Many educators are in the dark about their retirement options in 403(b) (or TSA) plans. Annuity products pushed in these accounts can end up costing teachers thousands of dollars -- and that's money that isn't plentiful in this profession. Our guest columnist urges teachers to take advantage of no-load (no-fee) alternatives in their retirement plans.

By Dan Otter (dano@403bwise.com)
August 28, 2000

It's no secret that teachers aren't the most highly compensated professionals. What seems to be a secret to most educators, however, is a powerful retirement wealth-building tool that is largely ignored or misunderstood. In fact, only two in five teachers take advantage of this tax-deferred savings plan, according to the Spectrem Group, a San Francisco-based consulting firm. What's even worse is that those who do participate in this plan overwhelmingly invest their money in high-fee, low-performing investments.

So what is this secret, underutilized, often poorly invested investment? It's the mysterious 403(b). Most educators know the plan as the TSA, or tax-sheltered annuity. That's really a misnomer, because the name of the specific tax code that created the investment is 403(b). It's also financially limiting to refer to the 403(b) as a tax-sheltered annuity. The reason? It gives the impression that the only place participants can invest their money is in insurance-based annuity products. That's simply not true.

In 1974, Congress added paragraph 7 to the 403(b), which for the first time allowed participants to invest directly into mutual funds through a 403(b)(7) custodial account. Why should this matter? Because investing directly into leading no-load (no sales commission) mutual funds from the likes of Janus, Fidelity, and the Vanguard Group is not only less expensive, it also offers significantly better long-term performance prospects than annuity products.

The so-called financial professionals who troll school districts seeking clients don't want you to know that you can invest, by yourself, directly into no-load mutual funds through a 403(b)(7) custodial account. They'll tell you they offer mutual funds -- and often do offer investments in companies like Janus, Fidelity, and Vanguard. The big difference, however, is that their investments are in variable annuities that come cloaked in an "insurance wrap" that can often add more than 1% in fees. This may seem like a small amount to pay for access to leading mutual funds. It's not. Thirty years from now, that extra 1% in fees can mean tens of thousands in lost earnings.

It's true that many educators wouldn't be invested in 403(b)s today if it werenąt for the armies of salespeople who have descended upon classrooms pushing their insurance products. Who among us hasn't gotten that business card in our box, that phone call at home, or worst of all, that visit to our classroom? It's equally true that educators are more than smart enough to figure out how to do this themselves. If we can teach up to five academic subjects a day, we can figure out how best to invest our 403(b) money.

As educators, we're never going to realize the big money. That's OK. We teach for other reasons besides money. We would be irresponsible, however, to not take advantage of the few financial incentives available to us. For that reason, I urge you to get wise (or Foolish!) about the 403(b). Investigate all your investment options. Research your choices. Get second and third opinions. And get started.

Dan Otter teaches fifth grade at McKinley Elementary School in southern
California. He also runs a 403(b) advocacy website dedicated to educating educators about the 403(b).