Defined contribution plans for public school teachers are notoriously poor retirement plans, often described as a Wild West of sorts that's plagued by minimal plan oversight, subpar investment options, and fund and insurance brokers who are free to walk into schools and sell products to teachers.
While there are many challenges involved in improving such plans, one of the road blocks is, perhaps surprisingly, the teachers and the unions that represent them, said retirement plan advisers who work in this market.
"I'll put it this way: they haven't helped," Scott Dauenhauer, principal and owner of Meridian Wealth Management, said of unions. "They haven't been a source of advocacy on behalf of teachers, which is ironic because that's their sole job."
Mr. Dauenhauer is an adviser who specializes in retirement plans that aren't covered by the Employee Retirement Income Security Act of 1974, a federal retirement law that codifies certain protections for plan participants.
Public school teachers in kindergarten through 12th grade have workplace retirement plans known as 403(b) plans that, unlike their 401(k) counterparts, fall into the non-ERISA camp. Non-ERISA 403(b) plans hold roughly 57% of the $900 billion in 403(b) assets.
Partly because of this non-ERISA status and the way 403(b) plans, which pre-date ERISA by roughly two decades, have evolved, they're often structured differently than 401(k) plans. Many have multiple, sometimes dozens, of providers and hundreds of investment options, often a mix of fixed and variable annuities as well as mutual funds.
Public K-12 403(b) plans are frequently set up with little employer involvement, and teachers enter into individual, rather than group, contracts with providers, creating a lack of economies of scale that partly contributes to some of the high fees experienced by these plans.
While 403(b) plans for public K-12 school teachers aren't the only non-ERISA plans, advisers and industry practitioners say other types of non-ERISA plans don't experience the same issues on a widespread scale.
Even if school districts try reforming their DC plans, employees and unions sometimes act as impediments.
'SHOOTING THEMSELVES IN THE FOOT'
"In this case, [teachers] are shooting themselves in the foot, over and over and over again. And really big employers, really big school districts, have tried to tackle this and literally gotten defeated by their unions," Joshua Schwartz, the president of Retirement Plan Advisors, said.
Mr. Schwartz, who describes himself as a progressive Democrat and pro-union, said he experienced such a situation firsthand more than five years ago, when the Chicago Board of Education attempted to consolidate its plan from six record keepers to no more than two.
Employee groups sometimes balk at reducing investment choice when school districts attempt to make changes, given the history of such retirement plans placing importance on an abundance of choice, Mr. Schwartz said.
There may also be a degree of distrust between school boards and teachers that freezes progress, he added.
For one, unions sometimes think devoting any resources to improving the district's DC plan shows their endorsement of this type of plan over a traditional pension plan, and "that's a big no-no in the union space," Mr. Dauenhauer said.
"Unions are more interested in protecting the pension and medical benefits, so they don't really concentrate their energy on this," said Tony Isola, a former teacher and adviser at Ritholtz Wealth Management specializing in non-ERISA plans. But it's hard to generalize for all unions, he said.
He called this approach "short-sighted," though, given the underfunded status of many public pension plans across the country and the need for teachers to have strong supplemental savings plans.
Some unions distributing their own retirement products may also have financial incentives to keep their current plans intact, advisers said.
They pointed, for example, to the National Education Association, the largest labor union in the U.S., which represents roughly 3 million public school teachers and other school faculty members.
One of the union's wholly owned subsidiaries, Member Benefits Corp., has an exclusive service agreement with Security Benefit Corp. and its affiliates, whereby Security Benefit pays several million dollars in annual fees to Member Benefits in connection with distribution and marketing of the NEA Retirement Program.
Investment products in the program consist of three fixed annuities and a variable annuity issued by Security Benefit Life Insurance Co. There are also two mutual fund retirement plans and a self-directed mutual fund program, securities of which are distributed by Security Distributors, a brokerage subsidiary of Security Benefit Corp.
Members Benefits markets the program mainly to local school systems and districts and NEA-chartered state and local education associations, according to a Form ADV the company filed with the Securities and Exchange Commission in December.
In 2015-16, Security Benefit paid an annual base fee of $2.84 million, according to the filing. That fee can increase between 5% and 10% per year if Member Benefits "achieves some or all of mutually agreed upon market-opening and program promotion goals," the document said.
Members Benefits also paid roughly $127,000 to certain NEA-chartered state education associations last year for assistance in marketing the NEA Retirement Program, according to the SEC document.
"If they spend time reforming their 403(b), they'll essentially reduce the amount of money they can make from the 403(b)," Mr. Dauenhauer said.
NEA Member Benefits didn't return a request for comment by press time.
In 2006, ING Life Insurance and Annuity Co. paid $30 million to settle allegations brought by Eliot Spitzer, then the New York attorney general, regarding a 403(b) product exclusively endorsed by an arm of the New York State United Teachers union.
An arm of the union, NYSUT Member Benefits, paid $100,000 and made a series of reforms to its 403(b) program in connection with the investigation.
But there aren't too many unions that enter into these sorts of financial relationships, and some unions "do a pretty decent job" at setting up retirement programs, Mr. Dauenhauer said.
He pointed to the Wisconsin Education Association, whose 403(b) plan looks much like a 401(k), with roughly 20 mutual funds, including a sleeve of target-date funds, and a fixed account.
Union pushback, in Mr. Dauenhauer's experience, isn't the primary road block to change, though – rather, the de-centralized structure of these 403(b) plans allows several different brokers and insurance agents to interface with teachers and union members to undercut an adviser's messaging.
That's why Mr. Schwartz will only work with a school district that limits its active providers to less than three. Many more than that and the situation becomes "untenable," he said.