The Next Steps for K-12 403(b) Reform

Advocate Steve Schullo says reform is moving in the right direction, but there is more work to do.

W. Scott Simon


My interview with Steve Schullo, a reform advocate for 403(b) plans in the K-12 marketplace, concludes this month. The first two parts of this interview may be accessed here and here. Steve’s latest book, “Fighting Powerful Interests: Educators Challenge Tax-Sheltered Annuities and WIN!,” can be downloaded (as a PDF) for free. He is also a blogger at Late Bloomer Wealth.

Scott Simon: Please explain the nature of in California and how it may (or may not) be helpful not only to teachers in California but to others all across the country.

Steve Schullo: Dan Otter, a former teacher in California, launched in 2000. He has been a tremendous advocate for change in the California K-12 403(b) marketplace. The website features a discussion forum and tons of information about 403(b) and 457(b) plans, and California state insurance code section 770.3 and the legislative fights to reform that ancient code. Instead of me telling you about it, your readers can see for themselves:

1.   Since the reform of 403(b) plans is so important right here in California, Dan has devoted an entire section to it: here and here.

2.   When the California Teachers Association (CTA) crushed our latest legislative effort to reform California insurance code section 770.3, was right there reporting it all, which angered CTA.

3.   Our Participants section has comprehensive, objective information on both 403(b) and 457(b) plans.

4.   The website really pushes the fiduciary perspective hard with their Advisor Fiduciary Pledge available at our home page (lower right).

After 15 years of being a registered member of, I have posted more than 3,700 messages in the Discussion Forum. I love helping my teacher colleagues and debating about investment options that are low cost and well diversified with a stock-bond balance. From the beginning, I and other educators have wanted to keep the discussion about terrible 403(b) plans going and help our colleagues get out of annuities and instead invest in low-cost, best-in-class investment options in diversified portfolios of stock and bond index funds.

What has always been the case–even now–in the K-12 403(b) marketplace amounts to just about a 100% censorship on the ability of school districts and unions to form organized meetings to publicly discuss 403(b) plans. To its credit, the Los Angeles Unified School District (LAUSD) is the lone exception with our 457(b) advisory committee. But few, if any, unions have created a committee for the sole purpose of discussing 403(b) and 457(b) plans with full public transparency.

What I find quite perplexing is that many K-12 teachers are savvy investors, but they rarely talk about it or write a letter to their school district or union asking them to reform their 403(b) plans. While it’s certainly their right not to engage in advocacy, the fact remains that the 403(b) system is terrible for our educational colleagues in the K- 12 school districts. Naive teachers who haven’t done their homework have nowhere else to turn. The system shouldn’t force them to pick nothing but bad food from a menu. Instead, the menu should be full of good food–and nothing but good food–so that no one will have to get sick. Is that really too much to ask? I am puzzled as to why these savvy teachers have not come forth in masses to demand reform, as many must see what we see in the advocacy community that their less savvy colleagues are forced to continue to buy nothing but bad food: rip-off annuities.

Many of our colleagues would like to sit down with a “professional.” Over the last half century, however, those professionals have not had teachers’ best interests in mind. The 403(b) system is rigged against teachers because objective information is just not there. Teachers get only scary insurance company sales pitches. Lower cost mutual funds aren’t backed up by an army of insurance company salespeople.

The obstacles are many. The educational culture can be a tough nut to crack when it comes to launching a public discussion about personal finances. Dan Otter as well as Scott Dauenhauer, Dan’s longtime professional colleague and fiduciary consultant to the California State Teachers Retirement System (CalSTRS) Pension 2, are creating podcasts to promote the Discussion Board on the website. Hopefully, this development will lead to more discussion and transparency laying out the problems with 403(b) plans in the K-12 marketplace. The good news is the 403(b) reform community will not go away. We will not rest until all 4 million of the nation’s public school employees have a genuine chance at making objective financial choices. is our primary place to make this happen.

Could you please leave us with some parting words to other reformers of 403(b) plans around the country?

There have been some positive developments over the last 15 years. At LAUSD, the second-largest school district in the country, our advisory committee is 100% committed to the new 457(b) plan. Teachers and their collective bargaining representatives on the advisory committee–composed of district and retired employees–recommended this plan to our chief financial officer. Why? Because it’s our own plan. No high-cost annuities are sold to the 70,000 LAUSD employees in the 457(b) plan.

In addition to the 30-plus news stories enlightening educators about the woes of the 403(b) plan in K-12 school districts, the following developments show a broad-based change within educational and professional institutions:

  1. In 2000, as noted, Dan Otter launched com.
  2. In 2003, CalSTRS launched their own website,, which provides objective information on 403(b) vendors signed on to each school district in California.
  3. In 2007, CalSTRS created their excellent and rare, low-cost 403(b) plan, Pension 2. It’s available to school districts in California, which may cause some to ask: “Why isn’t Pension 2 promoted by every single school district in California?” Fair question. The problem is, who is going present, enroll, and deliver the Pension 2 product to the 800,000 school district employees in California? Obviously, the insurance agents that are everywhere in almost all school districts will never mention that Pension 2 is available to all school district employees. In fact, if a teacher asks about Pension 2, what is going to stop the agent from saying what I was told by them: “I would never recommend mutual funds to teachers because they are too risky!” Districts publicize the 403(b) plan only when they have to, and that is to keep in compliance with the IRS’ regulations.

The two biggest teachers’ unions in California, United Teachers Los Angeles and the CTA, terminated their “approved vendor” programs years ago. To its credit, CTA’s savvy retirement committee recognized Pension 2 for what it is: retirement plans with low costs and best-in-class investment options. The CTA’s own committee passed a motion to recommend Pension 2 to their 325,000 members. But the CTA bosses ignored it. And that was about the same time the CTA crushed attempts at 403(b) reform.

So why didn’t the CTA ever endorse Pension 2 or support attempts to reform 403(b) plans in the K-12 marketplace in California? My own view is that the CTA thinks they can make money off their members by offering their own 403(b) product. So even though Pension 2 remains available on the lists of school districts, there is little or no marketing plan to help it actually get incorporated into districts’ retirement plans. As a result, Pension 2 is growing very slowly–low-cost investment options just don’t attract an army of salespeople–while insurance agents likely bad-mouth it any time it comes up. Nonetheless, we advocates do what we can to spread the word about Pension 2.

  1. In 2010, for the first time in its history, the National Association of Governmental Defined Contribution Administrators (NAGDCA) began offering workshops, and a separate committee was formed that focused on 403(b) plans. Many of NAGDCA’s professional members are genuine
  2. In 2014, NAGDCA honored the LAUSD 457(b) plan for one of the best “Plan Designs” award. To my knowledge, no other public school district has won a prestigious award for their defined contribution

The nation’s largest teachers’ unions have begun to move in the right direction:

  1. As I noted, in 2000, the American Federation of Teachers (AFT) published their seminal article, Shark Attack!, which in my view is the best ever critique (a devastating critique) of the 403(b) problem. Unfortunately, as of 2015, AFT has not followed up on their many powerful suggestions from that article. I urge your readers to view
  2. The New York City AFT local union has an excellent 403(b) plan with a 73% participation rate. This plan should be replicated with other AFT locals, while the AFT national union could replicate what the NYC local
  3. The National Education Association (NEA), our country’s largest teachers’ union, offers a great 401(k) plan for their 700 employees. This plan should be used as a model for all defined contribution plans with both public and private
  4. In 2007, the California Teachers Association (CTA) launched an excellent 403(b)/457(b) informational website. For example, their guidance on evaluating and selecting a fiduciary advisor is well thought out and thorough. But they have not gone any further than their website. As previously noted, the CTA bosses intentionally never endorsed CalSTRS Pension 2 because, in my view, they think they can offer a better, lower-cost

Due to these positive developments by powerful unions as well as the second-largest school district in the country, I have to believe that they may finally be getting the message that they need to advocate for a 403(b) plan with investment options that are low cost and well diversified or replace it with a 457(b) plan. There are many good models in place right now that have been noted: the LAUSD 457(b) plan, the NEA 401(k) plan, and the New York City AFT 403(b) plan. We are going in the right direction because we must do so. It is the right thing to do. It’s that simple. Since the 2008 financial crisis, the current fiduciary proposal from the U.S. Department of Labor and recent court decisions, the financial world is slowly moving to a fiduciary model of providing financial advice that looks out for the best interests of all employees.

W. Scott Simon is an expert on the Uniform Prudent Investor Act, Restatement (Third) of Trusts and Title I of ERISA. He provides services as a consultant and expert witness on fiduciary investment issues in depositions, arbitrations and trials as well as in written opinions. Simon is the author of two books including The Prudent Investor Act: A Guide to Understanding. He is a member of the State Bar of California, a Certified Financial Planner® and an Accredited Investment Fiduciary Analyst™. Simon received the 2012 Tamar Frankel Fiduciary of the Year Award for his “contributions to advancing the vital role of the fiduciary standard to investors, capital markets and to society.” The author’s views expressed in this article do not necessarily reflect the views of Morningstar.

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