Second-grade teacher Crystal Mendez was in the staff lunchroom at 42nd Street Elementary in the Crenshaw district when an investment broker introduced herself and started talking up a retirement plan.
Mendez, fresh out of college, thought she could trust the woman because her company had been endorsed by the Los Angeles teachers union.
Mendez agreed to put $400 a month into a retirement account. She assumed her money would be invested in stocks. Just 22, she figured she had plenty of time to ride out any dips in the market. She said the saleswoman told her: "Leave it to me."
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% a year and I was earning 3%," 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 with high expenses that eat away at 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 Assn., 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.
Teachers unions across the country -- including those in Las Vegas and San Diego and 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 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% of their savings. That is about 10 times as much as they would pay in 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% a year. That means an investor would have to earn a return of nearly 5% 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 advisors 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.
The 403(b) accounts are key to teachers' financial security. Most can count on receiving pensions when they retire, but many are not covered by Social Security. For that reason, Congress in 1958 allowed teachers and other nonprofit employees to establish savings accounts under section 403(b) of the Tax Code. Today, an estimated $607 billion is invested in these accounts.
As with a 401(k), the nest egg grows 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 reasonable 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, touting a bewildering array of products. A union endorsement confers a huge advantage, allowing a provider to stand out from the crowd.