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.

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Target-Date Funds Aren’t the Retirement Bull’s-Eye

The Vanguard Group published recently its “How America Saves 2018” report, a trove of data on more than 4.9 million retirement savers in 401(k)s, 403(b)s and other defined-contribution plans.

My colleague Barry Ritholtz has already noted many of the highlights, but one detail deserves more exploration: Target-date funds are taking over retirement accounts.

The numbers are astonishing. Roughly half of retirement savers invested their entire account in a single target-date fund in 2017. None did so as recently as 2004. Vanguard estimates that number will grow to 70 percent by 2022.

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