It’s Not All About the Benjamins … It’s About the Fees!

“A thorn of experience is worth a wilderness of wisdom.’

This quote came rushing to me when I realized I have experienced yet another painful lesson in my financial journey that got my attention faster than all the books I read on the topic.

If you’re a teacher who is investing, feel free to experience this lesson yourself, but if you want to save a couple of thousands dollars, you might want to read on and heed my warning.

Quick backstory:

Once the ink was dry on my first teaching contract, I started investing. I was 25, bright eyed and clueless about finances. The  optimistic sales guy that came to speak to us and the charts showing the rule of 72 was the reason I jumped in with gleeful abandoned. Though I was $60,000 deep in debt (mostly student loans), I wasn’t focused on paying anything off right away, so I opened up a 403B retirement account with this sales rep and began putting $400 pretax dollars into this account per month.

I didn’t ask any questions. I just signed up and sent my money off to Lala land.  Why? Because the rep told me to and because he had free donuts.

Fast forward to 2012 and our administrator announced that the staff could no longer invest into any outside 403B accounts. “If you want to continue contributing into your pre-tax 403B accounts,” she explained, “you have to do it with this new company that has contracted with our school. “ This company shall remain nameless soooo – let’s call them PM Company.

I thought it odd that we didn’t have a choice with who we could invest with but, once again, I didn’t ask questions. I didn’t know which questions to ask. The rep came to visit from the PM Company and yes, he brought donuts. And yes, he displayed those ubiquitous graphs that show how your money grows over time. He cheerfully chatted about the benefits of investing with pretax money versus post tax money and then, without missing a beat, offered us a flashy smile and handed us a pen.

I still felt uneasy but since we had no choice of vendors, I moved the money I had in my 403B, along with my IRA and ROTH IRA accounts over to the PM company and continued chipping away at my non-existent investment goals. By then, I was married and my husband and I were halfway done with getting out of our $100,000 of debt, so my contribution was lowered  from $200 to $50 (so we could use the extra money to pay off our remaining loans).

Then it happened.

As we were nearing our debt payoff goal in 2015, I started doing research on investing (since that was the next step after solidifying our 6-month emergency fund). I settled on the book 7 Steps To Financial Freedom by Tony Robbins. When he began speaking about an important factor most people don’t think about when it comes to investing, I almost dropped the book. When we invest, we look at the funds or whether we’re ‘aggressive, moderate or conservative’ but we don’t look at this other important element. When I finished the chapter, I slowly closed the book and thought about the ONE THING I should have been thinking about all along….

The fees. I didn’t ask about the fees.

O.M.G

ANOTHER YEAR ANOTHER VISIT – Summer of 2016

August was here and so was the unbearable heat but that also meant that the PM company rep was blazing a trail across our school lawn tracking down new teachers to get them to sign that expensive dotted line.

I was ready and armed with my questions.

This time he didn’t have donuts, he had sandwiches.  “Yay free sandwiches!!” I exclaimed as I walked into the teacher’s lounge. I totally got sidetracked.

“Wait Genein,” I thought, “Stay focused!!”

I asked him nonchalantly about any fees on our 403B account and he tells me, in the most reassuring voice, “Yes, you have fees, and they are only 2% but let’s look at your account. You only put in this much but look how your account has grown over time. This amount here is ALL interest!” The classic redirection move. Nice.

I got excited to see the growth and then sat down happily with my free sandwich.

But something still didn’t feel right.

Isn’t 2% kinda high?

Since I had nothing to compare it to, I wasn’t sure. I continued reading the Financial Freedom book and Tony Robbins pleads the importance of knowing and calculating the fees on all your accounts. He gave the example of two people who are equal in every single aspect of investing (income, number and percentage of contributions, return on investments) but if one person has a fee of 2% and the other 0.25%, the person with the lower fee could have more than double the amount than the other person by retirement.

Just because of that one, ever so eluding, factor.

The fees….

After reading other articles on this and learning about other lower fee options, I go to my administration to ask if we can have more choice in our 403b accounts. The other options I discovered were TIAA-cref (but they don’t work with small charter schools for 403Bs, only large districts), Vanguard and CALStrs Pension 2 (and I just discover Ellevest, investing for women!). Nevertheless, our retirement accounts were not high priority at that time, so my request got moved to the back burner.

I end up moving my IRA and ROTH to TIAA but I’m stuck with the PM Company for my 403B.

I’m trapped with nowhere to go.

Now it’s 2018 and we suddenly have a change in administration. Like Mary Poppins on the westerly winds, the PM rep strolls on through and even though I’m on maternity leave, I hear that he’s back getting people to sign up for the high fee 403B account. He urges the teachers to invest as much as possible. He keeps saying, “Well someone here has over $100,000 in their account,” trying to make us feel inadequate for not increasing our own contributions. Big no no.

First of all, should you even be sharing that personal information? Second of all, that person is also being charged over $2000 a year in fees!

But I didn’t say anything to the staff.

I did compose an email of questions (listed below). I wanted to know every single fee that was hitting my account and where I could find them. I wanted to know the performance of my funds and if there was an alternative program that PM company has or is the 2% program the only option for us. I wanted to know if the rep was paid on commission and if the PM company was a for profit company or not-profit company.

I wanted to know the truth.

I sat down with my 3 month old baby and tediously went through my online account, searching for the fee amounts. Hiding out on an obscure page, I finally discovered them (they were very well hidden – aka ‘hidden fees’) and I had to scroll through hundreds of transactions to pull out the fees. Advisory fees. Account maintenance fees. First quarter, second quarter, third quarter fees. I added them all up and when I finally pressed enter, I gasped, startling my little one.

For the six years I’ve been with the PM company, I have contributed about $5,500 to my account.

They took about $2000 from me in fees!! TWO THOUSAND DOLLARS!!!!

I felt like I got punched in the face.

Not only did I lose the $2000 to fees but I also lost the interest it would have accrued had it stayed in my investment account.

Most companies charge you on your account balance, not on your monthly contributions. So if your balance is $20,000 but you’re only contributing $50 a paycheck ($100 a month), several of those monthly contributions are going straight to fees! The higher the balance, the more money they take from you.

That’s why it’s important to keep the fees as low as possible!

But WAIT, there’s more!

PM company not only charged us 2% on our balance but an annual fee of $50 for account maintenance.

So with these high fees you would think my account performance would be amazing right? Hovering with a ROI as high as 10%? 14%

Nope.

At the time of this writing, the life of the account exhibited a performance of 8%. The same performance as the other company fund accounts that have much lower fees, like Vanguard or CALStrs Pension 2.

EDUCATION SHOULD LEAD TO ACTION

Those of you who know me know I spring into action when I feel there’s been an injustice, especially when it comes to teachers’ and my students’ well-being.

I called the teachers together for an informal meeting and shared my story. I first explained that in addition to our CALStrs Pension, we need to be investing in another type of retirement account to supplement it, whether it be a 403B, a ROTH or a traditional IRA. This is no longer an option. Teachers need to do this.

I continued to share my findings of my dilemma with our current 403B provider. I showed the company logo, the tactics and of course a picture of free donuts.

Then I showed them the number. My number. My fees.

A hollowing gasped was quickly followed by silence. They stared at the amount of fees I have paid to date. Many of them were in the same boat I was.

Collectively, we all took a vote as to whether we wanted to keep PM company or switch to a lower fee non-profit company that has our best interest at heart. The vote was unanimous and we are now in the process of transferring our accounts to CALStrs Pension 2, who’s fees are 0.25% instead of 2%.

Had we started with them in 2012, I would have only paid $300 – $400 in fees instead of $2000. Had we’d stayed with PM company for 20 more years, I would have lost half of my investment to fees.

Big mistake.

BIG

(said in my Julia Roberts ‘Pretty Woman’ voice)

PROTECT OUR TEACHERS

It saddens me that teachers and others in the non-profit sector aren’t protected when it comes to investment options like these. Teachers, who have given their life and the possibility of higher earnings in order to educate our nation’s students, are being taken advantage of left and right by companies who are depending on our ignorance to gain a massive profit.

But now I know and I’m sharing my story with whoever will listen. Sallie Krawcheck from Ellevest, an investment company by women and for women, says that you should not pay fees higher than 0.5% for digital services and 1% for human services. Anything above that should be a red flag.

At a Jump$tart seminar of financial education, I met one older teacher who is the ‘Pre-Retirement Chair’ of the local Teachers’ Union. After hearing my story he came up to me and said, “Genein, you’re not alone. That PM company made more money off of my retirement funds than I did! They’re the worst!”

Shame on you PM Company. Shame. On. You!

So, to my fellow teachers and other investors out there dedicating their life to the betterment of  others, please heed my warning and do your due diligence. Go with your gut, ask questions and if it doesn’t feel right, don’t invest until you feel confident the reps have your best interest at heart.

Looking back, I should have eaten those donuts more slowly. Those were the most expensive donuts I have ever been offered.

QUESTIONS I asked my 403B provider:

Where can I see the compilation of fees charged to my account? How much in fees have I paid to date? What are the amount of fees paid per distribution?

If I move any money from PM Company, if there a surrender charge? If so, what is it and when does it expire?

Do you offer annuities? Does my plan have any annuities in them? If so, what type?

What is your annual fee? Administrative fee? Custodial Fee? Management Fee?

Do you offer no load index funds?

What is the commission structure for the PM Company?

Is PM Company a not-for-profit company or a profit company?

21 Questions To Ask About Investment Fees from NY Times Financial Expert  @RonLieber