Wednesday, May 20, 2020

Secret Lower-Cost 403(b) Products That We Hope You Never Have To Use

Low-quality vendors sometimes offer secret lower-cost programs

Photo by Kristina Flour on Unsplash
There is an old saying, in the land of the blind, the one-eyed man is king. There is a similar saying in the world of 403(b) advocates, in the land of bad 403(b)s, the less-bad 403(b) is king. Ok, no one really says that, it just sounded good in my head, but there is truth in that statement.

We come across a lot of products at 403bwise and most are pretty awful. We tend toward recommending a list of vendors we know to have reasonable fees, these vendors are:

CalSTRS Pension2 (only in California)

There are many 457(b) plans run by states that we like as well (as well as several states with 401(k)s that are offered to teachers - Idaho, Colorado, North Carolina).

But what happens when we come across a school employer who has both bad 403(b) and 457(b) choices? 

Our first recommendation is to begin lobbying your employer for better options (see our resources page), the second is to consider contributing to a Roth IRA if you qualify (insert link). Roth IRAs are simple to set up, low in cost (basically free at Fidelity) and allow you great freedom in investment options, but if you are going to contribute more than the Roth limit, have an existing low-quality 403(b) and or you don’t qualify for a Roth, you’ll want to research if your employer offers a vendor with a secret lower-cost program.

It sounds mysterious and the vendors offering them would prefer they stay that way. While these programs are not advertised by the school employer or the vendors who offer them, they can be a refuge for those desperate to lower the costs in their 403(b). 

The vendors offering these programs are not offering them out of the goodness of their own heart, quite the opposite. They are offering them in order to keep quiet the people who might otherwise advocate for better choices in the 403(b) overall, it’s a way to silence those who have become wise to the 403(b). The vendor is thinking that if they just give in and satisfy this small group of agitators, they won’t become a bigger group demanding even bigger change (which might be a prelude to the vendor being removed). To some extent, this has worked, but as 403bwise is proving, it won’t work for long.

Who offers these programs?

So far I’ve been able to identify three providers, though it seems that the programs are not nationwide. There are likely to be other secret low-cost programs offered in particular states, if you come across them, let me know.

Lincoln Investment’s RetirementSolutions Participant Directed Program

This program is offered only in New Jersey, though I’m told it’s also offered in a few other select school districts, but I’ve not been able to identify them. If you have information on these other districts, please let me know. In researching the program the rumor was that this program was put together by the New Jersey Education Association, though I’ve not been able to find any evidence of this.

This product is essentially a clone of the Vanguard 403(b) product, it charges a flat fee and offers almost every major Vanguard fund (usually Admiral share class). I do not believe Lincoln pays any of the compliance fees on behalf of the school district, though I could be wrong.

This is a good way to get access to low-cost Vanguard investment options when you have no other choice.

Annual flat dollar fee: $60

Annual asset based fee:          0.00%

How to access: You simply e-mail and ask for the PDP application and they will e-mail it to you (with a gentle reminder from Lincoln that you really should re-consider doing this on your own). You’ll still need to process a salary reduction agreement separately.

Who can access:          As far as we can tell, only school employees in New Jersey.

PlanMember Participant Choice

For those not familiar with this company, they are now partially owned by AXA/Equitable, a notorious player in the 403(b) world. You will often hear the benefits of fee-based accounts and the word fiduciary is thrown around, but don’t mistake these representatives for full time, fee-only fiduciaries. 

This program is not “low-cost”, it’s better labeled “lower-cost”. It’s not the best option out there, but it does offer very good investment options with mostly institutional share classes where possible. Vanguard, DFA and American funds are all available along with a few T. Rowe Price funds. Think of it more as a curated, not crafted mutual fund list.

You can find information about it on 403bCompare, here.

Annual flat dollar fee: $50

Annual asset based fee:         0.35%

How to access: You can goto the 403bCompare page for this product and attempt to e-mail them for access to an application. I’ve done this, but have yet to receive a response. Here is the e-mail for PlanMember. you’ll still need to process a salary reduction agreement separately.

Who can access: Since this program is disclosed on 403bCompare, we assume it’s offered in California, but we see no reason why it wouldn’t also be offered nationwide anywhere that PlanMember (or potentially AXA/Equitable) has a payroll slot. We are working to get an official statement from PlanMember.

NEA Direct Invest offered through Security Benefit

This is a program that almost no one knows about but is probably the most widely available low-cost product offering in the nation. As far as we can tell, very few teachers use it and it’s not easy to get your money into it if someone hasn’t already set it up at your school employer. However, once it’s setup, it seems to work well and you are not bombarded with advertisements for other Security Benefit products (at least, I’m not).

For those who don’t know the history with the NEA and Security Benefit, the two have been selling high cost financial products for decades together and the relationship appears quite profitable for both. A wholly owned subsidiary of the NEA, NEA Member Benefits receives an annual base fee of $3,827,256 (see prospectus here) in exchange for promoting Security Benefit products and I suspect that number is higher, though NEAMB will not disclose how much they are paid be each of the vendors they work with, so I can’t be sure.

Dan Otter and I had conversations with the NEA many years ago about how bad their product offerings were, we like to think this had some influence on them starting this NEA Direct Invest offshoot product. The NEA does very little to market the product as they make the money selling higher margin products, but they have assured me that whereever Security Benefit has a payroll slot, this product will be available (note: this doesn’t mean the school employer will allow it).

My very first blog post, nearly twenty years ago was an expose on the NEA Valuebuilder program, you can read it here.

While I’m not a fan of the investment lineup (they offer Vanguard index funds alongside BNY Mellon index funds that pay Security Benefit revenue and which are 4 - 12 times higher in cost for the exact same investment) the great part about this program is that it does offer access to a few good Vanguard funds with a low annual fee (which can be waived). You can build a globally diversified portfolio by using the Vanguard Total Stock and Total International Stock funds combined with either a money market or a bond fund. It’s not perfect, but it’s better than most of the junk in the 403(b) marketplace. We would love to see them revamp the lineup to add a few more Vanguard funds and removed the high cost BNY Mellon funds (BNY Mellon S & P 500 fund cost 0.50% versus the Vanguard Index 500 at 0.04%).

Annual flat dollar fee: $35, waived for balances of $50,000 or more

Annual asset fee:         None (which is quite amazing, though this is due to all the other high cost funds in the lineup subsidizing the Vanguard funds)

How to access:         You can enroll online here, you’ll still need to process a salary reduction agreement separately. It can take 6-8 weeks to get the account set up if you’re the first to do so in a district.

Who can access:         As far as we can tell, anyone, even if not a union member.

What Should You Watch Out For?

These programs are often used as marketing lists. Expect to be bombarded with “information” about the company offering the program and trying to get you into their advisory services that are much more expensive. With that said I’ve been pleasantly surprised that the NEA Direct Invest program does not currently do this (my wife has an account with them and yes, it’s possible they’ve simply removed her account from the lists so that I don’t see any marketing, but I’m skeptical that’s the case). I do not have accounts with Lincoln or PlanMember, so I don’t have first hand experience and can’t say for sure they will market to you, though it’s common sense to think they will.

These programs might be acceptable, in some cases even good deals, but do not mistake them for good players in the industry, in my opinion, they are not. None of these companies in my opinion are high quality. The salespeople they employ are not full time fiduciaries and the companies didn’t set these accounts up out of altruism, in my opinion they did it to perpetuate the status quo.

Compliance fees are generally paid by these vendors on the participants behalf, they likely won’t be with these products. Many school districts hire a third party to perform tasks in order to keep their plan in compliance with IRS regulations, this isn’t cheap and the fees are often passed onto the vendors. The higher cost, lower quality vendors might absorb these fees given their higher profit margins, but there is no way to absorb such fees and not lose money with lower-cost options. You might end up paying $75 to 100 a year in flat fees between the vendor and the compliance fees. While this isn’t ideal, you’d pay a similar fee with using Vanguard. If you don’t have any other good options, paying these flat fees is cheaper in the long term than paying high asset-based fees.

You should consider whether the 457(b) is a better option for you and check to see if that plan is offered with better terms. Many states offer solid 457(b) options (and as mentioned earlier, a few like North Carolina, Idaho and Colorado offer great 401(k) options as well). 

Don’t Stop Advocating for Better Choices

If your school employer only offers poor 403(b) choices, but one of them happens to be from the above companies and you decide to take advantage, great, but don’t stop there. Advocate and Educate. Work to add a good vendor to your list. Help educate your HR staff and fellow employees on the benefits of a low-cost provider. It might not be easy, but it’s the right thing to do and you could literally save your colleagues hundreds of thousands of dollars over their lifetimes.

Account Closure Fees

The NEA Direct Invest does not seem to have account closure fees, however Lincoln charges $60 (as of May 2020) if you were to close this account. PlanMember as of May 20th does not show an account closure fee on 403bCompare, which means that if you have this account as of this date, they cannot charge an account closure fee if your account is associated with a California school district (a vendor cannot charge a fee that is not disclosed), however outside of California a fee may be assessed, so find this out first. I’ve had this issue with PlanMember in the past charging a termination fee not disclosed on Compare. After initial resistance, they realized they had no choice but to reverse the fee. Check the custodial agreement for language regarding termination fees.

Loan Availability and Fees

The NEA Direct Invest allows loans, but charges an arm and a leg. You will pay a $100 setup fee and $50 per year for your loan.

The Lincoln program charges $60 to setup a loan and a $60 annual fee to maintain it.

PlanMember is silent on loans, which doesn’t mean they don’t offer or charge, just that it’s not currently disclosed on 403bCompare.


I hate writing blog posts like this. The fact that teachers have to do so much work to find a reasonably cost retirement plan is ridiculous. The fact that the National Education Association continues to offer their own employees a Vanguard retirement plan while promoting high-cost, low-quality products to their members is infuriating. My wife is a member of the NEA and we are both supporters of our local, state and yes, even the national (NEA) union. We don’t believe unions are perfect, but in many respects they work hard to protect teacher’s rights. Why they have chosen to do the opposite in this case is hard to say, but we hope to change their mind.

If you don’t have good 403(b) options in your school district, work as a 403(b) advocate to get better options for you and your colleagues. In the meantime, maybe one of the above programs will provide a bridge to when that day comes.