Savings Plans Shortchange Public-School Teachers

The effort by providers is paying off — for them. According to a 2016 report by Aon, a human-resources consulting firm, 76% of assets in 403(b) plans are in annuities, and more than half of those are in variable annuities that charge more than 2% a year on amounts invested. It’s an egregious amount, and it compares unfavorably with many mutual funds and exchange-traded funds with fees that are approaching zero or already are there.

Fixed annuities may be even worse. They typically promise a modest rate of return, assuming the provider stays in business, of course. The provider then invests the money, generates a higher rate of return over time than the pittance promised to the annuity holder, and pockets the difference. In some cases, that difference dwarfs the fees annuity holders would pay for other products. Sure, they receive a “guaranteed” rate of return, but the cost is almost certainly too high.

And once providers have teachers in their products, they do everything possible to keep them from fleeing to friendlier locales. Many annuities impose multiyear lockups. Teachers who want to move their money face penalties that can be as high as 5% to 7% of their investment.

All those fees and forgone returns add up to a fortune over time. Consider that savings of $5,000 a year earning 7% for 40 years would grow to roughly $1 million. Subtract fees of 2% a year, however, and that nest egg would be cut almost in half.

As Tony Isola, a teacher-turned-financial adviser and advocate for 403(b) reform, often points out, there is a simple way to discourage Wall Street from preying on teachers: Apply ERISA to 403(b) plans. Requiring providers to look after teachers’ best interests would mean they could no longer sell them investment products that are nakedly inferior to those in 401(k) plans. Yes, it would also impose costs on schools like those incurred by private-sector employers, but those costs would be a fraction of the fees paid by teachers in 403(b) plans.

It won’t be easy, of course. Providers are often big insurers such as Valic, Voya, AXA and Lincoln Financial, with lots of resources to repel challenges to their 403(b) business. But there isn’t a surer or more obvious way to secure a better future for public-school teachers.

—For more Bloomberg Opinion columns, visit http://www.bloomberg.com/opinion.

Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and as a consultant at Ernst & Young.