Friday, December 16, 2005

Follow Up to Long Live the 20% Surrender Charge & Equity Indexed Annuities Debate

I've recieved quite a few comments from people on my recent article "Long Live the 20% Surrender Charge." Most of the comments were complimentary, but evidently I ruffled a few feathers in the insurance agent community (which is of course the point). I received e-mails from a few reps who called themselves Independent but then claimed to be senior reps with one of the companies mentioned. I don't see how you can be a "senior" rep with a company and still be independent, but that's another story.

I was accused of not presenting the whole story or just not being fair. One agent told me the product had been discontinued, another told me that he had placed 200 clients in that product (a truly scary thought and not something I'd readily admit too). None of these agents actually disputed that these products exist or existed, which is of course the point.

I recieved one e-mail that told me AVIVA now offers a product with only a 12% surrender charge.....only. If this doesn't tell you what is wrong with the 403(b) market, I don't know what will. I can't imagine a 401(k) plan with a 12% surrender penalty and a lousy interest rate, it may happen, but it isn't bragged about as in the 403(b) world.

Companies that are offering products with 10 year surrender periods and excessive surrender penalties shouldn't be allowed to offer products and their agents should be banned from school districts.

Equity Indexed Annuity

Recently I came across an industry publication that is supposed to be for "insurance agent use only" and it listed fixed annuity products along with their corresponding surrender periods, beginning surrender charges, and commission rates. What interested me the most was the commission differential between a traditional fixed rate annuity and the equity indexed annuities that seem to be so hot right now. I'll use Great American as an example since they sell 403(b) products, though keep in mind that I don't know if the products listed are available in the 403(b). What I want to demonstrate are the incentives agents have to sell one type of fixed annuity versus another.

Company Product Sur Period Sur Charge Commission
Great American American Freedom 10-ST 10 Years 9% 8%
Great American American Legend EIA 10 Years 10% 9%

Now, this is actually a pretty good differntial, there isn't that much incentive to sell an Equity Indexed Annuity over the straight fixed product, but there is still an incentive, one must ask why? Some companies have differentials of 7% or more which means an agent would get paid up to 7% more to sell an equity indexed annuity over a traditional fixed annuity, this is just wrong. I'm not picking on Great American, I'm picking on the insurance companies, agents, and marketing companies that continue to lie about the equity indexed annuity and pay higher commissions to promote them. The concept of an Equity Indexed Annuity could actually work (though not like presented by most agents) if it was done on an honest, simple, and commission reduced basis. The industry won't listen, they make way to much money on these products.

I'd love to continue to hear your thoughts and opinions on Equity Indexed Annuities and excessively high surrender charges on fixed products.

Scott Dauenhauer, CFP, MSFP

Sunday, December 11, 2005

The Perfect Storm - School Districts Beware

School Retirement Plan Editorial

It’s Time To Get Serious About 403(b)/457(b) Retirement Plans

The perfect storm is developing in the 403(b) world, only this storm has the potential to wreck serious harm on the 403(b) industry, not the employees the industry portends to serve.  The outcome of this perfect storm could very well spell the beginning of the end for the current inefficient distribution method of the 403(b) retirement plan.  It is time the school districts and county office of educations around the country began taking these back burner retirement plans seriously.  The education community has the opportunity to take back a retirement plan that was started as an employee benefit, but has largely become a subsidy for the financial services industry.

What are the events that are precipitating this Perfect Storm?

A Movement Begins

The first event isn’t really an event, it is a movement that began in 2000 when a teacher by the name of Dan Otter started a website called www.403bwise.com that allowed a community of like minded educators to congregate in one place and speak out against 403(b) abuses in the industry and simultaneously provide unbiased education about retirement plans available to school employees.  Dan eventually teamed up with myself to write “The 403(b) Wise Guide,” a manual on how to effectively utilize the 403(b) retirement plan.  The book has sold over 10,000 copies and led to a second book solely authored by Dan called “Teach and Retire Rich.”  These two books have had the effect of educating the educators and have started a “Great Awakening” among them about how best to save for retirement.

The IRS Issues New Regulations

The second event is the Proposed IRS regulations for the 403(b) which are scheduled to become final January 1st, 2007.  These regulations are far reaching and require the employer to take control of the 403(b), whether the employer wants to or not.  The new regulations require the employer to monitor all transfers, distributions, loans, and to create a plan document that governs how the plan will be run.  While the employer is currently obligated to do many of these things already most don’t, but they won’t be able to get away with not complying anymore.  

The new regulations are serious and will create a compliance nightmare if school districts continue to offer a long list of providers.  The 403(b) industry is scared of these regulations and is fighting them.  The spokes group for the 403(b) financial services industry is the National Tax Sheltered Accounts Association and they have attempted to hire a lobbyist to fight these regulations, though they couldn’t come up with the money from their members, mainly insurance agents.  However, insurance companies themselves are taking the battle to congress and they are a powerful lobby.  My hope is that they don’t get their way.  The new regulations will be tough to comply with under the current way of operating, however they will be simple if a new way is adopted.

Intermediaries Fail

The third and most disturbing event is the series of third party administrator (TPA’s) failures over the past 18 months.  These TPA’s were responsible for accepting money from school districts and forwarding it to the 403(b) vendors the educators want to invest in.  The TPA’s were also responsible for keeping the plan in compliance.  Horizon Benefits Administration, NEBSonline, and Plan Compliance Group have not only failed over the past 18 months but are all facing criminal investigations, lawsuits, and worst of all they (allegedly) stole money from school district employees.  The latest, Plan Compliance Group has taken school districts across the country for over $3 million.  School districts across the nation are sending money to TPA’s with very few checks and balances in place to prevent this theft and they are paying for this mistake out of their own pocket.  

Not only are districts sending money to TPA’s who may not be financially viable they are sending money to financial services companies that don’t actually have their own products (I dub them “403(b) Intermediaries”).  There are many “payroll slots” in school districts where money is sent to a financial services firm and that firm deposits the money to their own corporate accounts before sending the money onto another 403(b) vendor.  These companies either don’t have a 403(b) product or their own or they offer their product alongside of others.  Though this is common practice in the industry it is dangerous for three reasons.  

First, the IRS clearly states in publication 571 that “Generally only your employer may make contributions to your 403(b) account” through a salary reduction agreement and “this agreement allows your employer to withhold money from your paycheck to be contributed directly into a 403(b) account for your benefit” (emphasis added).  Thus the IRS requires school districts to make contributions directly to your 403(b) account; they cannot be made through an intermediary that is not a direct agent of the district.  What this means is that money withheld from an employee’s paycheck should not be going to a company that simply re-forwards the money to another entity (presumably a 403(b) vendor).  This appears to be a violation of IRS rules and regulations.

Second, even if it isn’t a violation of IRS rules and regulations to send money to an entity that is not the product vendor it should be a practice that is frowned upon as the district has absolutely no control of the entity it is forwarding the money too.  If the entity a district forwards money too goes bankrupt or just steals the money before sending it to the actual provider the employee has lost money.  Presumably the school district should have exercised better fiscal control and will in the end reimburse the employee for the losses incurred by the intermediary.  School employees and school districts are financially exposed to these “403(b) intermediaries” and should not forward money to them.  In fact, a district should research vendors before allowing them on an approved vendor list to ensure that the vendor actually offers a product and that school employee money will go directly to that product (as required by the IRS).  Districts are not currently doing this and are left exposed.  Districts should be actively policing and auditing their vendors.

The third reason these “403(b) intermediaries” are dangerous is because they act as a middleman in the process and drive up the cost of products and make compliance nearly impossible for a school district.  How is a school district supposed to monitor loans, hardships, and other distributions when it doesn’t even know who has their employee’s money?  

If you take the above three events and combine them with the fact that 403(b) products on the whole benefit the financial services industry more than the employees they are suppose to serve you have a situation of The Perfect Storm.

This Perfect Storm will combine to force the pendulum to swing from an industry in favor of financial services companies (and agents) to an industry that favors the end user, the participant.  There are many ways this can happen, but I believe the best way is for school districts to combine with other school districts (combine buying power) and to move toward a fiduciary based Single Vendor System.

A Single Vendor System would solve all the above mentioned problems and if done right could save hundreds of millions of dollars annually while improving the 403(b).  This system I envision is one that has been rejected outright by the leaders of the NTSAA (the trade organization that represents the 403(b) industry) because they believe it will hurt the agents who are their members.  School districts, their unions, and their employees must come together for once on this issue and stand up to the financial services industry that controls the 403(b) and find a better way.  

There is a better way; the winds of change are beginning to blow.  

Scott Dauenhauer, CFP, MSFP

Thursday, December 08, 2005

iLind.net - Plan Compliance Group Follow Up

iLind.net

A Hawaii Blogger is following the events of Plan Compliance Group and has some additional thoughts.

Scott

No Losses For Orange County School Districts

After speaking with the President of Envoy Plan Services I have been assured that no Orange County School Districts (or any Envoy school districts) have been harmed or lossed money due to Envoy's sub-contractors legal problems and allegations of theft. Envoy stopped using Plan Compliance Group in October after running the September payroll.

Plan Compliance Group allegedly stole or misappropriated nearly $3 million from school districts as it acted as a conduit from the districts to 403(b) vendors. The alleged theft took place in September. I will be providing a full report soon on what has taken place.

It is clear that school districts going forward are going to need to put better safe guards in place to ensure the employee's money is not lost due to bad Third Party Administrators. Plan Compliance Group is the third TPA to be accused of theft in the last year.

To be clear - Envoy Plan Services no longer uses Plan Compliance Group for Common Remitting though will continue to use Plan Compliance Group for compliance functions and number crunching through the end of this month. PCG will not have any control of Envoy School Districts money and Envoy is not cited or alleged to have done anything wrong.

More on this too come.

Scott Dauenhauer, CFP, MSFP

Wednesday, December 07, 2005

25 Schools District Sold A Ridiculosly High Cost Retirement Plan

Press Release - RSG Elite Choice

Perhpas the most scary observation was the following from this press release:

"Denise Smith, Director of Human Resources for the Imperial County Office of Education says, "We found that Elite Choice offered the most comprehensive and competitively priced program. Elite Choice is a total solution for the district and employers. Elite Choice quite simply fits our needs, and so far has exceeded our expectations."

I've reviewed this Elite Choice plan and found it to be among the most expensive retirement options ever offered. The claim that this plan meets a districts fiduciary responsibility is laughable as the fees are absolutely outrageous.

If you've adopted this plan as a district you can expect to pay about 3% in fees annually.

Scott Dauenhauer, CFP, MSFP

The Fall of the TPA - School Districts Stuck With Losses

In September of 2003 I wrote a short story titled "The Rise of The TPA." At that time we were beginning to see school districts hire Third Party Administrators to help with compliance issues relating to their 403(b) & 457(b) plans. I devoted a lot of my attention in 2003 and 2004 to one TPA, Envoy Plan Services. I didn't like Envoy or how it conducted business and I wrote to several school districts expressing my concerns. Envoy is at this point still in business, however the company it uses (or used to use) to outsource its compliance and common remitting has apparently gone to the dark. Plan Compliance Group is being accused by three states of mishandling or stealing school employees retirement funds. There is no evidence that Envoy is involved, nor have they been mentioned in any reprots, investigations, or lawsuits. I am at this point unclear of the relationship with Envoy and Plan Compliance Group, though I have call into Robert Hornaday to find out.

Plan Compliance Group is being charged with stealing money from school employees and I have been unable to reach Bill Reimers, the President for over a month to find out if he has a side to his story. The Department of Education in Hawaii and the Attorney General of Hawaii are the first to sue Plan Compliance Group for money that has disappeared.

This is not an isolated event, Plan Compliance Group is just the latest in a series of TPA failures in the U.S. that has literally cost educators millions of dollars (actually it cost the school districts millions). Last year both Horizon/Flagship Benefits Administrators and NEBSOnline both failed after stealing money from school employees before sending their retirement contributions on to the intended retirement vendor.


I have compiled links to several articles regarding the failures of these companies and will continue to update you on the Plan Compliance Group situation.

Horizon/Flagship

Unions sue districts over missing retirement funds
REVOCATION of ohio salesperson license
HAROLD HOPKINS INDICTED ON 56 COUNTS OF SECURITIES LAW VIOLATIONS
Missing investment funds scandal spreads beyond islands
Local couple named in securities/pension lawsuit

NEBSOnline

Financial officer's death adds twist to probe at retirement administrator
Ontario-Montclair fights teachers' lawsuit

Plan Compliance Group

DOE sues California firm over lapse in pension fund
Department of Attorney General - Hawaii News Release
School District Deals with Missing Money - includes video
State of Hawaii DOE Files Legal Action Against Plan Compliance Group, Ltd.
California company accused of mishandling Hawaii funds
Missing investment funds scandal spreads beyond islands
Statement by Superintendent Patricia Hamamoto regarding Employee Tax Sheltered Annuity Funds
Schools share pension woes
State Investigates Company Managing DOE Retirement Annuity Includes Video

I will continue to track this developing story. I have put in several phone calls to Mr. Reimers without a response. I have also called Envoy Plan Services to get their response. At this point it is unclear whether a relationship still exists with Plan Compliance Group and Envoy or whether any funds are missing. As soon as I find out more information, good or bad, I'll update this blog.

Scott Dauenhauer, CFP, MSFP

Tuesday, December 06, 2005

Smart Stops on the Web

Smart Stops on the Web

The Journal of Accountancy has named my site one of the Smart Stops On The Web!

Thanks!

Scott Dauenhauer, CFP, MSFp

DOE loses $2.28M in pension deposits - The Honolulu Advertiser

DOE loses $2.28M in pension deposits - The Honolulu Advertiser

Districts, please read, this is of upmost importance. More on this to come....

ScottyD

Equity Indexed Annuity Debate

Last week I got into a rather heated debate with another advisor on the topic of Equity Indexed Annuities. I don't like them and feel they are misrepresented, he apparently likes them (and likes to misrepresent them - in my opinion). I get called a few names, but I can take it. It's a long post, but has a lot of good information on both sides. I believe I debunk quite a few of his myths.

Have fun.

Scott Dauenhauer, CFP, MSFP