NEW ORLEANS — In the world of workplace retirement plans, there is a persistent problem with 403(b)’s, which are like 401(k)’s but for nonprofit employees.
The people who do some of the most good in the world (and often get paid the least for it) end up in high-cost plans with second-rate investment choices. When these employees finally wise up, it can take years to find a better deal and get their human resources departments, or bosses, to find an outside financial adviser who can help them switch plans.
There are few people who understand this reality better than Ryan Frailich. Over about a decade, he’s gone from working as a teacher in three states, and putting his own money into a succession of 403(b) plans that were mediocre or worse, to running the human resources department for a charter school. Then, fed up and worried about the fate of his fellow educators, he became a financial adviser here to help them set a better course.
Along the way, he ran into sales representatives bearing candy and dispensing hugs who put young adults into annuities paying low fixed rates. Then, he ran into brick walls while spending hour upon hour trying to extract people from those accounts.
None of it needed to happen. When the teachers trying to turn around the city’s troubled schools end up feeling like they’ve been punished financially for their efforts, something is wrong. It begs the question of whether the complex 403(b) plans were erected for the benefit of the very people who built the systems.
Mr. Frailich, 32, is the son of a Minnesota stockbroker, but he wasn’t thinking about the details of his retirement plan when he took his first job as a Teach for America educator in Mississippi. As he moved from there to Brooklyn and then to New Orleans, he was just glad to be saving something for later and getting some matching contributions. “I didn’t know I had an annuity,” he said. “I was just glad that I was putting away 10 percent of my salary.”
At age 26, as the human resources director for a charter school here, he woke up to the fact that he and his colleagues had money in some problematic annuities — financial products that promise a particular return but often limit your ability to sell them and come with very high fees. Local sales representatives who were independent agents had helped set up the school’s plan. Mr. Frailich found employees in their 20s with fixed-rate annuities earning just 3 percent, hardly enough to secure a comfortable retirement.
Because of prohibitively high costs, his school did not participate in the state’s teacher pension plan, so the 403(b) plan was all that was offered to him and his colleagues.
Moreover, many states, including Louisiana, have pension funds that are badly underfunded, and keep pushing off what seem like inevitable benefit cuts or income tax hikes to cover the shortfall. Some younger teachers, especially those who are not sure they will make a 40-year career in education, approach them with wariness.
Mr. Frailich realized his colleagues needed the ability to invest directly in mutual funds in their retirement plan, the way most people with for-profit employers can. That would give them a chance at higher returns. To do that, however, those colleagues needed entirely new accounts — on top of the annuities in their original accounts, which came with penalties if you sold them before several years had gone by.
“In the process of making things better, I also had to make them more complex,” Mr. Frailich said. After he left the school, another administrator made further adjustments, leaving some veteran teachers there with five or six separate 403(b) accounts.
Now, years later, some of his former colleagues (some of whom have become clients) are having a hard time getting out of the old 403(b)’s and into one consolidated account that would be simpler and cheaper. Some of the problem appears to be sloppiness on the part of Voya Financial, the company that controls the old accounts.
One teacher, Katie Harvey, recently discovered that Voya had her first name wrong, her birthday wrong and her email wrong. Changing all of that required printing out a form and sending Voya a copy of her identification by mail.
Another teacher, Sara Wilson, had been trying for four months to extract her accounts from Voya, but still hadn’t managed to finish when I spoke to her this week, even with the help of other local financial advisers. “It’s been very entertaining to listen in on the calls,” she said. “The girl is saying words to me that I don’t understand. And my adviser keeps saying `Do you expect my client to understand this?’”
Kristin Foght, who also teaches in the area, tried to move her accounts away from Voya without any expert help. She began in August. There were name-change forms, since she got married along the way. Then spousal consent forms. Then demands for notarization. Then requests for a letter of acceptance from the company that would be receiving the funds. Then a requirement to fax the forms. “They kept telling me that they were not getting the fax,” she said. “And I kept saying `Nobody faxes anymore besides you guys!’”
At one point, the letters of acceptance expired. So she found herself driving 20 minutes with her 2-year-old in the car to an after-hours notary. But what really pushed her over the edge, she said, was when a Voya supervisor said she was transferring forms to a third-party administrator and then failed to do so. A month later, Ms. Foght said, that same person told her that the wrong page had been notarized, and Ms. Foght would have to begin again.
So why were these teachers in low-rate annuities in the first place, instead of simple and cheap index funds, and were those annuities appropriate? Voya would not answer that question, but one of the original independent sales representatives, Delinda Duncan, who no longer sells Voya’s annuities, did. “Teachers are very conservative in Louisiana,” she said. “It’s a little different than in other parts of the country.”
She added that in many instances there were variable annuities available that did allow people to participate in the growth of the stock market.
As for the service issues these teachers encountered, Voya examined Ms. Wilson’s and Ms. Foght’s situations and expressed contrition. “We acknowledge that, in both cases, we did not meet the high service standards that we deliver on a consistent and reliable basis to our five million retirement plan customers,” the company said in an emailed statement. “Our culture is centered on continuous improvement, and we will be reviewing the opportunities here to help avoid future processing delays. The transactions for both customers are now complete and rollover checks have been issued.”
Mr. Frailich spent eight hours extracting his own Voya accounts, an experience he described as “brutal.” And while he used to harbor ill will for Ms. Duncan and her mother, who sold products with her, he no longer does. “People get caught up in a sales culture selling things that maybe they don’t understand,” he said. “I believe they thought they were doing a good thing.”
The 403(b) plans are much better for many educators in New Orleans now, and many teachers are able to invest in simple index funds. But Mr. Frailich remains unhappy with Voya and its attempt to profit from teachers who he believes would be better off in simpler, cheaper investments.
He said that he understands that Voya has to answer to regulators and lawyers. But it would not be hard, he said, for the company to create a simple website for people like his clients who want to move their money — one with correct forms and electronic signatures that do not require faxes.
“You could just push a button,” he said. “But if an institution has an incentive to hold onto your money, they are going to hold onto your money.”