I Teach Teachers How to Invest Better

Dan Otter alerts his fellow educators to the pitfalls of putting 403(b) retirement money into annuities.

From Kiplinger's Personal Finance magazine, December 2005

In 1993, I became a teacher and started work at an elementary school in Corona, Cal. Early on, a saleswoman walked into my classroom while I was writing a lesson plan and tried to sell me a variable annuity, an investment from an insurance company. I said, "No thanks." I did not appreciate the unsolicited sales pitch.

Sales pitches like that are still common in schools nationwide. School districts aren't required to explain their 403(b) plans, which let public and nonprofit workers sock away pretax earnings, as 401(k) plans do for employees of for-profit companies. Instead, districts usually leave it to salespeople to explain the menu of tax-deferred investments. That's dangerous. Salespeople usually tout annuities because annuities earn them the highest commissions. But teachers deserve to know that they can take advantage of a 403(b) tax break without buying an annuity.

In 1998, I considered investing in an annuity in my district's 403(b). But I noticed that my district's 403(b) also offered a no-load mutual fund. When I compared the investments, I saw that the annuity would nick 1% more of my account's value each year than the no-load fund.

Annuities typically cost more than no-load funds largely because they include insurance. They promise that when you die, your beneficiary will get as much as you've contributed, or more -- even if losses have lowered the account's value. The promise usually isn't worth the high fees. In the long term, the stock market is likely to go up and insurance against loss is not necessary.

Despite this, roughly 1.5 million teachers own annuities in 403(b)s. I spread the word about the costs to other teachers. Many looked ashen after I told them. I teamed up with two friends (another educator and a financial planner) and in 2000 we launched a Web site called 403(b)wise (www.403bwise.com). The site has averaged thousands of new visitors a month.

I was angry at first, but now I just want teachers to understand all the options before they invest.

--As told to Sean O'Neill

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