Teacher unions get cut on annuities
Mood:  d'oh
Topic: Lib Loser Stories

Full Image: Crystal Mendez's union-backed retirement plan earned 3 percent a year while her boyfriend's 401(k) was getting 15 percent. >>>>>

Teacher unions get cut on annuities

Companies pay them to steer members into mediocre investments
Last of three parts.

Second-grade teacher Crystal Mendez was in the staff lunchroom at 42nd Street Elementary in Los Angeles when a broker introduced herself and started talking up a retirement plan.

Mendez thought she could trust the woman because her company had been endorsed by her teachers union. She agreed to put $400 a month into a retirement account, assuming her money would be invested in stocks. Just 22, she figured she had plenty of time to ride out any dips in the market.

Nearly two years later, when her boyfriend started bragging about the returns he was earning on his 401(k), Mendez took a closer look at her own account. "He was earning 15 percent a year and I was earning 3 percent," she recalled. "I thought, 'There's something wrong here.'"

Mendez's money was languishing in a fixed-rate annuity, an investment ill-suited to someone in her early 20s. Worse, she would have to pay a steep penalty to bail out.

Public-school teachers across the country are in similar predicaments.

And many have their unions to thank for it.

Some of the nation's largest teachers unions have joined forces with investment companies to steer their members into retirement plans that frequently have high expenses and mediocre returns.

In what might seem an unlikely partnership, the unions endorse investment providers, even specific products, and the companies reciprocate with financial support. They sponsor union conferences, advertise in union publications or make direct payments to union treasuries.

The investment firms more than recoup their money through sales of annuities and other high-fee products to teachers for their 403(b) plans - personal retirement accounts similar to 401(k)s.

New York State United Teachers, for instance, receives $3 million a year from ING Group for encouraging its 525,000 members to invest in an annuity sold by the Dutch insurance giant.

The National Education Association, the largest teachers union in the country with 2.7 million members, collected nearly $50 million in royalties in 2004 on the sale of annuities, life insurance and other financial products it endorses.

Other deals
Teachers unions across the country - including statewide teacher associations in Pennsylvania, Michigan and Oregon - have struck their own endorsement deals. Unions in Dallas, Miami, Phoenix, Seattle and Atlanta, among others, refer members to products approved by the NEA and typically receive a share of endorsement revenue in return.

Many teachers say they presume an endorsement means their union has used its clout to get the best price, as unions do on products ranging from eyeglasses to automobiles. But when it comes to retirement accounts, union backing is often a sign that the product will cost more, not less.

Buyers of an NEA-endorsed annuity sold by Security Benefit Life Insurance Co. pay annual fees totaling at least 1.73 percent of their savings. That is about 10 times as much as they would pay with 403(b) plans available from Vanguard Group, T. Rowe Price and other low-cost mutual fund providers.

The costliest option in the NEA-endorsed plan charges 4.85 percent a year. That means an investor would have to earn a return of nearly 5 percent just to break even.

Union leaders defend the endorsement deals and the prevalence of high-fee annuities. They say that teachers get valuable advice from brokers and financial advisers in return for the fees, and that the companies' contributions to union coffers help pay employee salaries and other union expenses.

Yet no one disputes that this money ultimately comes out of teachers' pockets.

"The nature of the marketplace is such that you have these little under-the-table payments, or whatever you want to call them, and a good-old-boy network that really works against the teachers," said Mark Fischer, who runs an Ohio company that designs and manages retirement plans.

As with a 401(k), funds invested in a 403 (b) grow tax free until the owner retires and starts making withdrawals. But there is a key difference. In the private sector, employers sponsor 401(k) plans and are required to screen the investment options and make sure employees have good choices.

School districts are under no such obligation. Most leave it to teachers to find their own investments.

As a result, hundreds of insurers, mutual fund companies and financial planners compete for teachers' money, promoting a bewildering array of products. A union endorsement confers a huge advantage, allowing a provider to stand out from the crowd.

Teachers generally are not aware that unions are paid for their endorsements, directly or indirectly. Such deals usually are not mentioned on union Web sites or in brochures describing the favored investments.

"This is a national problem," said Dan Otter, a former Maryland teacher and founder of 403bwise.com, a Web site that offers tips on finding low-cost 403(b) plans.

"It's a rare school district that gives teachers access to quality choices," Otter said. "In many cases, the 403(b) is a source of profit for unions."

The NEA receives royalties on sales of Valuebuilder, the annuity it endorses, and other financial products. Union officials declined to say how the royalties are calculated or how much money union-endorsed retirement plans bring in.

Disclosure required
They are, however, required by federal law to disclose the total revenue from all endorsement deals. The most recent disclosure on file with the Department of Labor shows that the NEA received $49.6 million from Security Benefit Life Insurance, the provider of Valuebuilder, and other endorsed companies in 2004.

That money pays the salaries of 110 union employees, said Ronald Mentzer, treasurer of NEA Member Benefits in Gaithersburg.

In addition to its direct payments, Security Benefit sponsors dozens of NEA conferences each year.

NEA officials said they endorsed the insurer's annuity because they wanted a provider with a national sales force to serve affiliate unions.

"There are companies that have lower fees, but they don't have the distribution structure that our members tell us that we need," said Gary Phoebus, an NEA spokesman in Washington.

Local unions that help promote NEA-endorsed products get a share of the royalties. The Florida Education Association, for example, collected $140,000 in "program royalties" last year, federal records show. The Illinois Education Association received $178,148, while the Maine Education Association was paid $33,610.

The rival American Federation of Teachers has a far less lucrative arrangement with ING Group. The 1.3-million-member union endorses ING as a provider of 403(b) plans but does not share in sales revenue. Instead, ING reimburses the union for the money it spends promoting the insurer's products.

Those payments have totaled less than $50,000 since the agreement took effect in 2003, said John Abraham, the union's deputy director of research. The lower overhead translates into lower-cost options for teachers. ING offers American Federation of Teachers members a choice of mutual funds with fees as low as 0.25 percent, as well as an annuity with higher expenses.

"We do not have a royalty arrangement like NEA," Abraham said. "All of our deliberations with ING have centered on getting lower fees for members and more benefits and services going forward."

In Wisconsin, the teachers union set up its own low-cost 403(b) program.

The Wisconsin Education Association, which represents most kindergarten through 12th-grade teachers in the state, charges an annual fee of 0.3 percent of assets.

"We have no profit motive. Our goal is to cover the cost of operations and keep the cost to participants as low as possible," said Randy Mullis, assistant executive director of the union's Tax Sheltered Annuity Trust in Madison.

Several years ago, Mullis said, the NEA asked the Wisconsin union to help promote the Valuebuilder annuity.

"We said that in all good conscience, we can't do that," he said.

Kathy Kristof writes for the Los Angeles Times. Times researchers Scott Wilson and John L. Jackson contributed to this report.
Baltimore Sun ~ Kathy M. Kristof ** Teacher unions get cut on annuities

Gosh, you mean yet another Union whose leadership takes care of itself before it takes care of it's members??? What a shock!