Friday, August 28, 2009

Tax Deferred Services Sues Former Affiliates

So I was checking to see if Tax Deferred Services had filed any lawsuits lately (Bob Lotter threatened to sue me several times on a phone call a few weeks ago and you might say I'm a bit paranoid, he's the new money man behind TDS).

Guess what I found, TDS made good on their promise to sue their former reps. You can track it by clicking the link below and entering the case number below. I've embedded the documents that have been posted so far, there is a hearing scheduled September 15th.

Some interesting things to note is that National Benefit Services is somehow involved in this whole mess, though its unclear to exactly what extent. It appears Great American Plan Administrators and NBS along with an unnamed Florida TPA were all trying to get the business from the reps who used to work with TDS.

The first doc is just the complaint and should load quicker, the second doc is all the filings thus far and is about 221 pages, so give it some time.

I'm not done reading the documents, but will certainly be updating you on what I find.

Case Lookup

Insert 34-2009-00055591 to bring up the case documents

TDS Compalint
Tax Deferred Services Lawsuit

Scott Dauenhauer CFP, MSFP, AIF

Thursday, August 20, 2009

TDS Not Requiring New Vendor Agreements?

Tax Deferred Services has begun sending out letters and contracts to school districts stating that they are going to start charging for their "compliance" services. However, the preferred method of charging is for TDS to charge the vendor the $3 fee (see my previous post on this topic). As a consultant to the California Teachers Retirement System's 403(b) program (Pension2) I was concerned that they would need to sign a new "vendor agreement."

After a call by CalSTRS to TDS the response was that they would use the existing agreement and not require a new one. This is strange and further proof that TDS is more interested in creating a revenue stream than actually protecting the school districts and providing competent compliance services.

If you were going to charge vendors for your compliance services, wouldn't it be nice to have that in writing? Lets say that TDS receives about $40 million a month in contributions from their school districts (a number that I've been led to believe is about right). While for certain this number will and probably already is plummeting do to employers canceling their contracts with TDS, lets pretend it only falls by half to $20 million. We'll also assume that the average contribution amount is $1,000 (its actually far lower), thus about 20,000 potential participant contributions to charge on. At $3 per participant contribution you are looking at $60,000 per month (less in the summer months) in revenue.

Wouldn't you want that revenue secured by a contract?

Call me crazy, but I would want an agreement in place with the vendors that are supposed to be paying me. This is just one more reason that I don't believe this company can be taken serious when it comes to handling district money and 403(b) compliance.

Scott Dauenhauer AIF

Friday, August 14, 2009

TDS to Charge Vendors $3 for "Compliance"

Below is a letter written to Business Managers who use Tax Deferred Services. In it TDS reveals that they are in the process of moving from giving away services for free to charging vendors $3 per contributing plan participant per month.

Here we have a company that has admitted to compliance service issues who now wants to charge 50% more than compliance firms who have had full systems in place at least since the beginning of the year. They are attempting to get the districts to go along with trusting them by saying that they are going to charge vendors and thus the districts still won't pay. Of course this will lead to fewer vendors and higher costs for the participants.

In addition, the way the letter is worded it seems to indicate that it is the vendor charging for the processing of contributions,
"Some vendors may pass the additional costs on to the participants. In these cases, we require the vendor to notify the participant in advance and allow them to redirect their contributions to a vendor who does not charge for processing their contributions (emphasis added)."

Let's be very clear, vendors do not charge for compliance or for processing participants contributions (okay, they do charge administrative fees as either part of the embedded expenses or via a spread). It is Tax Deferred Services charging for "processing....contributions," and then passing these charges onto the vendor, who then may pass the costs onto the participant. Keep in mind, in the long term, the fees will always be passed to the participant as the vendor MUST cover the new costs somehow. I don't have a problem with a compliance firm charging a fee (though I do not consider TDS a compliance firm) for their services, in fact I encourage it. However, that fee should be charged to the employer or employee. In fact, in California an employer is not allowed to charge vendors for compliance.

The pertinent sections of AB 2462 is as follows, Ed Code Section 44041.5 (b):

"For purposes of a deferred compensation plan authorized by Section 403(b) or 457 of the Internal Revenue Code or an
annuity program authorized by Section 403(b) of the Internal Revenue Code that is offered by the school district which
provides for investments in corporate stocks, bonds, securities, mutual funds, or annuities, except as prohibited by the California Constitution, the governing board of each school district when drawing an order for the salary payment due to an employees of the district shall, with or without charge, reduce the order by the amount which it has been requested in a revocable written authorization by the employee to deduct for participating in a deferred compensation plan or annuity program offered by the school district. The governing board shall determine the cost of performing the requested deduction and may collect that cost from the organization, entity, or employee requesting or authorizing the deduction. For purposes of this subdivision, the governing board of a school district is entitled to include in the amounts reducing the order the costs of any compliance or administrative services that are required to perform the requested deduction in compliance with federal or state law, and may collect these costs from the participating employee, the employee’s participant account, or the organization or entity authorizing the deduction."

I've bolded the applicable sections, 44041.5 used to read "without charge..", it was changed to "with or without charge.." in order to give school districts flexibility in how they pay for their deferred compensation programs. They could pass it on to the employee (assuming the collective bargaining units agree) or pay for it themselves. It does not state that they can charge vendors. It does say that they "may collect that cost from the organization, entity, or employee requesting or authorizing the deduction." This is the line that presumably TDS and others are using to say "gotcha" we can charge vendors. However, there is nobody other than the employee who can "request....or authorize" a deduction (the vendor can't) and thus this fee can only be collected from the employee, not the vendor. So how are the "vendor charging TPA's" getting around this? Notice that the Ed Code states "may collect these costs from the participating employee, the employee's participant account, or...". this is the key. The TPA's tell the vendor (with a wink and a nod) that they must debit the client account for the compliance fee, but if they choose to, the vendor can pay that fee on behalf of the participant. Thus, vendor pays and the TPA gets their fee - the participant however is left holding the bag - being forced to change vendors or pay higher costs or accept lower interest credits so that their vendor can pay the fee. At the end of the day the participant gets hurt, it would be much better if the participant paid the fee directly.

To give you an idea of the vendor reduction taking place when the vendors are required to pay, the FBC in San Diego charges vendors and according to their website they have 37 vendors available (there is some duplication in that number) versus the CalSTRS 403bComply program, which the employer or employee pays - the number of vendors is at 57 and includes Vanguard (The FBC does not at this point). Full Disclosure: I am a consultant to CalSTRS for Comply and Pension2. The employer/employee pay option allows for more choices (54% more in this case) and lower cost options (Vanguard). The new TDS chairman told me that "choice" was the single most important aspect of a deferred compensation plan (which I won't address now) yet he wants to push a model where choices are greatly reduced and fees for participants will have to rise.

So there you have it, vendors are charged 50% more than the marketplace cost for unproven "compliance" and participant choice is greatly reduced. If that is the plan you want, I guess you should stick with the new Tax Deferred Services. Maybe the new motto should be "Less choice, higher costs, same lousy services!"

The document below is what was sent out.

Scott Dauenhauer CFP, MSFP, AIF

TDS Fee Changes

Monday, August 10, 2009

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SDCOE's FBC Subpoena's Me In Advisor Lawsuit

The sue happy Fringe Benefit Consortium, a subsidiary of the San Diego County Office of Education has served me with a subpoena to appear for a deposition in their case against Barry Allred, Christopher Dougherty, Chris Furtado, Mary Seki, Lori Lin, and Michael Zeiger. I believe the defendants are countersuing the FBC.

Dan Puplava's attorney was CC'd on this subpoena, for those of you who read this blog you know that he threatened me for linking to the San Diego Union Tribune article that was not friendly toward his client (Dan Puplava).

There is no reason for my name to be pulled into this lawsuit.