Q. My wife works as a teacher in Mesquite. Her 403b is with the American Funds Group. The A-share loads on these funds are 5.75 percent. The state of Texas recently began to offer teachers more choice. Now teachers can choose from 7 high front-end load funds plus yearly fees.

Today my wife asked her Edward Jones representative about their loads. He explained them. My wife then told him that her husband's money is with Vanguard. The representative announced that Vanguard was no good because they have high and hidden fees. I compared American's balanced fund expenses at 0.68 percent to Vanguard's expenses of 0.22 percent a year. (And don't forget the 5.75 percent load of American Funds vs. 0% for Vanguard.)

How can they get away with blatantly lying to these teachers? Who is watching these guys? What can one person do about this? Why can't teachers have ONE no load company to choose from

---"Angry in Mesquite"


A.   The first thing you should know is that your wife could do a lot worse. While the American Funds have a front-end load, they have a long history of relatively low annual expense ratios.   The average expense ratio for the 716 domestic equity funds with 5.75 percent front-end loads is 1.36 percent, according to Morningstar. The expense ratio for comparable American Funds is half of that.

Performance hasn't been so bad, either. Their largest fund, the $51.4 billion Investment Company of America, has returned 6.42 percent a year, adjusted for loads, over the five years ending June 30. Fidelity Magellan and Vanguard 500 Index have returned 3.62 and 3.63 percent, respectively, over the same period.  

Another thing you need to understand, even if your wifes' broker doesn't, is that mutual funds have different distribution channels. The American Funds--- like Massachusetts Financial Services and Putnam--- are in the broker distribution channel. This channel compensates brokers for selling the fund. Vanguard--- like T. Rowe Price and American Century--- is in the self-service channel and has no commission expenses.

For reasons they should be called upon to explain, the state legislatures in Texas and California appear to believe that teachers are bright enough to teach children but too slow to make investment decisions for themselves. As a consequence teachers are 'protected' into high commission retirement plan 'reservations.'

Fortunately, most teachers have a very interesting alternative.   Instead of accepting high commission load funds and variable annuities in their 403(b) plans they can vote with their feet.

They can stop participating.

Instead, they can contribute to a Roth-IRA from a low cost, high quality provider. This year through 2004, the maximum contribution you can make to a Roth IRA is $3,000. For 2005 through 2007 the maximum contribution will be $4,000. For 2008 the maximum contribution will be $5,000.

Those 50 and over are currently allowed to contribute an additional $500 a year. For 2006 and after, those 50 and over will be allowed to contribute an additional $1,000 a year.

It would be nice if the contributions limits were still higher but I'll bet most classroom teachers will be hard pressed to make the maximum Roth IRA contribution.

Since Roth IRA contributions are from after-tax income and allow you to take retirement distributions tax-free, you would have to contribute a more money to a 403(b) account or a traditional IRA to have the same retirement benefit.   Yes, you can open Roth IRA accounts with a lower cost provider.

The registered rep your wife spoke with may not be lying. He may only suffer from 'convenient ignorance'. I have heard that "hidden cost" line from brokers for years. They can't tell you how or why they 'know' it because they're just telling you something they heard from another broker without asking for a source. My suggestion: when a broker makes such assertions, ask for supporting research and evidence.

While some brokers are real students of investment and personal finance, we all need to remember that they are salesmen first.

Earlier column on The high cost of Texas and California 403b plans