Do you ever feel overwhelmed by too many choices?
The other day I walked into a specialty deli shop that had been highly recommended. A good friend – a self-proclaimed ‘foodie’ – gave the place high marks and said I should try it, however he failed to mention what exact dish to pick out.
Upon entering, I was greeted with a menu with dozens and dozens of choices, with the potential combination of various meats, cheeses, condiments and toppings leading to literally thousands of possible outcomes. What struck me is that unlike many establishments I have visited before, there was no ‘so and so’s famous sub’ or the ‘house favorite’.
Instead, you were tasked with building your own creation and being satisfied with the result. At first glance, you would think that having more choice, would ensure a better experience! After all, you can completely customize your food experience to your specific tastes and hunger.
This reminds me of the situation many teachers find themselves in with their 403(b) plans. In some local school systems, there are as many as 15 providers in the 403(b) space.
On the surface, the multitude of providers and vendors should be a real bonus for teachers. Most private companies only allow one provider for a 401(K) plan so it seems that having choice will result in a better investment experience for teachers.
However, this is where a good concept has gone completely awry. Having so many different ‘vendors’ can be a real headache for teachers. For most, this is an area that they have little to no knowledge or background in and it makes a selection of the best vendor difficult. School districts also do not provide the same level of financial education to employees that private companies are often required to do. Therefore, it’s up to the teachers themselves to somehow find the time to evaluate and then consider what’s best for their situation.
Psychologists actually call this negative affect ‘The Paradox of Choice.’ Simply put, having too many choices, rather than making people happy and ensuring they get what they want, can cause them stress and problematize decision-making. Barry Schwartz wrote about the negative consequences of having too many options in his 2004 book, The Paradox of Choice: Why More is Less. Schwartz maintained that an overabundance of options can actually lead to anxiety, indecision, paralysis and dissatisfaction.
Into this situation is where the financial planner, financial salesperson, financial representative, financial agent or whatever name you want to call them enters. Picture this, you have roughly 30 minutes to grade papers, respond to a parent email and eat that sandwich for lunch and in pops the ‘403(b) guy.’ You know these folks as the fresh-faced, bagel-toting representatives from the vendors that arrive weekly to pitch their particular product as the miracle cure for your retirement planning.
This is the exact moment where teachers can be led astray. Given the confusing nature of the choices, the lack of experience in making investment decisions and the sheer lack of time most teachers have, they often end up choosing a 403(b) plan that isn’t optimal. How do we know this is happening? It’s because we know that 70% of 403B plans are contained in high cost, high fee variable annuities
This is a big, big problem.
This ongoing is situation is not new, and it hasn’t gone without notice from regulators. ln October of 2019, the SEC announced that they are launching an investigation into retirement plans for teachers and government employees. Jay Clayton, the chairman of the SEC, expressed specific concern about the prevalence of high-cost investment products in schoolteachers’ retirement accounts.
The SEC is not alone. The New York Department of Financial Services also recently launched an investigation into 403(b) plan costs and the subsequent sales tactics. Earlier this month, the NY state regulator issued requests to several insurance companies seeking information on their policies and procedures around 403(b) fees and how the retirement programs are being marketed to schoolteachers.
Back to the sandwich analogy, what if you quickly agreed to a sub and it cost $12? However, much to your chagrin, a week later you found a better sub more to your liking and it only costs $8?
10 out of 10 times you’d switch to the $8 sub the next time for lunch. Here’s the rub: if the 403(b) ‘sandwich’ is an annuity, sadly this might not be the case. You might be stuck paying $12. 403(b) annuities often contain ‘surrender charges’ for switching to the lower cost… ’sandwich.’ This is one of the reasons why the SEC has finally taken notice.
Thankfully, some districts have already put on their menu what is called an RIA (Registered Investment Advisor) option. It just might be hard to find on the ‘menu’ among all of the other choices. If you see Fidelity or Aspire you may have this option already and just not know how to use it. These RIA 403(b) plans are normally more customizable, contain more diverse investment options, lower fees, and absolutely ZERO switching penalties.… certainly, more of a ‘chefs’ choice.’
If you’re not sure if your district has and RIA or mutual fund options and want a 403(b) meal catered to your needs, let us know. If you think you could be paying too much in fees, we can conduct a no-cost, no-pressure cost analysis. As a financial advisory firm dedicated to ensuring teachers get a square deal (or a square meal) on their retirement planning, we can assist in putting together a 403(b) that won’t leave a bad taste in your mouth.
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