Stephen Schullo never expects to see a dime from Social Security. So retirement planning is of paramount importance to this 50-year-old.
Yet when the third-grade teacher at Leo Politi Elementary School in Los Angeles looked at the investment options available to him through his school district’s 403(b) plan–the non-profit-sector equivalent of a 401(k) plan–he was horrified. Most of the nation’s best funds are not offered. The bulk of the options, he said, are high-cost funds that charge upfront fees or have fairly high continuing expenses that eat away at a participant’s returns.
Schullo wanted the district to open the gates to the likes of Vanguard Group, which offers competitive returns and some of the lowest fees in the mutual fund industry. Doing this could bring Schullo and his colleagues thousands of dollars more in accumulated retirement assets.
But the district said Vanguard didn’t meet its criteria because the company would not sign an agreement making it responsible for any errors the district might make in remitting employee contributions to the plan.
Schullo is refusing to accept no for an answer. For the last two years, he’s been talking to his union, his co-workers and to the Los Angeles Unified School District administration in an effort to expand the investment options available to teachers through the 403(b). A member of the LAUSD board has agreed to talk with him, and he now feels his quest may finally be getting somewhere.
For other teachers, many of whom complain about the sorry investment options their districts provide through 403(b) plans–and for employees in private industry and in government across the United States who believe their 401(k) and 457 plans don’t pass muster– Schullo’s story may prove instructive.
If you are persistent and able to gain support from your peers, you might be able to persuade your employer to improve its retirement plan options. The payoff can be huge. A fund that offers even a modestly better rate of return or even modestly lower fees can make a difference of tens of thousands of dollars at retirement.
Many experts say the plans offered to teachers are more likely to have high fees and produce lackluster results than those offered in private industry. However, the Labor Department has recently begun investigating the upsurge in fees charged to 401(k) plan participants.
That’s because an increasing number of mutual fund companies that participate in these plans have begun to create two tiers in their pricing structures, charging 401(k) plan participants more than individuals who buy funds outside of a qualified retirement plan.
“There is a concern that employers are not paying enough attention to fees, and they very much affect the ultimate retirement income . . .” says David Ganz, regional director of the pension and welfare benefits division of the Labor Department in Los Angeles.
Corporate-offered 401(k) retirement plans are ruled by the Employee Retirement Income Security Act, or ERISA, which legally binds employers to use reasonable care when choosing investment options.
If an employee believes the company’s operation of its 401(k) plan is so remiss that it would constitute an egregious or venal breach of fiduciary duty, the worker could report it to the Labor Department for investigation, Ganz says. However, the department won’t force a change in the plan unless there’s a clear and compelling ERISA violation.
The Labor Department has no jurisdiction over 403(b) or 457 plans, which is partly why these plans are prone to underperformance, experts say.
In many instances, these are little more than do-it-yourself retirement programs in which workers are given little direction on how to participate and sometimes are not even informed about what their investment options are, says Cathy Cleveland, legal consultant in the office of Hewitt Associates, a national benefits consulting firm based in Newport Beach, Calif. School districts still have a duty to choose prudent investments. However, any investment that’s fairly conservative would arguably fit the bill, she says.
Schullo found out that Vanguard funds were not available to him only after he filled out a form asking to invest in one of its funds and had his application returned. It took dozens of calls to find out which funds were available in the district’s plan, he says.
Other teachers say officials in their districts usually tell employees to contact one of several financial advisers who work with the district. More often than not, these advisers recommend load funds that pay the adviser a commission when individuals invest. Many teachers must be fairly savvy and aggressive to find out about the lower-cost funds that might be available within their plans.
Like Schullo, you can make what may become a Herculean effort to get your employer to change its ways. Often this requires winning support from other employees–taking the time to call or write them and carefully explain why investment options matter.
When many employees ask for a change, it often happens, Cleveland says. “The clients that call and ask us to redesign their plans usually tell us that they’re doing it because workers were complaining,” she says. “It’s a squeaky-wheel thing.”
