Wednesday, September 30, 2009

Friday, September 11, 2009

TDS Appears Desperate In Latest Memo

"TDS has not, is not, and will not charge the employees or school districts for our services"


Evidently TDS hasn't read California law, you can read my in-depth analysis:

Here.

In this latest memo TDS attempts to settle down district CBO's who appear to be jumping ship.

TDS maintains their service is free and they will charge vendors..
"TDS will now charge vendors a nominal monthly fee per participant. Many plan administrators do this already and the "vendor pay" model is an acceptable industry standard"


Again, perhaps TDS needs to consult with the law on this, all the documents a district needs to determine whether vendors can be charged in California are located Here..

In a previous post I demonstrated that TDS is only promising to do common remitting in the service agreement with providers - there is no information sharing, which is necessary for compliance.

Also, the TDS nominal fee is an addition to the commission they earn on the products they sell. Plus the nominal fee of $3 per participant is 50% more expensive than full service TPA's available now in California.

While vendor pay may be acceptable in other states, who may have fewer vendors, it is not currently allowed by law in California, of course I've also described in previous post how a loophole has developed where vendors "pay on behalf" of the participants.

TDS believes that charging vendors will not result in a reduction of vendors:

"Despite rumors to the contrary, this change in our model will not result in vast vendor defections from your plan"


On the contrary, its a simple law of economics, the higher the cost to play, the fewer players. Vendors will drop off, whether or not this is a bad thing depends on who drops off. But it is ridiculous to state that there will not be a reduction in vendors if the vendors have to start paying. It is also ridiculous to state that employees will NOT be charged, they will. The employees will pay the $3 fee either as a direct pass through or worse, through much higher product fees or much worse product crediting rates - its a simple law of economics. You can't raise the cost to a product and expect them to simply absorb it, the cost will eventually make it to the employee (which is why perhaps it would be best for the employee to pay the cost directly out of payroll, simple and clean).

TDS goes on to state:

"Please rest assured that TDS will not make any changes to your plan without your approval and understanding."

This, despite the fact that they sent out vendor service agreements that don't provide any documentation that the employers have given TDS permission to act on their behalf to charge this fee. Employers, TDS would be your alter-ego according to the Attorney General and you would in fact be charging the vendor the fee.

Secondly, my understanding is that TDS HAS made changes to employer plans (457(b)) without the approval or understanding of the employers. Of course, I could be wrong, but when all the TDS representatives were released, the broker of record on all those 457 plans must have been changed. The questions the employer must ask are the following:

When TDS let go of the TDS representatives, who became the new Broker of Record and WHO authorized the changes? Thousands of plan participants that were working with a representative suddenly have a new Rep, yet this new rep was not determined by the employer.

Who is this new rep?

Who is now receiving the compensation?

Was the employer for each of these 457 plans notified of the change?

Did a prohibited transaction occur?

No accusations here, the employer is at risk of fiduciary breaches with their 457 plans and when changes are made, they should be aware of them and be involved in the those changes BEFORE they happen. All I'm saying is that the employers should ask the questions.

Am I biased here, absolutely. All I'm doing is providing the information, you can make your own decisions and you can ask your own questions.

Scott Dauenhauer CFP, MSFP, AIF





TDS Memo 8262009

TDS Wants $3 A Participant For A Payroll Slot

Below is a letter sent to TIAA-CREF from Tax Deferred Services on August 12th which includes a copy of a "Vendor Services Agreement." Keep in mind that on several occasions, CalSTRS called TDS and spoke with them asking for a copy of the Vendor Services Agreement and were told that one did not exist. The entire time, they had already sent one to the record-keeper of Pension2 (full disclosure: I work as a consultant for CalSTRS). There are some frightening things in this Vendor Services Agreement and some frightening things that were left out.

The strangest provision is number four, which states:

"In consideration for making Vendor's financial products available to Plan Participants and providing the Services defined above, Vendor agrees to pay the Plan Administrator $3 per month for each Plan Participant who contributes to one or more of Vendor's financial products through a payroll deduction processed by the Plan Administrator."


First, "in consideration" implies that the $3 fee is a fee that is charged for a payroll slot. The vendor must pay consideration in order for their products to made "available to Plan Participants." This is a no-no in California, see my previous post.

Secondly, TDS wants this "consideration" for "providing the Services defined above," those services "above" include only the following:

1. Accepting premiums (contributions) from the employer on behalf of the employee
2. Remitting said premiums (contributions) from the employer to the Vendor
3. Review those premiums (contributions) for compliance (in other words, making sure they don't over-contribute)

To sum up the "services" offered for $3 per month, the vendor is paying ONLY for common remitting of funds. That seems a bit out of whack to me considering the current going rate for FULL SERVICE COMPLIANCE in California is about $2 per participant.

No where in the letter does TDS state they will provide full service compliance to the district and in no place do they ask the vendor to "share information" which is necessary and required in order to do actual compliance. Is this letter and agreement an admission by TDS that they don't actually do compliance (real compliance)? It would appear so.

In addition, the letter doesn't say with what employers this agreement applies, nor does it show any documentation that any of the employers have in fact authorized TDS to collect this fee on their behalf.

Who is in charge over there anyway?

This is scary stuff, in an age where school districts need competent TPA's to ensure compliance they are getting something that is far less.

As an employer, would you authorize an entity who not only charges $3 per head for common remitting only (the letter apparently proves this) but then also solicits your employees for 403(b) and 457(b) product sales that produce commission for TDS and the reps they employ? I can tell you this, in an ERISA world - this would not fly.

Scott Dauenhauer CFP, MSFP, AIF

TDS Vendor Agreement

2008 AG Opinion Does NOT Say Vendors Can Pay For Compliance

A few companies running TPA's in the state are now telling school districts that while their services are now free to the district, they must now charge the vendors for their services. In other states this is legal, in California I don't believe it is - I'll post the documents, you decide. Let's forget for a minute that vendors that must pay the fee will ALWAYS pass that fee through to the participant, which might be okay if it was a straight pass through, however most of the time it is hidden with higher fees and or lower crediting rates.

There is a long legal history in California of school districts paying for compliance type services, it started back in 1974 with an AG Opinion (all are below). This opinion (see section 5. Service charges) refers to what was originally Ed Code Section 13009 and is now Ed Code Section 44041, it stated:

"The governing board of each school district when drawing an order for the salary payment due to employees of the district shall, without charge, reduce the order by the amount....."


The key term here is "without charge," the AG found that this term "reflects a distinct legislative determination that school districts must themselves bear the administrative costs of providing tax-sheltered annuities to their employees"

All of this came to a head again in 2002-03 when another TPA decided that they would begin charging vendors for their compliance services, this led to a big fight that eventually was once again resolved by an AG Opinion, issued by Bill Lockyer and Gregory Gonot on February 18th, 2004, No. 03-1005 (below). The question posed was:

"In light of a school district's broad authority to conduct its programs and activities, may a school district assess a fee upon providers of deferred compensation plans to cover its costs of administering the plans for district employees?"


The conclusion was the same as the 1974 opinion:

"Even though a school district has broad authority to conduct its programs and activities, it may not assess a fee upon providers of deferred compensation plans to cover its costs of administering the plans for district employees"


Thus it was once again established the vendors could not be charged. This would not be the end though.

When the IRS issued new proposed 403(b) regulations in 2004 it was clear that the school districts and public employers where going to have to spend more money on compliance as the compliance duties would be much heftier than in the past where they mostly collected money and remitted it. This led to Assembly Bill No. 2462 that was passed in 2006 that did several things:

Created new disclosure laws for all Third Party Administrators (most of which are not following them)
Allowed CalSTRS to create a Third Party Administrator
Changed Ed Code 44041 to allow employers to pass the cost of compliance onto the employee

A few things are important to understand in this legislation (which is also below)

Ed Code Section 24953 (g) reads as follows:

"The cost of providing administrative or compliance services pursuant to this section shall be deemed to be a cost incurred by the employer and subject to subdivision (b) of Section 44041 or subdivision (b) of 87040"


So what does 44041 say?

Ed Code 44041(b) was changed to read:

"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 employee 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."

The key phrase changed was from "without charge" to "with or without charge." This changed allowed employers to charge employees for compliance (assuming they could work it out with Labor). However, the law says even more, in to places it states the following:

"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."


Then,

"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."


Many TPA's are jumping on this language to claim that something regarding charging vendors (whom are not listed) is now allowed by law. They are claiming that the terms "organization or entity" refer to vendors or deferred compensation providers. While it is not entirely clear why these extra words were added, it is important to read the entire sentence. Again, the sentence reads "....may collect these costs from the participating employee, the employee's participant account, or the organization or entity authorizing the deduction."

So, the employee can pay via their paycheck or via their 403(b) account, however it does not say that the vendor can pay, the sentence ends with "entity authorizing the deduction." Who is the only entity that can authorize a payroll deduction? The employee. A vendor cannot authorize a payroll deduction, in fact the employer cannot even authorize a salary deduction unless it is first authorized by the employee (which is why there is no Auto Enrollment in California). Regardless of the language saying "organization or entity" there is no other entity that may authorize a deduction other than the employee. That is it, this bill didn't expand the law to allow employers to charge vendors. If it did, it would have specifically mentioned them, it doesn't.

But wait, there is more, yet another AG Opinion, this one (which I refer to as the FBC Opinion) was issued by AG Ed Brown and Deputy AG Taylor Carey on August 25th, 2008, No. 06-408 (below). This opinion asks about preferred providers and whether school employees can receive commission (they cannot) from 403(b) vendors. But it also states the following:

"With respect to 403(b) plans in particular, the Education Code provides that a school district, as an employer, may offer 403(b) plans to, and collect the costs of regulatory compliance and administrative services from, it participating employees"

In section 2. Compensation for Promotion, it states:

"Before Assembly Bill 2462 was passed, school districts were not allowed to charge employees for the administrative costs and other expenses associated with processing 403(b) plans. In recognition of sharply increasing administrative burdens on school districts that offer 403(b) plans, AB 2462 gave school districts the authority to recover the costs associated with 403(b) transactions."

It goes on to cite Ed Code Section 44041(b).

In my professional opinion (I am not a lawyer) the law has not changed around whether a vendor can be charged for compliance services relating to a 403(b) plan. AB 2462 did not change this, nor did the most recent AG Opinion.

So the question must be asked...why are TPA's in California telling school districts that they can pass their fees onto the vendors and citing state law and AG Opinions that do not support doing any such thing?

Perhaps they think the districts won't check out what they are saying or perhaps the TPA's don't understand what they are reading.

If I'm wrong on this, great, but somebody needs to show me the progression and prove to me that I'm wrong.

At least two TPA's are currently charging vendors or plan on charging vendors in California, how are they getting away with it?

I believe they are doing it with a wink and a nod. They are saying to the vendors "You must pay us, but we are not charging YOU, we are charging the employees account (which is legal), but if you can't arrange for the debit from their account, you can pay the fee on behalf of the participant." The TPA then excludes vendors who cannot arrange or won't pay the costs.

There you have it, the full history and examination of how the 403(b) compliance is paid for in California, along with all the documentation.....review and decide for yourself.

Original 1974 AG Opinion

AG Opinion 06-408 (the FBC Opinion)

ab_2462_bill_20060830_enrolled

200403-1005 Lockyer AG Opinion

Thursday, September 03, 2009

ASEA & Nationwide - Fun, Food & Frolic

The Alabama State Employees Association is in a bit of trouble:

In a report posted on the state personnel Web site on Aug. 21, the Alabama Securities Commission, the state’s securities regulator, described how the folks who run the employees association hit up their plan provider, Nationwide Retirement Solutions of Columbus, Ohio, for millions in, ahem, “endorsement fees.”

Some of those fees took the form of a Napa Valley vineyard tour, player slots for a celebrity golf tournament, first-class airfare, souvenirs, Chicago Cubs baseball tickets and, for the executive director, a handsome boost in salary. Other goodies made it onto the Alabama perk list, too, but you get the idea.


Scott Dauenhauer CFP, MSFP, AIF

Tuesday, September 01, 2009

TDS Poaching Reps?

Word is that Bob Lotter, the new TDS owner is making good on his promise to close districts to his representatives only and he's poaching the reps of his competitors. At least one competitor says that 10 reps went to Lotter after Lotter told the reps that he would be the one controlling access to the districts.

In a letter Lotter wrote last month he alludes to this control, which is not legal in California - good luck Bob.

Scott Dauenhauer CFP, MSFP, AIF

ZUK-ING...Uh, Maybe Not So Objective and Independent

Recently ZUK financial, a 403(b) product sales company sent a letter to districts that misrepresented the CalSTRS 403bComply program. ZUK attempted to paint themselves as objective and without conflicts, while stating that CalSTRS has conflicts of interest. ZUK greatly misrepresents the CalSTRS programs and fails to mention how CalSTRS manages conflicts (of which there are few). DISCLOSURE: I do consulting work for CalSTRS.

Of course ZUK wasn't so quick to point out their own conflicts (the fact that they represent many 403(b) vendors and sell products from TPA's/Remitters that they recommend to school districts). On their own website they state:

"Zuk Solutions is not a one size fits all program, but a customized, comprehensive, unbiased and objective partner ensuring total transparency and the latest and best business practices."


Hmmm, unbiased and objective might be traits of a company that did not accept commissions from companies that will be in the compliance programs they recommend (or the products of TPA's they recommend), of course that is not the ZUK offering. What are the chances that ZUK offers up the CalSTRS 403bComply program? Zero. Instead they will offer ING, Great American and their newest employee's company Envoy - entities they have some degree of control over so that they can come in and provide "education." Education from ZUK will not be "objective or unbiased," as the people providing it are sales representatives of 403(b) products.

Don't believe me, you need to look no further than ZUK's own website. It states clearly "ZUK financial group, a representative of ING." If they are representing ING, how can they be representing YOU? This isn't an attempt to demean or even pass judgement on ING (whose product I have not reviewed), simply to point out that ZUK is NOT unbiased and objective using reasonable definitions of the terms.

I don't have a problem with ZUK wanting to sell 403(b) products (other than the fact that my clients were sold a bunch of terrible annuities from Great American when they were with ZUK), but I do have a problem when they send out letters lying or misrepresenting other programs and then put themselves forward as the objective and unbiased solution when nothing could be further from the truth.

If you want further proof of where ZUK's loyalties are, simply pull up their website and copy the names of the representatives and then goto the California Insurance website and look them up, you'll see who they really represent - Insurance companies.



Scott Dauenhauer