| 403(b) Theft — How Employees and Employers Get Bilked | |
| This is not another Enron or WorldCom tale. And it is not a Nigerian Internet hoax. In fact, it is a perfectly legal way for companies to excessively profit off of their customers. The scam? It is called the all too-typical 403(b) plan. The real shame is that most plan participants and employers have no idea how much they are losing. | |
| One Example | |
| Back in 2003 I volunteered at a non-profit organization. Many of the employees I met suspected their plan — administered by a large insurance company — wasn't so great. Their misgivings were correct. | |
| How Bad Was It? | |
| Fees were north of 2 percent. In fact, many participants were paying more than 3 percent. Unfortunately, this is isn’t surprising. According to Morningstar, the average variable annuity charges an annual fee of 2.08%. This figure does not include sales charges — known as loads that can be as high as 5.75% — or additional annual fees of up to 1% or more charged by the plan advisor. Most egregious is the fact that many of these fees are not disclosed in the statements provided to plan participants. | |
| What Does This Mean to the Average Participant? | |
| Quite simply, participants in expensive plans are losing A LOT of money. How much? How about $875,000 in some cases? Consider… If a participant
invested $10,000 per year (inflation adjusted) for 40 years, earned a 9 percent return (before fees), he or she would accumulate approximately $2.4
million. If fees were along the lines of the plan I just described (2.08 percent + additional advisor fee of 1 percent), this investor would pay more than
$875,000 in fees. Contrast this dismal example with a plan composed of low-cost index funds (annual fee of 0.25%) and one in which the plan advisor and plan administrator charge a flat fee not based on the assets in the plan. In this second example, with the exact same contribution figure ($10,000 per year, adjusted for inflation) and return (9 percent), the employee would accumulate almost $4.8 million. Fees in this scenario would total $120,000. | |
| How to Protect Yourself | |
| As a financial professional I still see far too many plans like the one I first encountered back in 2003. Here's what you can do: Ask questions. Find out exactly who the financial providers are and what they charge. High-fee firms often make it difficult for participants to easily unearth fees so in addition to asking for the prospectus — a legal document describing operating terms and rules of an investment — you can turn to www.403bcompare.com. This site is run by CalSTRS, the large California pension firm for teachers, and allows anyone to find out the fee structure of financial firms in the database. While this is a database of companies selling 403(b) products in California, chances are likely that a product you want to learn about is listed. I encourage you to check it out. And I encourage you to take what you learn to your employer. | |
| Final Word | |
| Everyone notices when large amounts of money suddenly go missing, but it is the drip-drip-drip of high fees over time that can really add up. | |
is a fee-only planner and owner of Long Financial Planning. | |
  | |
    | |
 | |
 |
