Who Protects Teachers’ 403(b) Plans? Nobody!



I argued in recent posts here and here that public school employee 403(b) retirement plans are confusing to enroll in and full of extremely expensive options, and that the bad program design seems to be on purpose, as it serves one particular industry1, at the expense of retirees.

The situation is so obviously bad that I figured surely public school employee advocates would be working hard to correct this problem. I reached out to public school advocates, as well as to the Teachers Retirement System (TRS) and legislators, hoping to find some good news. 

I have no good news to report. 

But first, I want to clarify a point that may have gotten lost in my attack on the status quo of 403(b) plans. I do not want to leave anyone with the impression that 403(b) plans should be ignored as a retirement tool by school district employees. Nothing could be further from my beliefs.


Between the automatic payroll deduction and tax advantages of 403(b)s, combined with the fact that TRS pensions won’t cover enough costs in retirement and the lack of Social Security for 95 percent of school districts in Texas, these defined contribution plans ought to be a key tool for retiring comfortably. 

The fact that the status quo design of these programs is objectively terrible shouldn’t dissuade you from participating in them, or in an Individual IRA, if you know how to do that, and properly navigate your way to good products. Some how, some way, you need to put some retirement money away in addition to your TRS pension, which will prove insufficient, unless you put in a full 43 years to qualify for 100 percent of your last five years’ salary. Got it? Good.

Now, I have my hair on fire about 403(b) program design, so I began calling around to public school employee advocates. We need some allies here.

I called the Texas State Teachers Association (TSTA), with a statewide membership of 65,000 and an affiliation with the National Education Association (with 3 million members). Spokesman Clay Robison told me, “Generally, we’re in favor of defined benefits,” by which he means the guaranteed TRS pension that employees qualify for over time. When I tried to shift the conversation toward 403(b) plans, he wanted to emphasize that their organization believes defined contributions are “obviously riskier,” and that recent studies show retirees benefit more from defined benefits (like TRS) rather than defined contributions like 403(b)s. Robison continued, “Our focus is keeping the teacher’s retirement program sound, and keeping the system from moving from a defined contribution to a defined benefit plan. If teachers want to invest in a defined contribution plan, that’s entirely up to them.”

To my pressing that fixing 403(b) plan design doesn’t take away from the TRS pension, he replied, “We’re focused on the defined benefits plan, because we’re convinced it’s the best option and it’s less risky. The TRS is a sound pension plan. Managed by professionals. For those that can afford extra, that’s their business.” Ok, then. 

I spoke with Bobbye Patton, past President (2012-2014) of the Association of Texas Public Educators, a non-union organization representing 80,000 members statewide. She said the issue of 403(b) plan reform has simply never come up within her organization. “I cannot remember that our association has talked about the 403(b). It’s always been focused on the retirement system itself.

“We have our TRS (pension). As far as I know, nobody pushes ideas about the 403(b). As teachers, we don’t understand it. We don’t fully understand what it would do for us.” Alrighty then.

Calls to the San Antonio Teachers Alliance, a local affiliate of the Texas AFT, and itself a state member of the national AFLC-CIO, did not get returned as of this writing.

I spoke to Rebecca Merrill, Chief Strategist at TRS itself, which is legislatively charged with administering and executing 403(b) rules statewide.

I wanted to know whether they are aware of the problems of 403(b) plan design, specifically forbidding school districts from designing a better system through a bidding process and negotiation. She assured me they understand the issues well.

“I don’t think its any secret that we’ve said ‘if it’s the legislature’s will for teachers to pay as low fees as possible, they should empower district to issue RFPs (Requests for Proposals) and negotiate lower costs.’” I asked if TRS itself could negotiate better terms for school district employees at the state level. 

Merrill responded, “We feel like we can’t. The legislation provides for an open access system. The industry pushed back and said the legislature wants choice.”

To be fair, Merrill points that certain very heavy sales load charges on funds were dropped in the 2017 reform, and I agree that’s good. Merrill also pointed out that allowable fee caps on products were lowered, although I still believe the move to be very incremental only.

In reviewing the results of 2017 reform of fees within the 403(b) plan, I expressed to Merrill that this was “reform” that only an insurance company could love. 

Merrill responded, “We made some recommendations for the (TRS) Board to go in a different direction. The Board did adopt some rule changes, including the fee caps. The Board heard from industry, and they heard from staff. We had a big dialogue with the industry. The industry wanted to make sure that advisors could be compensated. We worked through it the best we could.” At the end of the day, however, Merrill believes TRS cannot make the rules around 403(b) plans, nor can it interpret policy. “We are mindful that how 403(b) is implemented is a legislative question.”

Emailed questions and call to the office Representative Diego Bernal, San Antonio Democrat and Vice Chair of the House Education Committee went unanswered. Emailed questions and a call to the office of Senator Paul Bettencourt, Houston Republican and member of the Senate Education Committee as well as an advocate for shifting away from defined benefits and toward defined contribution plans, went unanswered.

And that, folks, is the depressing state of the world, with respect to the perfectly legal highway robbery going on with school district employees’ defined contribution plans. 

Don’t look to teachers lobbies, the legislature, or TRS itself to fix this anytime soon.

A version of this post previously ran in the Houston Chronicle and the San Antonio Express News.

Please see related posts:

The problem of choice in Texas teacher 403(b) plans

Teacher Retirement “Reform” Only An Insurance Company Could Love

Variable Annuities, aka Shit Sandwich

Variable Annuity Salespeople: Just because you’re paranoid doesn’t mean I’m not out to get you


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  1. The insurance industry, duh

403(b) Plan “Reform” Only An Insurance Company Could Love


403b_planWhile fixed and variable annuities make up over three-quarters of the products in public school employee 403(b) plans nationwide, both are inappropriate products sold by insurance companies. Their dominance is a perfectly legal crime hidden in plain sight that costs retirees $10 billion per year in costs, according to independent analysis by Aon Hewitt in 2016.

So what’s the big deal there?
The big deal takes a bit of explaining, but would be clear to any independent financial advisor. By “independent” I specifically mean “not paid by an insurance company.” I want to talk about first why the products are bad for school employees, and second, how it’s difficult to change the status quo in Texas. This is a game badly rigged by the insurance industry, at the expense of public school employees.

Public school district employees in Texas contribute over time to the Teachers Retirement System, (TRS) qualifying for 2.3% of their salary for every year served. Work for a school system for 20 years for example, and you’ll qualify for 46% of your employment income guaranteed, for life. (Because 2.3 times 20 is 46). That’s a fine deal for employees and very safe and lovely. It also means that long-term school district employees have a substantial fixed income guaranteed for life in retirement.

Prudent portfolio theory of diversification would tell you that you don’t need more fixed income annuities anchoring – and by anchoring I really mean more like sinking – the process of building up your retirement account. Fixed annuities are bad in this scenario because they offer a very low return that school employees don’t really deserve. That’s not what the insurance salesman is telling them, but it’s what an independent advisor would tell them.

Gold, Bitcoin, TimeShares, and Variable Annuities

Variable annuities are actually worse, because they charge extraordinary fees every year – TRS allows them to charge between 1.9 and 2.7 percent per year, more on that later – and further fees if you ever want to get out. Variable annuities are one of the Four Horsemen Of Your Personal Financial Apocalypse.1

School district employees: If you already set up your 403(b) account with that nice insurance salesman after the free pizza meeting in the teacher’s lounge, I know you ended up with a variable annuity product in your 403(b) account, because that’s what they’re paid to sell you.

It’s hard to fully describe just how broad the consensus is among non-insurance folks about the inappropriateness of variable annuities due to their high costs. They are the kind of product one sells, but never buys. Meaning, the people who like them are the salespeople. Everybody else – except, sadly, school district employees – knows they are terrible.

Now I’m talking directly to school district employees: Why should you believe me rather than that nice insurance salesman who bought you free pizza and put you into an annuity product rather than a brokerage product? Because I’m not being paid either way. But he is.

He is especially paid if you buy an annuity product, and specifically a variable annuity product. He’s likely paid a 5 percent commission on your upfront investment, and between 1 and 2 percent of your contributions thereafter. Now that’s what I call a great long-term annuity! For. The. Salesman.

When a stupid finance problem persists, like the status quo of public school 403(b) plans in TX, despite the fact that it’s obviously stupid to any non-conflicted observer, it’s worth asking: Why? Who benefits?

Who benefits from the stupid status quo?

The answer to that why question often lies in some regulatory and legislative garbage fire of complexity. Within that complexity, incumbents with lobbying power at the legislative choke-point can squash solutions as they occasionally arise.

Speaking of which, let’s talk about the last time TRS attempted reforms to 403(b) plans, in 2017.

TRS staff periodically reviews rules and fees and makes recommendations to the board to revisit fees in 403(b) plans, which had been in place since 2002.

For context: One of the great developments of the past 15 years in investment management has been the astonishing drop in fees for brokerage products, with competition from low-cost providers such as Vanguard, Fidelity, and Charles Schwab.

Since 2002, investment providers to 403(b) in Texas had their fees capped at 2.75% per year by TRS. Also for context: That is crazy high cost in this day and age.

These days, 1 percent is an arguably reasonable fee for a retirement product, although competition has driven many fees in many fine products down to a fraction of that 1% benchmark.2

But 403(b) providers in Texas have been allowed to charge between three and twenty times more money for products in a 403(b) than investors could get elsewhere, outside of their 403(b) plan.

Did you buy a Hyundai 403(b) at a Lambo price?

What do these fees mean in practice? They are selling Hyundais to school teachers at Lexus and Lamborghini prices. Trust me when I say the products do not perform like a Lambo.3

So anyway, how did that reform go in 2017? Thanks for asking. TRS adopted rules adopting a sliding scale of fee caps, between 1.9 and 2.7 percent for annuity products, and between 1.65 and 2.45 percent for non-annuity products. This is the kind of “reform” only an insurance company could love. This is like when I ask my daughter to clean up her catastrophe of a room, and I return 2 hours later to find she has put clothes on her American Girl doll and brushed its hair, and then she declares the entire place fixed up. This is not reform!

TRS_PensionAnother rule adopted in 2017 included the continuation of hefty “Surrender and Withdrawal Charges” for twelve years after you buy a variable annuity. Oh, did I not mention that? If you want your money in a different product after you took the advice of that pizza-slinging salesman, you have to leave between 1 and 10 percent of your investment behind.

I don’t think they literally make teachers put both hands in the air to act out the physical sign for “Surrender” as they turn over 1 to 10 percent of their retirement investment to the insurance company. But they might as well have. The perfectly legal crime is the same either way.

Just surrender those fees to the insurance company

Hey, insurance company lobby? You won. The 600,000+ public school employees surrendered. Nice job everybody.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related posts

TRS’ Problem of Choice with TX 403(b) Plans

Teachers Can’t Get Good Advice For Retirement

TRS Pension and Public Debate

Nobody Advocates at the State Level for Teachers’ 403(b) Plans

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  1. I’ll try to get that phrase copyrighted to me, thank you very much. Since you asked, the other three horsemen are gold, bitcoins, and time shares.
  2. I checked all my own accounts and I’m paying 0.16% on my most expensive fund.
  3. Yeah, you guessed it, I drive a Hyundai.

403(b) Plans in TX – The Terrible Problem of Choice


RetirementSchool district employees in Texas attempting to fund their own retirement – through 403(b) defined contribution plans – face a garbage fire of bad choices.

A neutral and expert observer – anyone not directly benefitting from insurance industry money – can look at the retirement options mandated by school districts and see a rigged game.

Problem of Choice

How is the game rigged? Let’s start with the 403(b) plan problem of “choice.”

School district employees typically have access to a 403(b) plan – a tax-advantaged retirement savings plan through automatic payroll deduction. 403(b) plans as designed and regulated in Texas appear uniquely suited to make a lot of money, not for school district employees, but rather for the insurance industry.

Here’s the first problem with the 403(b) options, because of regulatory and legislative restrictions. In Texas, as in other states like California and Ohio, school districts may not be proactive or selective about what retirement companies and products teachers may access. This is known as an “any willing vendor” rule, according to school district retirement consultant Cecile Russell.

I imagine this “any willing vendor” idea was once sold to legislators as reasonable because it encouraged “choice,” which sounds appealing at first glance. What it actually does is stuffs the menu of investment options to a ridiculous point with insurance companies and insurance products.

Better Design

A better program design, better than this “any willing vendor” model, would involve limiting choices in 403(b) plans to low-cost and appropriate retirement products. A better plan would be designed by experts with fiduciary responsibility looking out for the best interest of school employees. Just as private sector 401(k) designers have to do. School districts in Texas are not allowed to do this with their 403(b) plans.

trsIn Texas the Teachers Retirement System has approved 65 separate vendor companies. There are actually 74 approved vendors listed by TRS but some of those are affiliated companies.  These vendors in turn offer 10,520 eligible investment products to school district employees.

That’s the first problem. Having 10,520 choices is not good. It’s a behavioral finance nightmare which produces what an economist would call “The Paradox of Choice” but which we could also understand more simply as “The Deer in the Headlights” response. For some, their 403(b) plan contributions stay stuck in a money market account earning no return. For others, they use the random dartboard approach to investing. The third option, by design, is that school district employees invest according to the plan of that nice insurance salesman offering free pizza in the teacher’s lounge. All of these are bad results in their own way.

At least two-thirds of approved 403(b) vendors in Texas are insurance companies or have insurance affiliates. Do you want to guess the result of having insurance companies as the dominant providers for 403(b) plans?

A study by independent consultancy Aon Hewitt estimated in 2016 only 24 percent of 403(b) investments are in mutual funds (the preferable products), compared to 43 percent in fixed annuities (the inappropriate product) and 33 percent in variable annuities (the abominably high-cost product.) Those last two products are specifically insurance-company products, whereas mutual funds are typical brokerage company products.

aon_hewittThe result of these asset allocation choices, AON Hewitt estimated, is $10 billion in extra costs paid by 403(b) participant investors, as compared to a comparable 401(k) style investment platform available to private sector workers and products. This is a multi-billion dollar fiduciary failure involving many responsible parties.

One way to understand the asset allocation problem is to understand the effect of compounding different returns over a long career. A school employee who managed to put away $50,000 in her 403(b) by age 30 faces a vastly different retirement depending on what she chooses as her primary investment vehicle. A 4% return on that investment would become worth $240,000, as compared to an 8% return becoming worth $1.08 million by age 70. Differences in returns, when compounded over 40 years, lead to massive divergences in results. Costs and investment products matter tremendously.

Before 1974, only insurance companies could provide investment products to 403(b) plans, giving them a head start with these types of plans. But 45 years later, the relative absence of mutual fund providers stands out as a shocking result. After so many years that result must be considered a feature, not a bug, of 403(b) plan design. It suits the insurance industry to keep this territory for itself, at the great expense of public school employees.

Can reasonable people disagree reasonably?

Now, I haven’t yet explained yet why insurance products are particularly pernicious in Texas 403(b) plan platforms. Many nice people, including especially insurance company employees, believe these to be fine products.

They are not.

I am not anti-Insurance. I buy insurance. It has an important role to play in all of our financial lives. Fixed and variable annuities are not good products, however, for a retirement plan. They are specifically inappropriate within a Texas public school employee’s retirement account. But they account for 75% of the products!

I don’t work for any finance or brokerage company. This is precisely why, even if you don’t understand my point straight away, you should at least believe that I don’t have an ax to grind, except to state the truth as I understand it.

I would go so far as to say that any independent fiduciary for a teacher’s retirement plan – and by independent again I mean someone not paid by any finance company – would agree that these are not the best products for public school district 403(b) plan participants.

And yet, they are the dominant products. Why is that?

In subsequent posts I will lay out the plausible explanation for this result, which is a perfectly legal  – but ought to be illegal – crime hidden in plain site.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

See Related posts:

403(b) Plans – Failed Reform Only An Insurance Company Could Love

Teachers and Their Retirement Problems

Public Policy Debate on Teacher’s Retirement in TX

Nobody Advocating to Fix Teachers’ 403(b) Plans in TX

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A Confusing Puzzle Made Simple – Retirement Plans

A version of this post ran earlier in the San Antonio Express News


I recently received in the mail retirement plan documents for a local employer’s 403B plan.

I’m going to spend the first part of this column complaining about this 403B plan provider. Later, I am going to offer a better, simpler, version of the plan. And that better, simpler, version of the plan will make 99.5% of all investment advisors throw up in their mouth. But they are wrong and I am right.

But before I complain

Let me start with an important public service announcement first:

403B plans and 401K plans – employee-sponsored, tax-advantaged retirement accounts for non-profit and for-profit employers respectively – are Totally. Freaking. Awesome.

If you have access to one of these through your job, and you are not taking full advantage of these accounts, then drop your newspaper or iPad right now – seriously, right now – and call your HR department and sign up for automatic payroll-deduction investing.

Do it. I’ll still be here when you get back.

What are you waiting for? I said I’ll be right here.


Ok. Are we good?

Now then, my complaining

I received in the mail this packet entitled “important information about your retirement plan,” consisting of 42 pages, printed on double-sided paper and in small letters. You might be able to guess where this is going.

The problem

I’m bothered not by any deficiencies in the plan, but rather, the opposite. The document provides a gold-plated menu of options.

The problem is that anybody except a sophisticated financial professional would find the choices totally overwhelming.

I did some simple addition and this is what I found:

141 mutual funds of 100% stocks;

38 mutual funds of 100% bonds;

41 mutual funds with a blend of stocks and bonds, in varying proportions;

6 money market mutual funds; (By the way, this is perhaps the most ridiculous part of the whole list.  A money market fund is a money market fund is a money market fund. You don’t need 6 to choose from.)

6 fixed return investments;

1 lifetime annuity investment;

And a partridge in a pear tree.

Hello? Is anybody there? This makes me so mad.

Paradox of Choice

These choices make no sense. You would think the designers of this 403B plan had never heard of the behavioral finance theory known as the ‘paradox of choice’ idea in retirement planning.


Behavioral economists have shown that the more mutual funds you offer, the less likely people are to actually invest in anything. We tend to choose instead to delay decision-making to some later date. And that delay, in the case retirement planning, is a horrible outcome.

An economist’s study using data from fund company Vanguard showed that for every additional 10 mutual funds offered in a retirement plan, the rate of employee participation in the 401K and 403B programs declined 2%.

If you offer 50 additional funds for example, we would expect 10% fewer employees on average to participate in their retirement account.

The decision – due to confusion – to defer contributing to some far-off future date may cost you millions of dollars in your retirement. I’m sure the friendly folks in charge of designing this 403B plan felt good about offering so many choices because, hey, more choices are better, right?

Unfortunately, not when it comes to encouraging people to invest in their retirement accounts.

My solution, as DRAGO

Sometime in 2035, when I am elevated by President Miley Cyrus to the post of Dictator of Retirement Account Great Options (You can just call me DRAGO, for short) there will be two – and only two! – funds to choose from.

Miley Cyrus is a Patriot

In this way I will maximize your participation.

Risky and Not Risky

I will call these two funds Not Risky, and Risky.

Not Risky will never lose you money. Not Risky will provide you between 0 and 2% positive annual returns year in and year out. It will also never make you any money on your money, especially after taxes and inflation.

If you have 10 years or more until your retirement (a key ‘if!’) Not Risky is totally forbidden for your retirement account.

Risky, by contrast, is quite volatile. You can lose as much as 30% of your investment in one year. You can also gain as much as 30% in one year. Viewed over long periods of time, Risky has returned about 9% per year in the last century. Risky is also the only way to actually grow long-term wealth with your retirement account.

In the future with Risky, you should reasonably expect no more than 6% annual returns, over the long run, with tremendous volatility in the short and medium run.

But after taxes and inflation, Risky offers you a far better return on your money than Not Risky, many, many times over.

Finally, as your DRAGO, if you have more than 10 years to go until your retirement account (a key ‘if!’), I will force you to only have Risky in your portfolio.

Retirement money for most of us, remember, is long-term money. For most workers in their 20s, 30s, 40s, and 50s, retirement is more than 10 years away.

Only if you plan to retire within the next ten years (a key ‘if!’), will DRAGO allow you to invest in a blend of Risky and Not Risky.

In this way, I will maximize your wealth in retirement.

You can thank your DRAGO, as well as President Cyrus, for this important service and improvement in your quality of life in your retirement years.



please read related posts:

Stocks v Bonds, the Probabilistic Answer

Book Review of Simple Wealth, Inevitable Wealth by Nick Murray




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