Thursday, October 29, 2009

What Happened to TDS's Doug Holt?

I heard a rumor that Doug Holt of TDS is no longer with TDS, as of yesterday. I don't usually report rumors, only things that I can substantiate. I decided to check out his FINRA status on BrokerCheck and sure enough, he is no longer registered and it shows "Termination", though it doesn't state why. I should note that this termination is from Questar, his broker-dealer, so I can't say for sure that he is not with TDS. I'm awaiting an e-mail reply from TDS.

Update: Latest sources tell me Doug hasn't been terminated from TDS, only Questar (his Broker/Dealer). I wonder who the new broker will be on all those 457(b) accounts.

By the way, this is a tad strange as usually you can transfer to a new broker/dealer, there must have been some reason he didn't, we should find out soon.

10/30/2009 Update:

According to FINRA Holt was discharged by Questar on September 14, 2009 for the following reason:

"Registrant was terminated after internal review evidenced failure to provide prompt written notice and obtain written approval to participate in a private securities transaction and used unapproved marketing material."

I have given TDS a chance to respond to this, they have thus far refused.

Scott Dauenhauer

Tuesday, October 27, 2009

SchoolsFirst to Begin Charging Vendors for Compliance

SchoolsFirst has now joined the ranks of those charging vendors for compliance, citing the high costs of keeping districts in compliance. It makes one wonder how those who claim to do it for free are able to do so (the answer is they are losing money and hoping to make it up on product sales volume of their TPA partners).

For those districts utilizing SchoolsFirst, since the service is no longer free, perhaps it is time to look at the other available TPA's.

Scott Dauenhauer CFP, MSFP, AIF

Schools First Letter 10-14-09

Tuesday, October 20, 2009

TIAA Cracks Down On Switchers

Evidently enough people caught on to a secret trick that allowed one to reset their interest rate at TIAA (TIAA Traditional). Basically, you would sell into the money market (out of Traditional) on one day and then buy back in the next. This would effectively increase your rate to the new rate. So if you are earning 3% now and TIAA changes the rates to 3.5% you simply sell today into the money market and then repurchase back in a few days later and voila, you are now earning 3.5%. Well it turns out that this little trick caught on last year or TIAA knows that its going to have to raise rates in the future and doesn't want people resetting their rates (at least very often), so they are instituting the following new policy:

When you transfer out of TIAA Traditional and transfer back within 120 days, the amount, up to your original transfer, will be credited with the same interest rates that would have applied if the transfer out had not taken place. Such interest will be credited from the date the transfer in was made. Interest will not be paid for the period from the date of transfer out to the date of transfer in. Do you wish to continue with this transfer?

This will help, though lets say rates jump to 5% on the Traditional and I'm earning only 3%, you think I care if I lose out on 120 days of interest? I'll take that trade any day.

In reality this is a smart move, a daily liquid account like this is dangerous when you have volatile rates.

Scott Dauenhauer CFP, MSFP, AIF

Tuesday, October 13, 2009

Ed Siedle Speech: "Perspectives on the Future"

Click above to goto a great speech by Ed Siedle.

Since the 1980s the financial services industry has experienced explosive growth. Over the decades dealing with brokers, money managers and other financial advisers ceased to be limited to the wealthy few. As a result of shifting responsibility for retirement planning onto workers and financial product innovation, virtually all Americans (and foreign investors for that matter) that had accumulated any degree of wealth turned to financial services firms for expert, independent investment advice and investment products.

Scott Dauenhauer CFP, MSFP, AIF

Saturday, October 10, 2009

Former TDS Representative Sues TDS Group and Robert Lotter

Below is the copy of the lawsuit that Emily Wang has filed against Robert Lotter's TDS Group (Tax Deferred Services). This lawsuit gives considerable insight into what happened during the transition to Lotter. I'm going to decipher some of it for you in commentary to come.

Scott Dauenhauer CFP, MSFP, AIF

TDS Group Sued By Former Rep

Friday, October 09, 2009

Calling a Spade a Spade - Brokers Giving Investment Advice

Shared via AddThis

The "Free Education" Fallacy

Why most financial education programs in the Public School 403(b) and 457(b) world are really just covers for commission-based product sales.

A question that I continue to hear from Public School employers these days is “how do we best educate our participants?” Several companies that work in the 403(b) and 457(b) world have begun to develop and market “education programs” that purport to “raise financial literacy across the entire workforce.” I am all for financial literacy, in fact I think it is imperative that financial literacy is incorporated into our public school curriculum, however it is clear that financial education in relation to defined contribution participants (401(k), 403(b) and 457(b)) has failed.

There is plenty of evidence to support the failure of participant education:

Many participants are eligible for a match (free money) and fail to take advantage

The average participant account balance underperforms

The average participant couldn’t tell you the difference between a stock and a bond

More than 60% of participants don’t participate (about a third in 401(k)’s)

If you look at the dispersion of who is contributing to their 403(b) or 457(b) by age group those who are closer to retirement make up the overwhelming majority. These facts do not support the notion that participant education is working.

Participant education in Public School 403(b) and 457(b) retirement plans is very different than in 401(k) plans. In 401(k) plans there typically is a single plan and signing up is relatively easy, an advisor holds a plan meeting, provides some “education” and then helps people enroll or directs them to a website. This is not the case in 403(b) and 457(b) government retirement plans.

Most 403(b)/457(b) Public School retirement plans are “multi-vendor,” which means that the employer doesn’t have a single provider for their plans, they may have five or ten or in California, up to 76. Not only do these employers have multiple vendors, but many of these vendors also offer multiple products. In many districts in California its possible to have nearly 300 different products available to a participant. Each of these products may be sold by multiple agents, meaning that the number of choices between vendor, product and sales agent are almost too numerous to figure.

Imagine being an employee in one of these plans, you would be completely overwhelmed.

California has a website, in which each of the 403(b) products are disclosed in terms of fees and returns, yet it is unreasonable to expect the average employee to actually analyze all the available options. Its tough enough for the average 401(k) participant to analyze the twenty-to-forty investment options available to them, imagine the school teacher who has to manage nearly eighty vendors, nearly three-hundred products and potentially thousands of investment options within those products and then finally choose from whom she wants to purchase that 403(b). No amount of “participant education” or “increased financial literacy” will enable the average participant to fully understand what is being offered to them.

It is the “multi-vendor” environment that feeds the perceived need for more “participant education.” The sheer number of options overwhelms people and pushes them either into paralysis or into the arms of a commission-based salesperson, who shows up on campus under the guise of “education.” If the education was truly unbiased and not related to commission-based products, there might be an increase in participants making the right choices, however there is no evidence there would be an increase in the number of participants overall.

The true reason behind the push for “participant education” in the 403(b)/457(b) School District retirement plan world is commissions.

While many firms represent that they only want to provide “unbiased” financial education, they are lying. Think about it for a second, can you think of any non-profit financial education companies that are not tied to product manufacturers in some form or fashion? You can’t, its because they don’t exist. When someone comes to your workplace to provide “education” on a 403(b) plan (in a multi-vendor environment) it is for one reason and one reason only, they want to sell you a product in order to earn a fee or commission. They are not interested in protecting your best interest, they have no duty of loyalty to you and they are not providing the “education” in order to increase your financial literacy. Financial education is a front for product sales. There is a reason that the Department of Labor is making changes to the highly conflicted regulations under ERISA that allowed for salespeople to give investment advice.

A few Third Party Administrators (TPA) for Compliance in California sell their “free” services and wrap them in the blanket of “free financial education.” Even worse, some charge for their compliance services and then offer to provide “free financial education.” This is dangerous for both the employer and the employee. Free financial education, if offered without commission-based product sales is fine, but that is not what is offered. The TPA essentially is acting as an agent for the employer - to the employee the TPA appears to be “endorsed” by their employer (either implicitly or explicitly) and this leads to the assumption (right or wrong) that the representatives of that TPA are selling products that have been approved by the employer.

Essentially the employees are trusting the employer made the right decision and they transfer that trust to the TPA representatives, this is exactly what the TPA Representatives want. Once the TPA and its reps have the confidence of the employees (based on the implicit employer endorsement) they need only to get in front of them to sell commission-based products. The means to get in front of them is “participant education.” The TPA is simply a front for the sale of high-cost, commission-based financial products that are rarely in the best interest of participants.

These education conflicts can be avoided by not hiring a TPA or provider of 457(b) plans that earns a commission or a hidden fee for selling financial products. They can also be avoided by not allowing sales agents on campus to “provide education.” There is no evidence this education works and it only facilitates an employee providing a commission to a sales person who has no duty of loyalty to that employee.

If you doubt me, simply ask the TPA sales organization to put in writing that all of their sales representatives will act as a Fiduciary (under ERISA) at all times when working with your employees, none of them will do this.

So what is the solution to the education problem? That’s a story for another time.

Full Disclosure: I am a consultant to the CalSTRS 403bComply and Pension2 service offerings. CalSTRS provides financial education and does NOT receive commissions or fees in exchange for the sale of financial products.

Wednesday, October 07, 2009

Is There Really “Appropriate Separation” Between ZUK and Great American Plan Administrators?


In a recent letter to School Business Officials (SBO’s) regarding 403(b) Compliance, a ZUK representative claimed it “has appropriate separation between the TPA, product manufactures and education providers thus eliminating conflicts,” but is this statement true? My opinion is that it is not.

One of the “free” Third Party Administrators (TPA) that ZUK uses or at least recommends to some of the districts they service is GAPA, or Great American Plan Administrators. I decided to test this “separation.”

I guess one can measure “appropriate” however one desires, for my purposes “appropriate separation” will mean that the TPA does not benefit financially in the form of commissions from the sale of 403(b) and other financial products. This seems like a reasonable way of defining “appropriate.”

Let’s exam the relationship between ZUK, product manufactures, education providers and GAPA.

GAPA or Great American Plan Administrators is a subsidiary of the Great American Life Insurance Company (GALIC) and is also affiliated with Annuity Investors Life Insurance Company (AILIC).

Great American is a product manufacturer and markets '14' 403(b) products in California according to (vendor numbers 1167 and 1092). Each of these products pay a commission to selling agents and Great American earns revenue from the sale and ongoing servicing of these products. My research shows that Great American and Annuity Investors Life Insurance Company are both on all “Approved Vendor” lists that Great American Plan Administrators does the “compliance” for (in California). Does this sound like “appropriate separation” when the administrator who supposedly does the work for “free” benefits financially when certain products are pushed over others? Utilizing my definition of “appropriate,” this relationship doesn’t pass the test and I think we’ve discovered how Great American Plan Administrators can offer “free” compliance.

Of course, it doesn’t end there. We’ve established that there is NO separation between the TPA and the product manufacturer, let alone “appropriate separation,” but what about the appropriate separation between the TPA and the “education providers”.

Who are the “education providers” in this case? ZUK financial advisors. Are conflicts eliminated by allowing ZUK advisors to provide “education” and are the ZUK advisors really separate from Great American?

I’ll let you decide. I went to the public ZUK website and clicked on “The Advisors” link and looked up each advisor that works for ZUK on the state of California Insurance website to see who these advisors were registered to do business with, it is publicly available information.

Of the 19 advisors listed on the site, 16 were licensed and appointed with GALIC and 18 with ALIAC. Only one representative is not appointed with a company affiliated with Great American Plan Administrators. This doesn’t mean that every ZUK representative sells Great American annuities and life insurance or that any of them are required to sell Great American annuities and life insurance. However, it is interesting that ZUK recommends GAPA and states they are “eliminating conflicts” when in fact the conflicts that exist are quite large. Not only does GAPA offer products for sale, almost the entire ZUK advisor team is licensed to sell them. I can tell you from experience in working with clients that were former ZUK clients that nearly every client I took over from ZUK had at least one product sold to them from GALIC or ALIAC. So, is this how GAPA offers capital intensive “compliance” services for free? I think the mystery is solved as to why ZUK offers the GAPA TPA service and how it is offered for free.

Its one thing to advertise yourself as “unbiased and objective” its another thing to be unbiased and objective and I don’t think the evidence presents a case that ZUK “has appropriate separation between the TPA, product manufactures and education providers thus eliminating conflicts.”

Free is an enticing word, however the IRS wasn’t joking when they created the new 403(b) regulations and they expect employers to comply. Using a free service that does not generate revenue from compliance is an open door to problems in my opinion. Entities that perform free services to subsidize product sales will inevitably end up cutting corners (at least in my experience), something employers cannot afford. Employers need a partner whose primary business is 403(b) compliance, not 403(b) product sales.

Full Disclosure: I am a consultant to the California State Teachers Retirement System 403(b) Comply and Pension2 service offerings.


A client of mine is now contributing to a new 3121 plan (commonly referred to as a Social Security Alternative Plan) and that plan is now with Great American. Why is this important? The employer that this plan is with hired the gentleman from ZUK whom I refer to above to take their 403(b), 457(b) and 3121 plan out to bid. Whether the employer knew or understood that this individual worked for ZUK and was a product peddler is unclear at the moment, but an RFP (request for proposal) was conducted and guess who won the bid - ZUK. ZUK brought in their own 457(b) that pays their reps a commission and brought in Great American Plan Administrators as the TPA (the "free" TPA). It was a foregone conclusion who would be hired, imagine ZUK being hired to "consult" and then choosing someone else. So who did ZUK choose to offer the 3121 plan? None other than Great American Financial Resources's insurance subsidiary Annuity Investors Life Insurance Company and guess who is the agent on the policy? The ZUK consultant....sound like appropriate separation to you? This is the Quid Pro Quo, the free administrator is awarded with annuity product sales made by ZUK. Only in the land of non-ERISA 403(b) could this occur.