While significant progress is being made to improve 401k plans and even some 403b plans under ERISA, teachers’ retirement plans are getting a failing grade at public schools. In what is called “non-ERISA” 403b plans are getting a raw deal according to a recent NYTimes article. In fact, Aon estimates that teachers could be losing $10 billion annually in excessive fees.
So what’s causing the problem? Of the almost $900 billion in 403b plans, half are in non-ERISA plans not subject to the protection and oversight enjoyed by 401k plans or ERISA 403b plans used by colleges, hospitals, private schools and other not-for-profits. Along with multiple providers (harder to oversee) there are a myriad of funds making it difficult for teachers to choose. In most cases it requires the help of advisors, many charging excessive fees. One market research group estimates that school plans pay twice as much as ERISA plans like 401ks, not including advisor fees.
Along with lack of fiduciary protection and oversight by plan sponsors, most record keepers and especially advisors focused on this market are not competitive. Most experienced defined contribution (DC) advisors eschew the public school market due to the multi-vendor systems where multiple advisors are allowed to work with teachers making it harder for the plan sponsors to vet them.
The new DOL conflict of interest rule will not help as it will not apply to most school plans nor will Social Security for teachers in 12 states.
The problem is in search of a solution with some school districts moving to a single vendor and single advisor system helped by a change in the law in 2009. But with billions of dollars at stake, providers and advisors who struggle to compete in the 401k or ERISA 403b, and their high priced lobbyists, will make the transition more difficult and time consuming all the while crippling retirement for teachers.