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An antiquated 403(b) system in need of updating

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Unfortunately teachers in Pennsylvania are bearing the costs for a system that is in desperate need of an overhaul.  Right now, if you want to invest in a 403(b) program through your school district,  you choose a carrier from a list that your business office provides to you.  Of the 10 or so companies that are on the list, seven are probably insurance companies basically selling you fixed annuities.  None of these insurance companies have probably been vetted in a formal way to help protect your interests. These companies have ended up on the list due to some political connection.  Then there two other companies that offer variable annuity products and pre-packaged managed money (i.e. wrap) programs where you invest in mutual funds and they wrap an asset based fee around it.  Typically, these companies total expenses can average 2-2.5%/annually!  Lastly, we hope you have  a direct marketer of mutual funds or index funds like Vanguard on the list.  You go to these companies directly and you tell them what funds you want to invest in.  This is usually the cheapest option, but, you better know what you are doing!

Here’s how we think the system should work:

The school district (or many school districts together) negotiate with a company to offer fixed annuities, variable annuities, and wrap programs at cost efficiencies that would lower the annual fees to half or less than you are paying now!

A no-load company like Vanguard is one the list for those comfortable making their own investment decisions – about 22% of you out there.

Offer a fee-only firm (one that does not sell any products) to provide advice about retiring from PSERS and offers ongoing financial planning and asset management services.

Imagine how simple, transparent, and cost effective this system would be for all teachers.  Every teacher would probably have $20,000 more in their account as well as a result of the cost savings!

The article below provides an example of some changes that are happening like this in Illinois.

Consolidating Vendors
A K-12 403(b) plan sponsor improves efficiencies.

Rebecca Moore | March 2016

When the Internal Revenue Service (IRS) issued final regulations for 403(b) plans in 2007, school systems had to examine how their affected plans were administered. This led School District 27 Northbrook (NB27), in Northbrook, Illinois, to scrutinize its own 403(b) plan, says Kimberly Arakelian, assistant superintendent for finance and operations for the district.

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