How Retirement Plans Shortchange Public-School Teachers

It’s no secret that public-school teachers are paid too little, or that the problem won’t be remedied overnight. But there is something the U.S. can do right now to give teachers a more prosperous future, and the cost to taxpayers would be trivial.

I’m referring to teachers’ retirement savings plans, or 403(b)s. Like 401(k)s for private-sector employees, the plans let teachers defer taxes on money they save for retirement. But, the similarity ends there.

Unlike 401(k)s, retirement plans for public-school teachers are generally exempt from the Employee Retirement Income Security Act. ERISA is a federal law that imposes a fiduciary duty on anyone with authority over a 401(k), such as a trustee, administrator or investment adviser. That means they must put the interests of the plan’s participants ahead of their own. In other words, they can’t fill plans with products that are great for their bottom lines but detrimental to participants.

Another important difference is that retirement plan providers sell 401(k)s to employers, but they sell 403(b)s directly to teachers. That’s an important distinction because employers have the resources to properly vet the vendors and their investment offerings. And they can leverage the collective savings of employees to negotiate lower fees. Individual teachers have none of those advantages.

Also, 401(k) participants are responsible for choosing among a plan’s limited range of investment options, which is challenge enough for many workers. Now imagine having to navigate a sea of vendors, each with its own lineup of funds, impenetrable insurance products and complex disclosures. It’s a near-impossible task for any lay investor.

Continue reading “How Retirement Plans Shortchange Public-School Teachers”