Look toward Laredo and be thankful.

That's what teachers in Texas and, perhaps, California should do.

On January 25 the College Life Insurance Company of America and other plaintiffs settled a class action suit brought by a Laredo schoolteacher. The settlement was for $10,875,000 for a class of 130,000 policy holders who had been sold misleading "tax-sheltered life" plans inside their 403b plans, largely because no agency or school district did anything to protect the teachers.

This isn't the only such lawsuit against insurance products for teachers but it may have been the leading stimulus behind SB 273, a new set of laws passed by the Texas legislature that promises sweeping changes in 403(b) plans. The law should increase disclosure and bring teachers defined contribution savings plans that aren't burdened by excessive fees.

I learned this recently in Austin while visiting with Wade Caldwell, the San Antonio attorney whose firm initiated the class action suit. Mr. Caldwell, a former engineer and patent attorney, explained that he had moved his practice into this area because he liked the challenge of analyzing complex insurance products. As he talked, I could imagine a kind of forensic joy.

"The underlying difficulty is how the market works," he explained.

"In much of the Sunbelt there are laws that prevent the independent school district (ISD) from screening vendors. Basically, the ISDs take a hands off approach. There is no guidance. No screening. No accountability.

"Historically, the laws (that prevented screening) may have been passed to stop brother-in-law deals. But what happened in practice is that insurance companies are paying the major teacher organizations for endorsements. They like to do exclusive seminars, etc. At administrative conventions it's the insurance companies that are sponsoring the golf, the lunches, etc. Sometimes former administrators help to sell."

I asked what the consequences were.

"There has been a trend to higher and higher commissions. The commission is often 25 to 27 percent of the first year premium. That's up from 8 percent.

"Most of the commissioned sales people are with the companies that pay the highest commissions. Fixed annuities and variable annuities are the largest part of the market (for 403b plans). Mutual funds are the smallest."

Again, he explained, this has historical roots. In 1958 the first 403(b) legislation limited sales to annuity products. Abuses multiplied from there as sales forces put life insurance into the plans, sold plans as debt consolidation vehicles, and created phony group contracts that had fewer commission limitations than individually sold products. Another area of abuse was disability policies. Often structured with offsets for Social Security Disability benefits, the policies charged much but delivered little.

I asked where the abuses were most common.

"Texas and California," Mr. Caldwell answered immediately. He explained that both states had similar histories--- and very large markets.

I asked if there was any telltale indicator for an insurance company with expensive products that worked against teacher welfare.

"Yes. Most of these companies have 90 percent of their sales in Texas and California." Sales in other states are limited to non-existent, he said, because there is better regulation and oversight in other states.

Which brings us back to SB 273, the new law that requires vendors to be certified by the Texas Retirement System.   It also establishes maximum fees, costs and penalties that can be charged to employees of educational institutions. The law sets maximum expenses ranging from 90 basis points (0.9 percent) to 150 basis points (1.5 percent). If a teacher invested equally in all five-asset classes, annual costs would be limited to 1.25 percent a year.

That's nearly 1 full percent a year lower than the average variable annuity cost of 217 basis points.

This is not small potatoes.

As I have pointed out in other columns, costs matter. A difference of 1 percentage point a year, over a lifetime of investing, can make a substantial difference in teacher retirement security.

For good coverage of 403(b) related issues

A recent column on the long-term cost of management expenses