Tony Isola was the kind of guy other teachers liked to approach for help with their retirement plans. Which investments should they be in? They felt Tony would know, because he used to be a currency trader, and because his wife, Dina Isola, worked on Wall Street. Plus, a guy who could teach social studies to hormone-addled middle schoolers was good at making simple financial concepts intelligible.
“Ask me a question, and I’ll give you the answer,” he’d say. “Usually, it’s ‘I don’t know.’ ” But his colleagues didn’t even know where to start. So, save regularly, he told them. Stay in the market through thick and thin—it will reward you. “Focus on things you have control over: Your costs. Your behavior.” They asked Tony to look at their statements.
He couldn’t believe what he saw. Many of his fellow teachers were in high-cost annuities, lured by tax-deferred growth and a lifetime stream of income. It made no sense—savers don’t need income; they need growth. And they don’t need tax-deferred products, since their retirement plans were already tax shelters. For these unnecessary “features,” the annuities imposed high sales charges on every paycheck withdrawal. And a 2% annual management fee. And large surrender fees of, say, 7%.
Why was this even possible? Teacher retirement plans, known as 403(b)s, are similar to private-sector 401(k)s, with one important difference: Because they evolved separately, they are exempt from protections of the Employee Retirement Income Security Act. That act says 401(k) plan providers have a fiduciary duty to participants—in other words, they have to put the investors’ interests first. Teachers’ 403(b) plans are sold directly to individuals, rather than to employers, so the interest of the salesman was coming first. “Imagine you’re a kindergarten teacher and they’ve given you a 400-page prospectus about variable annuities,” Tony says. That’s why three-quarters of $1 trillion in 403(b) plans are in annuities, which enjoy record sales. Insurance is a high-commission business, which you can see from Tony’s Twitter feed, where he likes to share screenshots of insurance agent literature. One says “6% commission.…Finally! A short-term FA that pays you the commission you deserve.”
Dina, too, was horrified. At firms where she had worked, brokers were rewarded with lavish vacations for beating sales quotas. When her father was diagnosed with Alzheimer’s, a broker tried to make her mother liquidate their portfolio, creating an unneeded tax bill.
Thus began a journey to educate teachers about retirement and to push for reforms—specifically, that 403(b) investors should have the same protections as people in 401(k) plans. In 2005, Tony began offering financial planning while keeping his social-studies job. A couple of years later, after their twins turned three and Dina left her job in financial communications, she joined his advisory firm. They both started blogs: His is called A Teachable Moment, and hers, Real$martica. In 2015, Tony decided to work full-time as an advisor. He and Dina joined Ritholtz Asset Management, specifically to manage 403(b) plans. Operating from Stony Brook, N.Y., they manage $100 million in assets, including $12 million in 403(b) plans for teachers. Using index funds, they average 0.62% in annual fees in each account. There is no account minimum for 403(b) plans.
The stories continued to make their heads spin. How high were the fees? One young teacher was paying 3% a year to own the market, with a guarantee that he’d get his original investment at the end of 20 years. Dina shook her head. There has never been a 20-year period in the stock market’s history when it has lost value. Another teacher was paying $2,418 a year in fees on an $80,000 account. To get out, she needed to pay $3,000 in surrender fees.
“Ask me a question, and I’ll give you the answer,” he’d say. “Usually, it’s ‘I don’t know.’ ” But his colleagues didn’t even know where to start. So, save regularly, he told them. Stay in the market through thick and thin—it will reward you. “Focus on things you have control over: Your costs. Your behavior.” They asked Tony to look at their statements.
He couldn’t believe what he saw. Many of his fellow teachers were in high-cost annuities, lured by tax-deferred growth and a lifetime stream of income. It made no sense—savers don’t need income; they need growth. And they don’t need tax-deferred products, since their retirement plans were already tax shelters. For these unnecessary “features,” the annuities imposed high sales charges on every paycheck withdrawal. And a 2% annual management fee. And large surrender fees of, say, 7%.Why was this even possible? Teacher retirement plans, known as 403(b)s, are similar to private-sector 401(k)s, with one important difference: Because they evolved separately, they are exempt from protections of the Employee Retirement Income Security Act. That act says 401(k) plan providers have a fiduciary duty to participants—in other words, they have to put the investors’ interests first. Teachers’ 403(b) plans are sold directly to individuals, rather than to employers, so the interest of the salesman was coming first. “Imagine you’re a kindergarten teacher and they’ve given you a 400-page prospectus about variable annuities,” Tony says. That’s why three-quarters of $1 trillion in 403(b) plans are in annuities, which enjoy record sales. Insurance is a high-commission business, which you can see from Tony’s Twitter feed, where he likes to share screenshots of insurance agent literature. One says “6% commission.…Finally! A short-term FA that pays you the commission you deserve.”
Dina, too, was horrified. At firms where she had worked, brokers were rewarded with lavish vacations for beating sales quotas. When her father was diagnosed with Alzheimer’s, a broker tried to make her mother liquidate their portfolio, creating an unneeded tax bill.
Thus began a journey to educate teachers about retirement and to push for reforms—specifically, that 403(b) investors should have the same protections as people in 401(k) plans. In 2005, Tony began offering financial planning while keeping his social-studies job. A couple of years later, after their twins turned three and Dina left her job in financial communications, she joined his advisory firm. They both started blogs: His is called A Teachable Moment, and hers, Real$martica. In 2015, Tony decided to work full-time as an advisor. He and Dina joined Ritholtz Asset Management, specifically to manage 403(b) plans. Operating from Stony Brook, N.Y., they manage $100 million in assets, including $12 million in 403(b) plans for teachers. Using index funds, they average 0.62% in annual fees in each account. There is no account minimum for 403(b) plans.
The stories continued to make their heads spin. How high were the fees? One young teacher was paying 3% a year to own the market, with a guarantee that he’d get his original investment at the end of 20 years. Dina shook her head. There has never been a 20-year period in the stock market’s history when it has lost value. Another teacher was paying $2,418 a year in fees on an $80,000 account. To get out, she needed to pay $3,000 in surrender fees.
by Leslie P. Norton, Barron's | Read more:
Image: Twitter
[ed. See also: Confusing Options May Be Coming to Your 401(k). It Could Cost You. (NY Times).]
[ed. See also: Confusing Options May Be Coming to Your 401(k). It Could Cost You. (NY Times).]
