It’s ironic that the teachers to whom we entrust our childrens’ education have been noticeably lax about overseeing the costs and administration of so many of their retirement plans, even as their unions profit from them.

Those same teachers unions have used their dues-fattened war chests and presumed expertise to lead lobbying efforts to make other Americans subject to the inevitable leveling and rationing of government-run “universal health care,” often while themselves enjoying among the most generous and expensive medical benefits.

The irony is further compounded by the fact union lobbying war chests are further swollen by revenues received for recommending excessive-cost 403(b) retirement plans to members. Teachers’ ignorance of their own fleecing in their 403(b) retirement programs does not inspire confidence in their judgment about our health care.

The 403(b) retirement plan is the nonprofit sector’s tax-deferred savings counterpart to the 401(k) plans found in the private sector. The 403(b) plans have been in the tax code 20 years longer than 401(k) plans and grew up around insurance company annuities, which were prevalent at the time. By contrast, 401(k) plans use mutual fund offerings, which typically have half or less of the costs of 403(b) plans that affect their returns.

This story continues below
Advertisement

A 1 percent or 2 percent difference in costs over time and with compounding will result in a substantially lower retirement fund. For a worker contributing for 25 years, the difference can be 16 percent more in his retirement account with average cost mutual funds, or 37 percent more with even cheaper index funds.

As Forbes business magazine noted: “Teachers unions are complicit partners in this dubious pursuit. Insurers cut murky deals with labor unions to buy exclusive access to their members, sometimes paying the unions millions of dollars in fees in exchange for the unions’ endorsement of their annuity plans. Inevitably this foists on teachers some of the most expensive annuity products around.”

The Los Angeles Times came to a similar conclusion, reporting, “some of the nation’s largest teachers unions have joined forces with investment companies to steer their members into retirement plans with high expenses that eat away at returns. … [T]he unions endorse investment providers, even specific products, and the companies reciprocate with financial support.”

For example, the National Education Association received almost $50 million from such an arrangement in 2004. Lower-cost 403(b) providers exist but are unlikely to be selected because they don’t pay as much to the unions.

Another difference is that 403(b)s imposed fewer regulatory requirements on plan sponsors than 401(k)s. Changes in tax laws in the 1990s allowed nonprofits to also use 401(k) plans instead of 403(b)s, but few did so, thanks to lethargy, avoidance of higher standards of selection and management, and the profits going to plan sponsors from 403(b) providers.

More changes are coming, as current and proposed regulatory rule changes require 403(b) sponsors to demonstrate many of the same fiduciary responsibilities required of 401(k)s such as maintaining reasonable administrative costs.

As The Chronicle of Philanthropy observes, “The aim of the changes by the Internal Revenue Service is to bring more accountability and professionalism to the 403(b) world.”

Even so, 401(k) providers and sponsors are currently under pressure from class action suits, the Department of Labor, and Congress for allegedly excessive costs due to fund providers paying to be included in bundled offerings, and passing those costs on to savers.

A leading class action lawyer says those pressures “may serve as the first in a wave of cases,” as he awaits whether such cases will result in huge settlements. The outcome remains to be seen, but inevitably the result will be greater disclosure and justification for any benefit of such arrangements.

The United Teachers Member Benefits Trust settled a suit by agreeing to a $30 million payback to New York teachers and a group of Indiana teachers recently filed suit against the insurer of their union’s 403(b) plan. Keller Rohrbach, a leading class action law firm, is reportedly considering a similar suit against the NEA.

Defenders of 403(b) plans’ claim their higher costs are worth the additional annuity protections— a minimum interest rate, for example — compared with the mutual funds used by 401(k)s. Defenders also claim higher 403(b) costs encourages more personal attention for plan participants.

Even if those claims are true, there is no justification for teacher union profiteering from their members retirement plans. That they have looked the other way for so long reflects poorly on teachers who now want nationalized health care for the rest of us.

Bruce Kesler is a financial planner and blogs at Democracyproject.com.