Teachers desperately need unbiased financial guidance. However, that guidance is in short supply, especially for public schoolteachers.
More than ever, their security blanket of guaranteed pension income needs to be supplemented by defined contribution plans like 403(b)s. The underfunded condition of many states' pension plans adds urgency to this issue.
Numerous school employees do not contribute to their 403(b)s due to a confusing and conflicted enrollment process. In addition, teachers are often given advice by professional salespeople, whose job is to sell product, making their recommendations far from objective.
Further handicapping teachers is their own ignorance as to how inflation will ravage their fixed pension, and the ensuing dangers of relying heavily on a pension as the sole source of retirement income. Without owning assets that can grow over time, teachers run the risk of having to scale back their lifestyle in retirement.
Low participation rates, the need for good advice and strong job security among teachers present an enormous opportunity for the right financial adviser looking to provide retirement guidance.
Advisers who truly want to help must be aware of what is not needed:
• Financial salespeople hanging out in the school cafeteria to solicit business, as happens currently;
• The placement of high-fee, tax-deferred annuities in already tax-deferred 403(b) retirement accounts. The "this is better than not saving at all" argument expired decades ago, when mutual funds became available in these plans; and
• Former students, teachers and the children of current administrators who work for investment companies and use their "contact" lists to solicit business from school employees. Often, these individuals know little about financial planning and are being used to steer assets into high-fee products.
Teachers need fiduciary-based advice because most 403(b) plans are not protected by the Employee Retirement Income Security Act of 1974, a law that governs other retirement plans such as 401(k)s.
For example, employers sponsoring a 401(k) plan must educate participants on their investment choices, offer a variety of appropriate investments and screen the investment fees to ensure they are reasonable.
Teachers without ERISA protections are not given this consideration and need individual assistance navigating the confusing bundle of investment choices they are offered. Good advisers can help with this.
However, this is not an easy market. Many teachers have little saved. They need time to build accounts that will become profitable to advisers. Getting into schools is a difficult chore. It requires persistence. The pension system has diluted the urgency for teachers to save for retirement.
Many school administrators, overwhelmed by the complexities of these plans and uncomfortable with the conflicting sources of information, adopt a laissez-faire attitude toward teacher participation. They excuse themselves from involvement, when education is what is needed. Using third-party sources — for example, advocate sites such as 403bwise.com — can be an important first step in inspiring teachers to become vocal and spread the word among colleagues.
If you want to work effectively with 403(b) plan participants, you need to understand the parameters that constrain you. As a start:
• Look at the investment options in the school districts you want to work with. Are there any good ones? If so, set about meeting with teachers following a faculty meeting so that you can reach a larger audience. Be prepared to educate teachers about the importance of using the 403(b) in conjunction with pension income to create a solid retirement plan.
• If the options in a district aren't good, find out who the third-party administrator is. The TPA controls the vendors permitted to offer investments to plan participants.
• Even schools that use the same TPA can have different offerings. If there is a good option in one school district, chances are good you can add that option to another district's plan with the same TPA.
• Inform teachers they can get other vendors added to their investment list, particularly if the TPA works with these vendors in other districts. If teachers are unhappy with their investment options they can request other options be added. High fees are certainly a legitimate gripe that can be raised; if teachers inform others and speak up, change is usually not too far behind.
The main criterion for lasting success in this marketplace is a desire to help educate teachers individually. To build good will and establish credibility, use your expertise to offer educational programs on financial literacy and college planning for students, parents and faculty. Do this, and work with TPAs and districts to improve the offerings in these plans, and you will earn the respect — and business — of many educators.
Anthony Isola is head of the 403(b) group at Ritholtz Wealth Management.