By Scott Burns / The Dallas Morning News / 11 July 2000

Schoolteachers cope with two major problems: salaries that make it difficult to save in the first place and cost-ridden savings plans that can make their work lives look like Fat City compared with their retirement income.

Now, there are glimmers of hope for the savings plan part of the problem.

If you've never heard of 403(b) plans, don't worry. They are similar to 401(k) plans but for nonprofit institutions.

Unfortunately, the plans are rooted in insurance-based products that tend to be burdened with high commissions, high redemption penalties and high operating costs.

While expenses for employer-sponsored 401(k) plans are relatively low and falling--with many large plans well below 1 percent a year--the typical variable annuity sold to people eligible for 403(b) plans has annual expenses of over 2 percent. Worse, much of the investment money goes into fixed-income annuities with significantly lower returns than equity funds have enjoyed over the last 15 years.

So where are the glimmers of hope? In lawsuits and in the development of Web-based information on the products being sold to teachers.

One example of legal action is Martin, Drought & Torres, a San Antonio law firm that started to take insurance companies to court in the early '90s. According to G. Wade Caldwell at the firm, they have filed and settled one suit, have five pending and will soon file another two suits. All the suits are in Texas.

In a recent telephone interview, Mr. Caldwell explained that the situation was particularly bad in Texas because the Legislature had passed a law prohibiting school districts from limiting 403(b) vendors.

Aimed at protecting teachers from sweetheart deals that could enrich a school superintendent or board member, the law worked to allow a proliferation of vendors.

"It prevented school districts from protecting employees," he said. "So teachers are offered expensive and sometimes fraudulent products. We've seen cases of 23 percent commissions."

I asked what kinds of problems he has seen.

"There are a lot of product and conduct issues. One is called Tax Sheltered Life. It has a large premium with a small death benefit.

Another is equity-indexed Annuities. In the ones we've seen, the salespeople don't understand that the product isn't invested in the stock market.

"Another is old money/new money contracts. The teacher gets credited 6.5 percent on new deposits, but money that has been invested 12 months or more only earns 4.5 percent.

"Still another is the two-tier annuity. (These are sold as rollover products in which the teacher is told that the seller will compensate the teacher for the withdrawal penalties on the annuity being redeemed.) The teacher sees two account balances, the 100 percent balance plus interest and the second-tier balance, which is the actual deposit less surrender charges. There is a gap between the two amounts that never disappears. The only way to get the upper-tier amount is to stay with the company and annuitize (giving up the principal for a lifetime monthly income). When that was done, the company paid zero interest (on the amount annuitized).

"Beyond that, there is the basic problem of the use of variable annuities inside 403(b) plans and the expense of the death benefit."

Mr. Caldwell also said that some insurance companies go to great lengths to look like they are sponsored by teacher organizations or by the school district.

One company they are suing, he said, formed a cafeteria plan administration company and then offered to do benefit administration for the school district for free--in exchange for being allowed to sell variable annuities during enrollment periods.

While Texas may be one of the worst states for major abuses and deceptive marketing practices, it is not unique.

So what can teachers do?

Get educated about investments and the choices available for 403(b) plans.

Where do you start?

On the Web.

Mr. Caldwell's firm offers basic reading and helpful links on its Web site, mdandt.com. For a more ambitious effort, visit 403bwise.com, a site operated by two former California teachers.

Like fundalarm.com, this site carries no advertising and is supported only when visitors buy books and other things on linked sites.

If you are a teacher, think of these sites as your summer reading assignment.

Questions about personal finance and investments may be sent to: Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas 75265; faxed to 214-977-8776; or e-mailed to scott@scottburns.com Check the Web site:

www.scottburns.com.

Questions of general interest will be answered in future columns.