Teachers Union is Selling Financial Products to its Members, Not Good Ones


The NAE is in the practice of hiring teachers to sell financial products that the union endorses to its members.

In a November 2017 newsletter Liz Cannon (head of the Indian River chapter of the Florida Education Association) urged union members to buy retirement investments from Valic Financial Advisors Inc. She stated... that way “we also make money,” through regular dividends. What she didn’t say was that Valic is just a unit of giant insurance company AIG and that the instrument can carry high costs that may shrink the nest egg needed for when teachers retire. Valic’s Portfolio Director, an annuity that is popular in teachers’ retirement plans, charges fees of up to 2.3% of assets annually.

These deals and those similar mean unions and other groups get income from endorsements of investment products and services. This process also helps explain why many local-government workers continue to pay relatively high retirement-plan costs, while fees in corporate-based retirement plans have been falling for years.

At issue are 403(b) retirement savings plans for teachers and 457 plans for government workers—variations on the 401(k) plans many companies offer. About $900 billion was held in 403(b) plans for public-school teachers and 457 plans at the end of June, according to the Investment Company Institute, a mutual-fund industry trade group. Fees average less than 1% in 401(k) accounts, according to research firm BrightScope Inc. and the ICI. The fees 401(k) participants pay for mutual funds that invest in stocks fell to 0.45% in 2017, on average, from 0.77% in 2000, ICI and BrightScope data show. In teachers’ 403(b) plans, annuities account for more than half of invested assets. Annuities, largely sold by insurance companies, typically offer a pension-like lifetime income, but they can entail annual fees as high as 3% of invested assets.

“The unions should be advocating on behalf of members, not selling products to them,” said Scott Dauenhauer, a registered investment adviser in Murrieta, Calif., who specializes in financial planning for teachers. “They are there to protect teachers’ rights, not exploit them.”

A spokesman said Valic’s Portfolio Director is just one of a range of retirement-plan investments Valic offers, and an investor would pay the top 2.3% fee only if he or she chose a specialized fund that contains a very small part of the assets Valic handles in retirement plans. The average fee investors pay is considerably less, he said.

As recently as October, teachers’ unions in central Florida urged teachers who had retirement questions to reach out to Mary L. Thomas, who was a consultant at the union-owned Creative Benefits for Educators and also a long time sales representative at Valic, according to regulatory records. After further inquiry about her dual role, the Creative Benefits website shut down.

The NEA is the nation’s largest teachers union, with some three million members. “I thought that if they were recommending it, it must be a very good product,” Mr. Hamblen said. He is now sueing the union, as well as insurance company Security Benefit Corp. and others. The suit, filed in federal court in the Western District of Washington in Tacoma, alleged that 403(b) participants were harmed by an arrangement in which the NEA and an affiliate endorsed high-cost investments from providers. (A for-profit subsidiary of the NEA received about $3.6 million from Security Benefit last fiscal year)

Lisa Sotir, chief compliance officer at the NEA’s Member Benefits subsidiary, said it recommends Security Benefit to union members in part because the insurer has a “trained field force” that can educate members on the importance of saving, which school districts may not provide.

For its own employees, the NEA hired low-cost Vanguard to oversee a 401(k), resulting in investment fees a fraction of what many NEA union members pay.

Asked why the difference, Ms. Sotir said the “NEA, like many private employers, offers certain levels of online education and advice.”

The NEA subsidiary doesn’t return any dividends, profits or royalties to the parent union, but uses the money to promote endorsed products and provide education and guidance to union members, Ms. Sotir said.

Mr. Hamblen in California lost his lawsuit challenging the NEA subsidiary’s deal with investment providers. A federal appeals court said the union and its subsidiary didn’t have a fiduciary obligation to make sure that fees on retirement-plan products were reasonable. Generally, public-school teachers’ 403(b) plans are exempt from federal pension law requiring 401(k)-plan sponsors to act in participants’ best interests.

Trading on the union’s name and hiring teachers is brilliant marketing, said Erik Klumpp, founder of Chessie Advisors LLC, a financial advisory firm in Rochester Hills, Mich. “If the sales agent is a fellow teacher you see in the halls, it’s harder to call that person and say, ‘I don’t want to do business with you anymore.’ ”

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Economics, Finance and Investing