Should teachers invest in 403B plans? Maybe…

Conman

Maybe you are investing in your 403B plan at the same time you are financing a retirement plan for a financial adviser.

If you are a teacher or have a teacher in your family you may know that in most cases these folks with nerves of steel have very few options to make their working time worth more; in other words, it’s not easy to get raises. The only raises teachers get are either based on years of service or additional credit hours of professional development.

Many people may read this and wish for a political debate; not my intention with this post.

However, if one thing is true is that teachers’ opportunities to grow their wealth are limited. And the reason is two folded. On one hand, you have to either spend years of service in the trenches or take more coursework that requires an upfront investment.

Another option that is available to teachers and other public institutions is a 403B plan. A tax-deferred account that allows you to save money. The way it works is you let your employer know how much money you want to be taken out of your paycheck and your money, free of taxes, gets put in a special account with an investing company. Once the account is set and the money is transferred you can invest it in the stock market. You will not be able to touch this money until you are 59.5 years of age, and with the magic of compound interest you will have a decent a mount of cash to supplement your pension or retirement fund.

With that last word I probably lost YOU because many people think of “the market” and Wall Street as some sort of hocus pocus. A too complicated form of money investing for the common Jane or Joe. I get it. That’s what I always thought myself. Moreover, if you lived through the 2008 crash you are probably thinking of potential massive cash losses.

But with all and the market crashes, nothing could be farther from the true. All it takes is a bit of casual reading and few podcasts to get your mind set on track.

Most importantly, don’t make the same mistake I made. Let me tell you my 403B story. Well, not a pleasant one but definitely one that I learned a lot from and should help you avoid some of the pitfalls of investing as an educator .

When I first started working in the public school system I became acquainted with the P.E. teacher of my building. He was about 4 years away from retirement. He was animate about getting me to open a 403B account through my district. I had no idea what it was or how it worked. Coming from a different country, that was something totally out of sight for me. In my mind I had no business trying to invest in the U.S. stock market.

Somehow though, I ended up throwing $40 into it each month with Fidelity. I figured it couldn’t hurt. My P.E. friend told me where to put the money. I did and forgot about it.

A few years later, I remembered about it and went to check how much money was there. Wow! To my surprise, there were $6k+. Not that it was a huge amount of money, but it was a decent amount of cash for someone who was living from paycheck to paycheck.

At the time, when I was working with Fidelity I had no clue about what to do, where to invest or whatever pertain to investing. I did have the desire though of continuing seeing my money grow.

Sure enough, someone I knew from work happened to also work for an investment company. More importantly, it was part of the School District’s 403 plan providers list. He explained to me that the great thing about working with him was that he was also a financial adviser, which could certainly help me finding the right allocation for my money and bring the best yields. What can be wrong with that right? He also let me know that there was a fee of up to 2.5%. Nothing wrong with that I figured. At the time, I was paying 3.6% with my home mortgage; in my mind, I was getting a deal!

You can’t know what you don’t know, right?

I worked for about 3 years with this individual and his company. My money was invested in a lot of Vanguard stuff; remember I had no clue. However, in the midst of all this fog, there was something in me saying that I had to figure out my money. I always had that feeling of being blindfolded and I wanted to take the reins. My ignorance and the convenience of having someone resolving my finances were costing me more than what it should have and I wasn’t even aware of it.

It wasn’t until one day sitting on the couch with my wife, after listening to Dave Ramsey in a YouTube video that I got thinking about my 403b again. Few searches got me to the doors of the Financial Independent community. I started with the MadFientist podcasts. I listened to “Why you should retire before you hit your number” with Chris Hutchins and I WAS HOOKED! My gears really started spinning.

I felt enlightened. What I thought was a great deal of 2.5% for placing my money in Vanguards funds, I realized I could get it for 0.017% by managing my own money. In other words,  what was costing me $850 a year I could get it for $6.8! Holy s***!!! I am not a math genius but I knew that was a huge difference. Even worse when you think about this same difference if you get to have half a million dollars. $12,500 Vs.$85. Nope. It’s not an error. That is the difference of having half a million dollars and paying 2.5% a year or 0.017% in fees.

Needless to say, I pulled my money from that company and went back to work with Fidelity. My then financial adviser argued that he could actually help me to stay invested in the market if it went down and I panicked, and that argument was supposed to justify his fees.  Really? This was laughable to me.

I have kept on reading and listening to awesome podcasts like the ones from Afford Anything with Paula Pant. I read a few books and I feel confident about what I am doing with my money. I am escaping high fees and the hocus-pocus BS of financial advising from someone that is just trying to skim my account and profit from me.

If you are a teacher, or if you are thinking about investing in your 403B, which I would highly recommend to any friend or co-worker, make sure you are not paying high fees. What is a high fee? For me anything above 1% I would have to challenge it and find reasons as of why I am choosing that fund over a total market index fund with fees of 0.017% or at least under 1%.

Currently, there are a lot of school districts handing out their 403B plan management to third-party administrators, also known as TPAs. Unfortunately, no all investment companies are willing to work with TPAs because they work as gatekeepers. TPAs charge a fee to investing companies like Fidelity and Vanguard to serve individuals in the 403B plan of any given institution. As a consequence, many times you have that most of the companies available to employees to invest are garbage. Why garbage? Because they charge an arm and a leg in commissions. They rip you off! It absolutely sucks! Particularly beware of annuity programs. On the other hand, companies that do offer low fees for their services like Vanguard and Fidelity become off limits to you because they are not willing to pay any fees to the the Gate keeper TPA company. Otherwise they couldn’t offer the low fees they offer to their investors.

What to do? Is there a solution?

First and foremost, be in charge. Take the reins of your money and get involved. Nobody will make better choices for you. Learning this stuff is not that hard, and you really don’t need to know the ins and outs of Wall Street to figure that you don’t need a financial adviser to manage your 403B. A financial adviser might have its time and place but I would highly suggest paying an hourly fee before having someone completely in charge of managing your wealth.

Companies like Fidelity and Vanguard, make it easy for people like me. They offer what they call target funds, which are portfolios already preset according to your estimated age of retirement. Do you think you can find a way to outperform the market by finding “that one stock” that will make you a lot of money? Well, don’t. That’s your first lesson as an investor: Don’t try to outperform the market or you will get burned. Shoot for market average, low-cost index funds. Market average is great and all you need.

Also, very important, challenge your current options with your district. It’s your money. You work for it, so you should have a say about where you want your money to be invested. It might take some pressure but don;t just comply with whatever. Talk it over with coworkers, educate yourself and push your administration to find the best possible options for you. Remember, it’s your money; you are not begging.

You may also be paying Union fees regularly with every paycheck, so this is something that all Unions should be talking about and fighting for. Teachers need good and sound 403B plan opportunities. You Union should be fighting this at state level. If you are not in a Union you should find a collective voice about this matter. It’s your money, it’s your life.

I would love to hear about your 401K/403B opportunities in the comments. Do you feel that your company or District selects providers in your best interests? Do they care about the fees some providers charge?

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