Hidden Fees Dent Teachers' Retirement Savings
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What did The Wall Street Journal investigation reveal about hidden ties in teacher retirement plans?
Here's your Money Briefing for Wednesday, December 18th. I'm J.R. Whelan at The Wall Street Journal in New York. A journal investigation has found hidden financial ties exist between the investment companies that sell teacher retirement plans with steep fees and the school district administrators that hire and promote them. Wall Street Journal reporter Ann Turgason will explain why teachers are losing large sums of money from their nest eggs as a result. First, some money and market news you should know. The end of the General Motors strike helped put November's factory production into high gear. The Federal Reserve's tally of factory, mining, and utility output increased in November by more than 1% over the month before, and that marked the biggest month-over-month increase since October 2017.
But compared to a year ago, industrial production still has ground to make up. It's down by nearly 1% from November of last year. And there was some good news in the housing sector. The Commerce Department says construction of new homes rose more than 3% last month, and residential permits, which can be a forward-looking indicator for future home construction, was up 1.5%.
Teachers don't earn much, and they don't have a lot of extra cash to set aside for retirement. But it turns out that a lot of them are locked into retirement plans that have hefty hidden fees, the result of ties between administrators of teacher retirement plans and the companies behind the investment plans themselves.
How do 403(b) teacher retirement plans differ from 401(k) plans and why does that matter?
Wall Street Journal reporter Anne Tergesen is here to explain. So Anne, how do these hidden financial ties impact teachers?
Well, in a couple ways, but the upshot of it is that they can inflate, they can make it so that teachers end up with higher cost products in their 403B plans than they might otherwise have.
And how does the teacher's retirement plan, the 403B, differ from a 401K?
So they're really very similar. I mean, the whole idea is that you put money in on a tax-deferred basis and it grows over time, and then you take it out and you pay taxes on it. So it's the same type of retirement account, but it's just authorized under a different section of the IRS code. And 403B plans are actually older than 401K plans.
How do administrators and investment providers create hidden fee structures in 403(b) plans?
They've existed for decades. And they're generally educational institutions use 403B plans, and a lot of nonprofits do as well.
Just take us through for a moment what the cash flow is that results in the fees that a lot of teachers don't know exist.
Right. So what's actually kind of common in the K-12 area of education is when you have a plan administrator who will offer to provide administrative services and they don't charge the school district or the teachers for those services. Instead, product providers, you know, investment providers offer to pick up those fees and And pay them so that, you know, that taxpayers don't have to or teachers don't have to. So it sounds like a great deal. But in fact, the problem is that companies like Fidelity and Vanguard or other companies that offer low cost investment products, they're just not going to do that. That's just not part of their business model. They don't have the extra fees in their products to justify those types of payments.
So effectively what you get in the educational market is you get a lot of higher cost providers, including a lot of insurance companies, that are fine paying those administrative fees on behalf of teachers and teachers.
Why do some investment companies pay school administrative fees and who benefits?
and school districts in return for preferred provider status. So they get on these platforms that school districts then can choose from when they're trying to decide who should be in their 403B plan.
And it's caught a lot of teachers by surprise.
Teachers just generally don't know about it, and you really can't blame them because it's not – it was hard enough for us to kind of ferret this out. So, you know, unless a teacher takes a huge amount of interest in their retirement plan, I don't really see how a lot of them would even be aware of it.
But it has caught the interest of the SEC.
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Chapters
7 chapters
1
What did The Wall Street Journal investigation reveal about hidden ties in teacher retirement plans?
0:05–1:36
2
How do 403(b) teacher retirement plans differ from 401(k) plans and why does that matter?
1:36–2:21
3
How do administrators and investment providers create hidden fee structures in 403(b) plans?
2:21–3:40
4
Why do some investment companies pay school administrative fees and who benefits?
3:40–5:46
5
What role is the SEC playing in examining 403(b) administrator–provider relationships?
5:46–6:39
6
How much can higher fees reduce a teacher’s retirement balance over decades?
6:39–8:04
7
What practical steps can teachers take to find lower‑cost options or get financial help?
8:04–9:25
Speakers
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