Monday, April 29, 2013

403(b)izarre: Make It Automatic - Fiduciary Responsibility (Part IV of IV)

In the previous three parts I Introduced the Make It Automatic concept, asked who would oppose it and then addressed a common objection.  In this last part I address the issue of Fiduciary Responsibility.

The Fiduciary Liability Objection

Another objection I hear is that a fiduciary based, auto-everything defined contribution system would cost school districts money and take up staff time as well as opening them up to potential litigation.  

Valid concerns, but easily addressed.

First, by allowing any insurance agent to sell high commission, non-consumer friendly products on your campus - you are already opening yourself to such litigation.  

Of course this line of thinking moves one toward removing the program all together and that is a bad idea.  The truth is there are many things the school employer can do to alleviate the time commitment and litigation threat.

Many states (and many more are starting) now operate defined contribution plans on behalf of public employers.   These defined contribution plans can work as "multiple employer plans" where the state may become the "plan sponsor" and take on most of the responsibility and much of the liability of the defined contribution plan for the school employer.  

The school employer is expected to do their due diligence and to monitor how the program is being run, but everything other aspect (except for the payroll functions) is conducted by the state.  The state negotiates the contracts, does the compliance, monitors the investment options, processes contributions, provides relevant notices and runs the "Make It Automatic" program.  They do this without cost to the school employer (the state is paid by the fees generated by the plans and is non-profit) and more importantly at a very low cost to the school employee.

Where such a plan is not available, many employers could form a consortium and run the program in a similar manner.  Implementing a "Make It Automatic," fiduciary based plan can be extremely simple and not cost the employer much, or anything at all.  One issue is that these plans are not available in every state and some states have laws against such a system.  Whenever these laws are proposed to be changed the insurance industry spends a lot of money to stop their repeal, the status quo drives profit margins.

Why aren't these ideas catching on like wildfire?  They are, but mostly in the private sector.  

Many government plans still remain in the stone age and there is little support from employee associations and dramatic opposition from insurance companies - ironically both of which are funded by school employees.  

Where these programs are being tried, the participation rates skyrocket - it works.

The lives of school employees across American could be dramatically improved by "Make It Automatic."

Isn't it time school employees had access to an "Automatic" option?

This concludes the 4 part series Make It Automatic.

Scott Dauenhauer CFP, MSFP, AIF
The Teacher's Advocate

Monday, April 22, 2013

403(b)izarre: Make It Automatic - What About Personal Responsibility? (Part III of IV)

In Part II of Make It Automatic I explored who might be against this program and why.  In this post I explore a common refrain I hear from smart people who may not have thought very much on the topic. (The intro is to this four part series is here)

What About Personal Responsibility?

Some believe the employer and associations shouldn’t be involved with encouraging school employees to save using “auto-enroll.” 

They feel it’s to paternalistic or none of their business.  

My response:

“Make It Automatic” is NOT a mandate, it has very simple opt-outs that every employee can elect if they choose.  Unlike a defined benefit plan, the participant is always 100% in control.  Should an employee find themselves auto-enrolled in a plan and then later decide they want to stop contributing, 
it’s simple to stop."

American’s have proven they won’t save on their own, they need a nudge.  I challenge anyone to find a retiring teacher upset with their decision to contribute to a defined contribution plan early in their career.

In most non-ERISA k-12 403(b) plans the participation rate is abysmal, hovering around 30%.  In my experience about 60% of those contributing are over age 50, another 25% are between 40 and 50 and less than 15% are under 40.  Those who are under 30 that contribute to a 403(b) are black swans (rare).  

To get the most out of retirement savings it pays to start early and yet almost NOBODY does.  Imagine the wealth that could be built by new school employees who are auto-enrolled.

Enrollment does not have to be at a high percentage.  The private sector often sees auto-enrollment rates at 6% or more with increases of 1% each year until the participant is around a 10% contribution rate.  

Given that most school employees have a defined benefit plan and sometimes Social Security, a smaller percentage or even a flat dollar amount could be used.

Employees who have a better financial outlook are happier, healthier and more productive - this leads to a better quality school program.

Employees who have saved for retirement are likely to retire earlier, allowing employers to replace them sooner with lower salary employees...saving the employer money.

Employees who have saved for retirement are likely to retire earlier and pose a smaller burden on underfunded pension systems.

“Make It Automatic” is a win-win-win - the employee wins, the employer wins and the pensions system wins.  Forget about paternalism, this program makes financial sense for every party involved.

Next week this series will conclude with Part IV of Make It Automatic and will deal with Fiduciary Responsibility.

Scott Dauenhauer CFP, MSFP, AIF
The Teacher's Advocate

Monday, April 15, 2013

403(b)izarre: Make It Automatic - Money and Power (Part II of IV)

In Part I of Make It Automatic I introduce the concept of automating retirement savings and the fact that their is opposition to the idea.

Part II explores the opposition and what drives it.

There is much opposition to the "Make It Automatic" idea and for the only two reasons that matter - money and power.

Last year I witnessed a 403(b) insurance agent ask a high level state employee (who administers the defined contribution programs) to make the following pledge:

"Will you promise not to support any legislation that allows for or requires auto-enrollment?"

While the question may have been worded slightly different, you get the picture.

The 403(b) agent was actively lobbying the state to not implement a program that would improve retirement outcomes for hundreds of thousands of school employees, all so he could continue selling his high-commission, low-quality products.  It never occurred to him that increasing the number of participants in a plan from the sub-30% range to above 90% would produce three times the number of potential clients (or in his case, victims).

A true financial planner who does the right thing for their clients will never be threatened by "automatic enrollment," as their clients will always value them more than as just an "enroller."

Recently, a large school district had a meeting with a gathering of 403(b) agents who were angry that they could not have full access to school district campuses.  They made it clear they would find their way onto campuses regardless of district policies.  This, in the wake of Newtown and other campus shootings is a bizarre behavior.

Putting aside the issue of safety, do we really need more distractions for our school employees during their work hours?  We send our kids to school to learn and our nation's school teachers (and employees) have a lot to fit into their schedule, particularly in the light of furloughs and shortened school years.

Allowing 403(b) salespeople onto a school campus is a further distraction and unwarranted.  What other employer allows salespeople to wander their places of business?

The outcry from these agents is always the same - "without us there would be nobody in these plans."

The 403(b) has been around longer than the 401(k) and yet most public school programs languish with participation rates well under 30% - in that respect there IS almost nobody in these plans.

Auto-enroll, auto-escalate and auto-default helps to solve the problem.  It removes salespeople from the campus, increases participation in the plans to the point where the minority are those NOT in the plan and increases the savings rate each year.  In 50 years of the 403(b), insurance agents have not come close to achieving any such numbers.

This is not to say that a qualified professional shouldn't be involved in a 403(b) program.

Between a Rock and a Hard Place

Power is the other thing keeping 403(b) programs in the stone ages.  There are organizations that purport to support school employees but then actively work against reforms that would serve to create better retirement outcomes.  They are more concerned about controlling or providing 403(b) programs than they are about making those programs work for the benefit of their members.

Misunderstanding the 403(b)

It is thought by many unions and associations that represent school employees that efforts to reform and strengthen 403(b) programs will be the first step in tearing down defined benefit programs.  This line of thinking has sound logic and I am sympathetic to it.

There is no doubt that public sector defined benefit plans are under constant attack.  For some, moving public employees to "defined contribution only" plans is a life mission (it is not mine, I fully support reasonable public defined benefit plans and will fight to protect them).  It only makes sense that the first step in such a conversion would be to first insure that the defined contribution plan that is being proposed is solid.  Thus, many unions see supporting reforms of 403(b) plans as supporting the enemy, looking like they are giving in or moving toward acceptance of such a transition toward eliminating the defined benefit.

I understand this concern, it's valid and it must be addressed head on.

My response to those who feel this way is that there is no reason you can't have both systems strong.

There is every reason to believe that a strong defined contribution system could bolster the defined benefit system - even potentially aiding in increasing the funding levels.

Think about it, a school employee who has saved all their life (through "Make It Automatic") will have a much simpler decision when it comes to retirement.  They will not have to work as long to meet their retirement goals and may retire sooner.  Not only does this take pressure off the defined benefit system (from paying out higher benefits), but it takes pressure off the school employer as they can replace that higher salary with a new teacher with a lower starting salary (not to mention getting new people into the workforce).

A strong defined contribution system has the potential to strengthen school employer budgets and defined benefit plan funding levels.

In Part III of Make It Automatic I will explore a common refrain against implementing "Make It Automatic,"-  that it's to paternalistic.

Scott Dauenhauer CFP, MSFP, AIF
The Teacher's Advocate

Monday, April 08, 2013

403(b)izarre: Make It Automatic Part I of IV

Is your car an automatic or stick shift?

You probably don't have to think about it, unless you're driving a sports car, it's an automatic.  Even many sports cars these days come as automatics.  Less than 7% of cars sold today are "manual."

The reason is simple, driving an automatic is easier.
When it comes to the 403(b) retirement program offered to most of the nation's k-12 school employees, they are getting a stick shift (actually they are getting the shaft) when they really need an automatic.

While many school employees think they are buying a sleek, sexy and sporty vehicle, in fact they are being sold a lemon.  The 403(b) program is mired with problems, but it can all be mostly fixed by moving to an "automatic" transmission.

What do I mean?

If I were asked (I often am) how a school employer or union could make an immediate impact on the financial lives of their employees and improve their odds of retiring with significance, I would tell them "Make It Automatic."

What does "Make It Automatic" mean and why is my recommendation often met with scorn, derision and even mockery?

I'll explore both in this first of a new segment on my blog I call 403(b)izarre.

The "Make It Automatic" program I recommend is increasingly in use today in the private sector, backed by very specific laws and regulations.  Not only is it baked into law, it's backed by very prominent behavioral economists with decades of research. Famed, behavioral economist Richard Thaler just penned an editorial for the New York Times list weekend (April 5th, 2013) emphasizing this series main point (the ideas of which came from Thaler, Bernartzi and Tversky/Kahneman). 


The Pension Protection Act of 2006 opened the doors to the private sector (ERISA plans) to allow them to automatically enroll participants into 401(k) plans as long as they follow certain "safe harbor" guidelines.  If followed, the employer would be exempted from liability.  The PPA related to automatically:
  • enrolling participants into a 401(k) plan
  • defaulting participants into an appropriate Qualified Default Investment Alternative
  • allowing for increases to the savings rate each year
These three simple automatic ideas (auto-enroll, auto-default and auto-escalate) represent behavioral finance's first big incursion into the retirement planning world and have the potential to change the retirement outcomes of millions of Americans (but remember, millions more are still without a plan - so it doesn't solve everything).  If followed, participation rates can easily hit 90% or more, even without a match.

The PPA does not technically apply to state and local government entities.  Worse, the very entities that could make this happen fight vehemently against its implementation.

If a school employee wants to contribute to a 403(b) currently, it's entirely a "manual" process. In most cases they are forced to go through a salesperson.  If the employee searches hard and finds a low-cost, quality 403(b) option they must fill out an agreement with their employer, fill out an application with the provider and then monitor their paycheck to make sure the right amount comes out and is sent to and deposited by the provider.

While this process doesn't sound difficult, when you consider that the employee may have to choose from dozens or even hundreds of investment options and has little information on any of them - it can be daunting.

Currently this process is alleviated by the use of a 403(b) agent, a sort of used car salesman who will help them navigate the "lot" of products to find the one most suitable.  Instead, they are sold a lemon and the agent makes lemonade...usually turning the sale into a qualification for a trip to somewhere exotic (Monte Carlo here we come!).

It doesn't have to be this way, there is now a path to 403(b) freedom and it starts with "Make It Automatic!" The opposition is fierce though.

Who is opposed to this newly available freedom? 

I'll post one part a week for the month of April.

Scott Dauenhauer CFP, MSFP, AIF
The Teacher's Advocate

Wednesday, April 03, 2013

National 403(b) Day is Here! Sign Up, Save & Savor Retirement

The 401(k) has its day (and ironically it's April Fools, I think we all know who the joke is on), but the 403(b) has never enjoyed its own day.  That changes today.

I declare April 3rd to be National 403(b) Day.

While I have no events other than a blog post later, my goal is to build 403(b) Day each year and use it to promote defined contribution plans for government school employees.

Specifically we will focus on the 403(b), but promoting the 457(b) (which will sadly never have it's own day in the calendar) will also be a tenet.

If you don't have a 403(b) and you are a school employee, I encourage you to sign up today.  If you have a 403(b), use today to increase your contributions and check your asset allocation, if you are retired with a 403(b) encourage someone who is just starting in the profession to start one.

Today is a day to focus on the positive aspects of the 403(b), there will be plenty of time to advocate to make it better.

If you are a school employer, a 403(b) Compliance TPA, an RIA or IAR, a company that offers great 403(b) me and let's spend the next year making the second Annual National 403(b) Day a success.

If you don't know what a 403(b) is, there is only one place to learn about it - Dan Otter's 403bWise website.

Sign up for a 403(b), Save in a 403(b) and Savor the great Retirement decisions you've just made.

Scott Dauenhauer, CFP, MSFP, AIF