Just in case you missed the audio version of this blog with yours truly, here 'tis!
There was an important article in the Wall Street Journal, that I wanted to write about for today’s blog.
Why should it matter to you?
The information should matter because it might affect you. I’d like to give you enough information so that you can make some choices.
Here is the title of the article, so that you may read it for yourself:
New York State Officials Open Probe on 403b Sales to Teachers, Officials Concerned About Annuity Fees and Disclosures to Teachers.
Last week, a top financial services watchdog sent letters to major insurers seeking details on how they market retirement income products to teachers.
That means a probe of industry practices is being launched.
They are seeking to determine whether life insurers (and agents) are taking advantage of teachers.
How might they take advantage of teachers?
By selling you inappropriate (and high cost) investments in 403b retirement savings programs.
The insurers have three weeks to respond, and we don’t know which insurance agencies received the letters.
New York has one of the biggest insurance regulations departments. Since they’re taking the lead investigating the practices, we're really hoping that other agencies follow suit.
They are questioning whether teachers are being properly informed about the cost of the products (and the advantages and disadvantages).
The insurers hire former teachers as salespeople. That means that school district employees may have a higher degree of trust in them.
Why was One Million Apples created?
These 403b retirement savings programs do provide a tax advantage way for teachers and some other professions to put aside money for the future (they’re a variation of the 401k program).
In 2019, they allow workers to contribute up to $19,000 a year ($25,000 if you are 50 or older), to tax-advantaged investment accounts.
The deal is that consumer advocates have been concerned that insurers are pushing the sales of annuities.
That means a high cost to teachers in 403b plans.
We are one of those people who have criticized some of these practices.
That is one reason why One Million Apples was created.
Are 403b marketing practices unfair and deceptive?
Did you know that many annuities are a combination of insurance and investment products that typically offer the opportunity for a pension-like lifetime income stream?
Teachers can choose to invest their money in stock funds to compound while other annuities offer bond based returns (moderate returns).
How are the salespeople reaching out to the teachers for marketing and sales? What are the fees earned by insurers? How much does an agent earn on commission?
Sales agents go to the schools to make pitches (annuities/investments)
Meetings happen in teacher’s lounges and classrooms (after hours)
Are you sitting down?
In 2019, the plans hold about a trillion dollars in assets.
Unfortunately, the 403bs for teachers in the public school settings don’t have the same protections that 401k plans do.
There is a legal obligation for 401k plan providers to screen investments. However, public school districts don’t have the same legal obligations when it comes to 403bs.
The Basic Points
Let’s talk about the fees:
403b annuities can charge 3% per year
401k annuities have fees of less than 1% (over a 25-year career)
The extra 2% in fees can make a huge difference to someone who is investing $100,000 and earning 6% a year!
Who does the representative come from?
There are two topics we could discuss:
However, our focus will be on insurance companies, because that is what the article is focusing on.
The representatives (aka financial advisors) are the ones that meet with you. They’ll tell you about the products and how they’ll help you with your financial goals.
Two things to keep in mind:
They don't always work directly for the insurance company.
They may have their own company (with a different name).
The insurance companies pay these representatives in several different ways. The most common is a commission.
Has a representative ever told you that the insurance company pays them?
That's because the money will come out of your account through fees, commissions, incentives, and bonuses.
What carrot does the insurance company dangle in front of the representative to incentivize their sales performance?
The carrot is bonus money, vacations, and even health insurance.
Are the representatives legitimate?
There are some representatives who will say they are sponsored by school districts or some other similar verbiage.
What does this actually mean?
This only means that the insurance company that they represent is on the approved vendor list.
There is a very subtle distinction here...
This does not mean that the representative (the person that is sitting across from you) was approved by anybody in a school district or the union.
It doesn't mean the representative was sponsored by anyone.
It doesn't mean the representative was vetted by anyone.
Their credentials may have never been checked, or their credentials may not even exist!
Because there isn't really a vetting process or strict guidelines for the “representatives” that are actually sitting across from you.
Where shall we meet?
According to the article, there's a concern about where these financial meetings are being held
The representatives come to campuses, and the meetings are held in lunchrooms, classrooms, and teacher lounges.
The location does not imply that your rates or fees on these accounts, or products have been discounted or lowered.
Did you see their company name or information on an email from the district?
That does not mean that you’ll get any benefit or discount.
Who is the representative?
Did you know that you are basically in the wild west when it comes to product sales?
There is a concern about how the products are being delivered to you, and somebody needs to be responsible.
The companies recruit current and past educators to be representatives. They know that there will already be a certain level of rapport and trust between you due to your similar values and experiences.
They also buy your information from lead lists, and they approach you with a pension review. Only it’s not just a review, that is the lead-in to account and product pitches.
These tactics came from somewhere, perhaps taught by the insurance companies, or learned from other representatives.
I’m not knocking an educator who becomes a representative for a job or a side hustle. The truth is everyone loves a good side hustle. However, we need to be aware that there is a reason your colleagues are being recruited for this particular gig!
Fees and the Bottom Line.
Are you paying additional fees?
The article points out that paying the additional fees will cost you. Those fees will affect your portfolio over the long run.
I have personal experience to share with that. For an hourly fee, we helped an educator out of an expensive product.
We've helped move this person into an account that will now save her a minimum of $27,000 in fees over her savings years.
There are people listening who may question whether she’ll get some guidance and help with the account, so here is what she is getting:
A bare-bones investment account that will do exactly what she needs it to do.
That prior product she was involved in? It came with zero services, and yet was costing her a lot of money. Nobody ever contacted this educator after she signed up.
However, the company was getting a cut. They were getting money via a commission every time she put money into the account.
Compare that to now, when she can hold on to the fees, and seek out advice when she needs it.
I'm not mad at someone for getting paid for a service they provide, but If you're not getting that service, you're not getting what you paid for.
If you want an investment account, and you only need a small amount of help, then find a cheaper account. There is no need to pay high fees to accomplish that goal.
Do you want to know if a person or company is working in your best interest?
Then make sure they aren’t working for incentives.
Let’s look at a scenario:
You sign up for a product (or account)
You are regularly making deposits
They make no contact for a year
It’s time that you reevaluate that service. In the state of California, regulators make sure that financial advisors can show what services we are providing, for the fees that we charge.
It's about time that the people coming on your campus have to do the same, we need to demand better vetting for your protection!
OK, quick check in!
How did you like this blog? If you've found it helpful and enlightening, please share your thoughts in the One Million Apples Facebook Community!
Or... if you find yourself in need of someone who can help you navigate your way through your financial plan, check me out at Wealth of Confidence!
I'd love to help you.