Tuesday, May 09, 2006

NEA Rebuttal

What follows is the NEA’s rebuttal to the LA Times article that came out a few weeks ago. I am still of the opinion that this program is not in the best interest of the members and that the NEA should discontinue it. I’ll follow up with my comments in a few days.

Scott Dauenhauer, CFP, MSFP

Some facts about NEA's Valuebuilder plan

On April 25, 2006 the Los Angeles Times published an article titled "Unions' Advice is Failing Teachers." The article suggests that teacher unions, including the National Education Association, sponsor 403(b) annuity products for their members to generate revenue for the sponsoring union. The article's conclusions are flawed and rooted in a misunderstanding of the K-12 403(b) marketplace and a misapplication of traditional 401(k) principles.

NEA Member Benefits is a wholly owned subsidiary of the National Education Association. Its mission is to provide the 2.8 million members of National Education Association, as a benefit of membership, the highest quality products and services at the lowest possible price. Although it is a for-profit company, it operates as close to a break-even margin as it can and any surpluses it may have are poured back into the services and products that NEA Member Benefits provides. It has made agreements with many of NEA's state affiliates to offer products and services to NEA members working in those states. Those states receive some compensation to facilitate the delivery of products and services.

No dues dollars are used to support NEA Member Benefits.

The following factual information is helpful in understanding NEA Member Benefits' Valuebuilder Program, along with background information to clarify and correct the misleading information in the article.

The facts about fees and expenses

NEA receives no money as a result of the sponsorship. NEA Member Benefits receives a relatively small payment from Security Benefit Group, the underwriter of the NEA Valuebuilder Program, to help market the program and ensure that the investments, relative to the marketplace, represent a good value for members. If NEA Member Benefits received no money from Security Benefit Group, there would be no material impact on the pricing of the product. The only impact would be lower quality, less visibility for the program, and fewer opportunities for members to participate in a great program.

While everyone prefers lower fees, research clearly indicates that NEA members want investment advice. Agents and brokers have been the best vehicle to provide that advice at a reasonable and disclosed price. For the segment of members who may want to do it on their own and enjoy the benefits of lower fees, we will be developing (assuming we can find a company willing to develop the product for us) a high-quality, low-cost product. NEA Member Benefits hopes to have this available by year's end.

403(b) and 401(k) plans are different

It is important to note that school district based 403(b) plans are not distributed in the same manner as employer-based 401(k) plans. In fact, there are significant differences between an employer with a centralized workforce, supported by a centralized HR department that provides a narrowly focused and often employer-matched 401(k) plan, and a school district with no employer plan or involvement, undifferentiated product offerings. One of the major differences is these decentralized plans often have substantial barriers to acquire the mechanism for making payroll deduction which enables tax-deferred contributions to an employee's investment of choice.

In a 401(k) environment, there are few barriers to participation so distribution costs in the form of brokers, financial planners and salespeople are not incurred. In a school district environment where work sites are spread across a city, county or municipality, there are huge barriers to participation. If it weren't for the information, service and support that brokers, financial planners and sales people provide, a large percentage of our members would not be participating in any investment plan at all, thereby losing the critical tax-deferred benefits and supplemental retirement savings opportunities that 403(b) annuities and mutual funds provide.

All things being equal - lower is better; but all things are NOT equal

All things being equal, lower fees are better, but everyone knows that things are usually not equal. In the late 1980s, NEA Member Benefits, in partnership with Mutual of America, created a very low-fee annuity program for members. The program was based on member activism, telephone support and no sales agents in the field to consult with members and obtain a mechanism for members to make contributions directly from their paychecks. After years of nurturing the program, it failed to appeal to members. In a retrospective evaluation of the program, members were asked in focus group sessions and surveys why they did not participate. Members indicated clearly that they preferred representatives, agents, brokers, and/or financial planners to help them understand investing and their investment choices. In addition, NEA members preferred to have representatives navigate the school district's administrative maze, to acquire the administrative mechanisms to make payroll deductions and participate in the program.

Programs to meet the unique needs of NEA members

Based on responses shared in multiple focus group sessions, individual interviews, and surveys, NEA Member Benefits reached the conclusion that it had an obligation to develop a program that would meet this specific need of the membership. Subsequently, the NEA Valuebuilder Program, a 403(b) program that provides members with face-to-face investment advice with quality, trained professional investment experts was developed and offered to members. The NEA Valuebuilder Program has a cost associated with it that members have explicitly expressed a willingness to pay. It is also worth noting that since its inception in 1991, the NEA Valuebuilder Program has become one of the best-received programs that NEA Member Benefits has developed for NEA members.

You can't compare apples to oranges

When compared to similar programs distributed by financial planners and brokers, the NEA Valuebuilder Program is very competitive. But you can't compare the NEAValuebuilder Program to programs that do not provide a similar level of service; this would clearly be comparing apples to oranges. Many people who have time and consider themselves to be savvy on investment matters want to make their own investment decisions, but research indicates that a large percentage of NEA members prefer to have assistance in making important investment decisions.

NEA Member Benefits understands that a segment of members are comfortable making these types of investment decisions without face-to-face consultations. NEA Member Benefits is developing a high-quality, low-cost, phone and Internet-driven product to meet the needs of these members. Unfortunately, there are not many companies interested in providing this type of program. It is not because of fees "the union" would demand for sponsorship; it is because those companies understand the barriers and the difficulty in providing high-quality, low-cost products, in the decentralized school district environment. Companies like TIAA-CREF and Vanguard have indicated that they can't reach critical mass in a program that has to acquire payroll slots and communicate a complex investment message, without an on-site expert.

NEA Member Benefits is very proud of the NEA Valuebuilder Program. If you have any questions, please email them to Gary Phoebus, president, NEA Member Benefits Corporation gary.phoebus@neamb.com or John Wendland at jwendland@neamb.com. For more information you may also visit http://www.neamb.com/.
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