Teacher Crystal Mendez was in the staff lunchroom at 42nd Street Elementary in Los Angeles when an investment broker introduced herself and started talking up a retirement plan.

Mendez thought she could trust the woman because the investment company had been endorsed by the 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 time to ride out dips in the market.

Some of the United States' largest teachers unions have joined forces with investment companies to steer members into retirement plans that frequently have high expenses and mediocre returns. The unions endorse investment providers, even products, and the companies reciprocate with financial support. They sponsor union conferences, advertise in union publications or make 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 525,000 members to invest in an annuity sold by the Dutch insurance giant.

The National Education Association, the largest teachers union in the U.S. 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 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 receive a share of endorsement revenue in return.

Many teachers presume an endorsement means their union has used its clout to get the best price, as unions do on products ranging 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 1.73 percent of their savings -- 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. An investor would have to earn a return of nearly 5 percent just to break even.

"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 designs and manages retirement plans.

The 403(b) accounts are key to teachers' financial security. Most 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 sponsoring 401(k) plans are required to screen investment options and make sure employees have good choices. School districts are under no such obligation. Most leave it to teachers to find their own investments.

As a result, insurers, mutual fund companies and financial planners compete for teachers' money, touting a bewildering array of products. A union endorsement confers an advantage, allowing a provider to stand out from the crowd.

Unions do more than give companies their blessing. Some help market and sell products. They tout investment firms on their Web sites and provide links to sites where teachers can buy annuities. Endorsed providers also enjoy access to schools and teacher conferences. Teachers generally are not aware that unions are paid for endorsements.

"This is a national problem," said Dan Otter, a former Maryland teacher and founder of 403bwise.com, a Web site that offers tips on low-cost 403(b) plans.

"It's a rare school district that gives teachers access to quality choices," Otter said. "... And it's the rare union that's advocating for better 403(b) investments for its members. In many cases, the 403(b) is a source of profit for unions."

Most of the money in 403(b) plans is invested in tax-deferred annuities -- insurance contracts that provide regular payments in retirement. Annuities come in two general types. A fixed annuity grows at a set interest rate. A variable annuity is tied to the performance of a mutual fund. Their insurance provisions are key selling points. The stock market goes up and down, but annuities offer guaranteed payments. A tax-deferred annuity -- the kind teachers are encouraged to buy -- also comes with a death benefit that ensures beneficiaries will get at least the amount invested.

But these features come with fees that reduce investment returns. In addition, in the early years of an annuity, investors cannot move their money out without penalty. Many finance experts say people would do better to put savings in low-cost mutual funds and buy term life insurance to protect beneficiaries.

The NEA-endorsed annuity, called Valuebuilder, charges 0.9 percent to 2.6 percent a year in fees -- not including management fees for the mutual funds available through the plan. When the fund fees are added, investors pay a minimum of 1.73 percent of their account balances each year. The most expensive combination of mutual funds and insurance features costs 4.85 percent a year.

A fee that large can ravage retirement savings over time. A teacher who contributed $500 a month and earned an average of 10 percent a year would have $379,684 after 20 years. But if 4.85 percent in fees were deducted each year, the nest egg would amount to $209,114.

NEA receives royalties on sales of Valuebuilder and other financial products it endorses. Union officials declined to say how royalties are calculated or how much money union-endorsed retirement plans bring in. They are, however, required by federal law to disclose the revenue from endorsement deals. The most recent disclosure on file with the Department of Labor shows that NEA received $49.6 million from Security Benefit Life Insurance, the provider of Valuebuilder, and other endorsed companies in 2004.

That money pays the salaries of 110 union employees, said Ronald Mentzer, treasurer of NEA Member Benefits in Gaithersburg, Md. In addition, Security Benefit sponsors NEA conferences each year.

NEA officials said they endorsed the insurer's annuity, despite fees, because they wanted a provider with a national sales force to serve affiliate unions.

"There are companies that have lower fees, but they don't have the distribution structure that our members tell us that we needed," said Gary Phoebus, an NEA spokesman in Washington.

The rival American Federation of Teachers has a far less lucrative arrangement with ING Group. The 1.3-million-member union endorses ING as a provider of 403(b) plans but does not share in sales revenue. Instead, ING reimburses the union for the money it spends promoting the insurer's products.

"We do not have a royalty arrangement like NEA," Abraham said. "All of our deliberations with ING have centered on getting lower fees for members and more benefits and services going forward. It's a membership organization. We just feel like it's the right thing to do."

Companies endorsed by United Teachers Los Angeles, with 44,000 members in Los Angeles Unified School District, return the favor in various ways. Some pay thousands of dollars to rent exhibit booths at the union's annual leadership conference in Palm Springs.

At the 2004 conference, CitiStreet Inc. treated about 60 teachers active in the union to dinner at LG's Prime Steakhouse, where rib-eyes run $34 and up. One guest estimated the bill at $4,000. CitiStreet, a partnership of State Street Corp. and Citigroup Inc., is one of five union-endorsed "preferred providers" of 403(b) plans.

The broker at Crystal Mendez's school two years ago was from Zahorik Investments of Pasadena, another preferred provider. Mendez said she filled out a questionnaire that showed she was comfortable taking risk and assumed she would be put in a stock fund.

Two years later, she discovered that her money was in a fixed-rate ING annuity. To take her money out, she would have to forfeit 10 percent of her savings -- $1,000. She did so, reluctantly.

Told about the teacher's experience, Toby Wills, a Zahorik vice president, said paperwork separate from the questionnaire indicated Mendez was a conservative investor, making the fixed annuity appropriate despite her age.

Judith Martindale, a certified financial planner in San Luis Obispo, said this approach did not serve the client's interests. Even if Mendez expressed a conservative attitude, she should have been advised to invest some of her money in stock funds, Martindale said. The major long-term risk for an investor in her 20s is inflation, not stock-market volatility, which tends to even out over time.

This is cache, read story here