Say Anything Blog

Earlier this week, Chris Meisenzahl at the Amateur Economist blog, noted a Baltimore Sun story about one of the unpublicized costs of being a member of the NEA, the country’s largest teachers’ union. Not satisfied with the revenue from members’ due, the unions have come up with a new way to get into their members pockets… and without the bother of actually telling them, either. Bear in mind, in most jurisdictions, such membership is not optional. If you want the job, you’re forced to join the union.

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.

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.

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.

They are… 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.

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.

So its not just the national unions that are feeding off the economic illiteracy of their members… the same members whose interest the union is supposed to be there to protect in the first place. State organizations are scamming their members as well. All without any requirement to inform their members just how much that union endorsement is actually costing them.

Whatever benefits union membership may have provided in the past, that advantage certainly doesn't seem to include union-endorsed financial products or services in the present. Union or no... buyer beware!