirement money, they want to make sure the firm is stable, not some phantom person who’s going to disappear. This makes them feel more comfortable.”
Interestingly, the same people who care whether or not Dauenhauer has an official office are entirely unfazed by the fact that the guy managing their retirement funds is, at least in a fair number of cases, less than half their age. “I have people in their 50s and 60s who have absolutely no problem with my youth. They just act like they don’t care,” he says. “Every so often you get [a prospective client] who can’t get over it, but usually they’re okay,” especially after he details his credentials, pointing out that he has been in financial services for seven years (including stints at Merrill Lynch, Salomon Smith Barney, and Morgan Stanley), is halfway through his master’s in financial planning, and is on the board of the Financial Planning Association. “Heck, the MVP of the World Series was 24 years old,” he says cheerfully. “Just because we’re young doesn’t mean we’re inexperienced or we’re not good at what we do.”
Whether they’re interested in hourly or retainer-fee arrangements, people who are interested in becoming clients of Dauenhauer’s firm begin with what he calls a “discovery call”–a 10- to 15-minute phone call in which he describes his services and the prospect explains what they’re looking for. If both parties choose to proceed, Dauenhauer faxes or e-mails the client a questionnaire to fill out prior to the first meeting. “I’m now using the ProQuest risk profiling questionnaire, but previously, I was dead set against risk tolerance questionnaires,” he notes. “You’re asked a bunch of dumb questions, and then you get this little score, and then based on that score, they pop you into a portfolio. But that doesn’t make any sense, because it has nothing to do with what their goal for that money actually is.” In Dauenhauer’s view, a planner should define the client’s goal, determine what money is dedicated to that goal, and then figure out what rate of return is needed to reach that goal. “If you look at everything and you find out this guy needs only 3% a year in order to do everything he wants in life, why would you put him in a higher-risk portfolio?” he says.
When the client arrives for the first face-to-face meeting, Dauenhauer goes over the questionnaire with the client and refines his understanding of their goals. An up-front deposit is required at the meeting “to make sure they’re vested in the process,” he says. “If they pay me $500 as a down payment on their plan, they’re a lot more apt to get back to me” with any financial information needed to complete their plan.
Over the course of the next several weeks, they meet again to go over the Dauenhauer’s recommendations, fill out paperwork, and confer about implementing the recommendations. “Some people want to do the implementation themselves to save money, and that’s fine with me,” he says. In other cases, the clients will give him their account numbers and passwords, and ask him to make the investment changes. Either way, however, Dauenhauer likes to make sure that the implementation part of the process actually gets done. If clients need to make changes to their 403(b), for example, he collects all the paperwork and has it ready for them to sign; if they need to make changes to their insurance, he makes a few phone calls to make sure that the insurance agent he recommended is following through. “I try very hard to make sure that I don’t just give them a plan and then send them off to do it themselves,” he says. “I want to make sure that the things we talk about actually get done.”
Critics of by-the-hour financial planning argue that an hourly rate encourages clock-watching and increases the likelihood that, in their hurry, clients will leave out details that are vital to the planning process. But Dauenhauer hasn’t found it to be a problem. In fact, he says, the hourly structure actually makes for a more productive meeting, not less. “They do watch their watches, but what I find is that they actually come to the meeting much more prepared,” he says. “Instead of just scheduling the meeting and then showing up with a folder full of statements, many times they’ll even have an agenda ready of things they want to talk about. So we don’t waste any time; we get right to the issues that they are concerned about.” Dauenhauer notes that it’s also important to have a strong questionnaire, so that he can have potential trouble spots in mind before the meeting even starts.
When he’s not working on clients’ financial affairs, chances are you’ll find Dauenhauer writing. There’s his client newsletter, plus his Web site–www.403bretire.com–and a separate print newsletter for teachers called The Teacher’s Advocate. At present the two newsletters appear monthly, but Dauenhauer plans to scale them back soon to a quarterly schedule to lighten his load and assure their prompt publication.
Dauenhauer’s book, The 403(b) Wise Guide, which he wrote with coauthor Dan Otter, was published by the authors a few months ago, and the two plan to begin work soon on a second book, The 457 Wise Guide. Dauenhauer and Otter initially printed 2,500 copies of The 403(b) Wise Guide but have sold out, so two more printings are in the works. “We have a company that wants 5,000 books, and then we’ll do another printing so we can start fulfilling orders again from our Web site and through different employee benefits catalogs,” he says. (The 403(b) Wise Guide is available at www.403bwise.com/ wiseguide/buyguide.html, or through the Investment Advisor bookstore at www.investmentadvisor.com.)
Dauenhauer says he’s indebted to his co-author, who is a teacher and a former journalism major, for keeping the book to a reasonable length. “If I’d written it by myself, the thing would have been 250 pages long, because I write with a ton of detail,” he says. “Fortunately Dan knows how to take the concepts and boil them down, so we were able to keep the book under 100 pages. It’s great, because a teacher can literally pick it up and read it in 45 minutes.”
While it’s true teachers don’t win the “Most Sought-After Client” award from most planners, Dauenhauer enjoys having them as the focus of his firm. Teachers often have complicated retirement issues that can be greatly helped by professional advice, they’re usually too busy to handle it themselves, and they’re generally very appreciative and trusting once they’ve become clients, he says. Besides, the clients he’s serving will soon be responsible for the education of his now-one-year-old son; while he can’t prevent them from being distracted by debates over phonics, Ritalin, and bilingual education, at least he can make sure they’re not worrying about their 403(b)s.
Assistant Managing Editor Karen Hansen Weese can be reached at email@example.com.