Tuesday, December 08, 2015

Sound of Silence

There is a deficit in leadership in this country on the issue of public school employee supplemental retirement programs and it’s hurting everyone (employees, employers, students and taxpayers). That sound you hear coming from the unions, district administrators and politicians is…silence.
No more. It’s time for change. The great rock band Pink Floyd sang:

Don’t accept that what’s happening
Is just a case of others’ suffering
Or you’ll find that you’re joining in 
The turning away

While I certainly won’t compare the suffering referred to in the song (On The Turning Away) to school employee retirement, it’s time we stop accepting what happening with school employee retirement plans.

For decades their has been to much silence. But over the past decade you might say the speechless have united in a silent accord (see what I did there Pink Floyd fans?). It’s time for that silent accord to become vocal. It’s time to stop being Comfortably Numb (just couldn’t help myself). It’s time to change shadow to light (I know, I’ll stop).

I’m calling on government leaders, unions, associations, teachers, school employees and fiduciary financial planners to turn on, tune in and drop in to fighting for what is right for school employee retirement plans.

There are many reasons that 403(b) and 457(b) plans are ignored by school business officials and unions, but among the most is important is that they are busy doing things that are, in the scheme of things, more important. School safety (especially poignant after the most recent shooting in San Bernardino), positive learning environments, balanced budgets and community involvemnt are much higher on the list for administrators than a supplemental retirement plan, especially since school employees have a pension. However, the reality is that school employees who feel more secure financially will be more productive, more tuned in to their work and more likely to retire at a normal retirement age — all goals for any School Administrator or Superintendent.

One way to feel more secure financially is through consistent contributions to 403(b) & 457(b) retirement plans that are operated in a manner that is in the best interest of participants. In addition, auto-enroll and auto-escalate are needed (not as much as in the private sector, but still a big need).
Right now there is almost no fiduciary responsibility for 403(b) and 457(b) plans across America. The silence is deafening. If you ask a Chief Business Officer of a school district, they’d rather not think about fiduciary responsibility and would likely whisper to you that they don’t want it. The last thing school officials want is to be subject to ERISA and all the headaches that come with it. I can sympathize with this point of view. But school employee’s retirements are suffering because of it and their productivity is most certainly lower as well.

How can we provide for better retirement outcomes without burdening school officials with overly complicated rules and regulations? This is the question that must be answered. I believe one answer to this are state run retirement programs that accept the fiduciary burden and essentially do the work for the school employers (similar to how they currently do it on the defined benefit side).
What are your ideas?

Some of us have been very vocal over the years and at least one politician has been very good on the issues, but it isn’t enough to defeat the forces that seek to undermine retirement security for educators (while proclaiming they are doing the opposite). It’s time to join the fight.

Scott Dauenhauer, CFP, MPAS, AIF

Wednesday, December 02, 2015

Welcome To The Fight — A Teachable Moment

I recently had the pleasure of meeting Tony Isola, a former teacher who has decided to pursue a career helping his former colleagues overcome terrible products and a more secure retirement. Tony’s new blog is called A Teachable Moment and he recently posted his introduction, here is a clip and a link to the blog:

Revenge of the Teachers | A Teachable Moment

Please welcome Tony to the fold of 403(b) Warriors.

Scott Dauenhauer, CFP, MPAS, AIF

Thursday, November 19, 2015

My Book Is Coming Soon! Wild West: Providing Fiduciary Advice to Public School Employees

It's taken me almost four years, but I'm almost there!

I'm in the formatting and distribution phase of my new book and anticipate it will be released in January 2016.

Wild West: Providing Fiduciary Advice to Public School Employees is written for financial advisors who consider themselves Fiduciaries and who want to learn how to work with those in education.

I'll post a chapter or two over the next 6 weeks as a preview. But look for it on Amazon, iTunes and Google Play in January.

Scott Dauenhauer, CFP, MPAS, AIF

Thursday, November 05, 2015

Warren Commission: Villas, Castles, and Vacations

Senator Elizabeth Warren began an investigation of insurance company non-cash compensation methods several months ago, what she found will be shocking to most people, but not to those of us who've been following the unethical sales practices of the annuity industry for decades.

Titled Villas, Castles, and Vacations: How Perks and Giveaways Create Conflicts of Interest in the Annuity Industry, the document outlines some of the incredible perks that insurance agents receive in addition to commissions when they sell annuity products. Warren hinted at some of these perks in a Senate Banking Committee back in April, you can watch her below:

In this report Warren attempts to discover the entirety of non-cash compensation, though she isn't entirely successful, here's an excerpt:

"Kickbacks pose an especially dangerous problem. When companies can offer kickbacks to agents for recommending high-cost financial products, and when those kickbacks are hidden from the customers, the likelihood that consumers will be duped into buying bad products increases sharply. 
To explore the prevalence of this type of conflict of interest, in April 2015 Sen. Elizabeth Warren (D-MA) opened an investigation, asking fifteen leading annuity providers for information on whether they offered non-cash incentives such as lavish cruises, luxury car leases, and other perks to annuity sales agents to promote their products and whether their customers were aware of the agents’ compensation arrangements."
Reading this report one wonders how the insurance industry continues to get away with such unethical and clearly conflicted business practices, it's a testament to the power of that industry and Warren is confronting them head on.

Dan Otter of 403bwise.com and I recently did a podcast on such compensation practices and you should be able to listen to it soon by going to www.teachandretirerich.com and clicking the podcast link.

I encourage you to watch the above video and then dive into Warren's report.

It's time to put a stop to these unethical compensation practices.

Scott Dauenhauer, CFP, MPAS, AIF

Wednesday, November 04, 2015

Texas Superintendent Ignites Controversy Over Primerica Affiliation

Primerica Million $ Club

A Superintendent in the Longview Independent School District in Longview, Texas is in hot water for using his position to promote Primerica financial products to his employees. The Longview News-Journal published Longview ISD' Superintendent's Business Banned in which it says the following:

Since taking the top job in Longview ISD, Superintendent James Wilcox has had a side business selling what he calls retirement planning to educators. As of this week, however, he and his representatives won't be peddling their products on Longview ISD campuses.

After representatives from Primerica — a company some say is essentially a pyramid scheme — made their pitch Oct. 22 at Longview High School, the district's school board directed Wilcox to "not allow any meetings of this type on any LISD property in that future," Wilcox said last week.

"That will be fully complied with in the future," he said.

A portion of the district's employee policy manual seems to prohibit such an on-campus sales pitch, but Longview ISD board President Chris Mack said last week he didn't see anything wrong with the company's services being sold on district property. The manual, however, prohibits employees from using their position with the district "to attempt to sell products or services."

The board made its decision, Mack said, not because of its policy but after hearing an uproar from the community.

"We got a lot of complaints," he said. "I honestly think James is trying to help people. Here's the thing: Nobody was forced to go to that meeting. ... Had he forced people to go, had he forced people to sign up, that would be inappropriate.

"We got a lot of complaints, but there was no pressure there. But because of the fallout, we felt like it would be better if we didn't allow it anymore. It's a shame that we had to say that because there was a lot of potential there."
Wilcox isn't the first person or educator for that matter to fall for the siren's call of Primerica. Who wouldn't want to earn an extra income while helping our nation's educators? Yet Primerica is NOT a financial planning company, it's a product sales company and is focused first on selling those financial products as well as recruiting others to sell their products, a multi-level marketing type business.

The issue here really isn't Primerica or Wilcox, it's the sorry state of the 403(b) market where things like this occur on a regular basis. The wild west of defined contribution world needs dramatic change if it's going to become an important part of educator's savings plans.

Scott Dauenhauer, CFP, MPAS, AIF


Thursday, October 15, 2015

CalSTRS National Retirement Security Week

National Retirement Security Week

The CalSTRS Pension2 program is a proud participant in National Retirement Security Week. In the spirit of this week, we will be hosting a variety of events. Come join us to learn more about saving for your future.

Online Workshops
  • Pension2: CalSTRS Retirement Savings Plan for Your Future
  • Tuesday, October 20 at 4 p.m.
  • Register now
  • AMA (Ask Me Anything) Session with 403b/457b Advocate Scott Dauenhauer
  • Wednesday, October 21 at 4 p.m.
  • Register now
  • Build a Budget Plan Using 50/20/30 Guideline
  • Thursday, October 22 at 4 p.m.
  • Register now
Free Financial Advice: Schedule a One-on-One 
Appointment at a CalSTRS Member Service Center

Half-hour Appointments Available

Member Service

Times Available
Tuesday, 10/20/2015
10 a.m. – 4:30 p.m.
Wednesday, 10/21/2015
10 a.m. – 4:30 p.m.
Santa Clara
Wednesday, 10/21/2015
10 a.m. – 4:30 p.m.
Thursday, 10/22/2015
10 a.m. – 4:30 p.m.
West Sacramento
Thursday, 10/22/2015
10 a.m. – 4:30 p.m.

Book your private session:
Pension2 on Campus (via CalSTRS New Beginnings Workshop)
Lake Elsinore School District: Wednesday 3:30 – 5 p.m.

Friday, October 09, 2015

The Ring: Warren Speaks Out About Annuity Incentives #incentivesmatter

Senator Warren mentions a diamond encrusted, Super Bowl style ring with a ruby in the middle. No, this is not a piece for the Onion, I found something quite similar. #incentivesmatter

Incentives Matter: Elizabeth Warren Investigates

A quick post of a few videos that I think are worth reviewing in the fight against annuity incentives.

Scott Dauenhauer, CFP, MPAS, AIF

Wednesday, September 30, 2015

WGN Hosts Finance For Teachers

It's always nice to see a fiduciary advisor on television giving advice to teachers. Dave Grant of Finance for Teachers (and the F4T Network) was invited on the local WGN news show to provide some tips for teachers.

Thursday, September 24, 2015

More Ridiculous Annuity Ads - 11% Commissions!

It amazes me what makes its way into my inbox these days.

This time I received an e-mail about an annuity that pays an 11% commission, wow!

Think about that, for every $100,000 you place into this annuity, you (the agent) make $11,000 - that is huge.

Notice how the details to the left are almost non-existent though? Most of the "features" are just throwaway gimmicks, what is missing is what the term, rate and surrender charges are...you know, the important stuff.

How much could this annuity actually pay in interest when the company has to pay 11% out to an agent and then credits the client with a 5% premium bonus, that's fully 16% of the amount deposited. You can be sure the client isn't making much interest.

How these companies can get away selling such junk is beyond me. This is why we need a Conflict of Interest Rule.

Scott Dauenhauer, CFP, MPAS, AIF

Friday, September 04, 2015

More Annuity Incentives - This Need To Stop

I've posted several e-mails that I've received from Insurance Marketing Organizations (IMO), they really should be more careful who they send this stuff out to. The latest advertises a 7% commission with several ways of increasing that commission by selling certain amounts of a particular annuity through a particular IMO.

If you are wondering what's behind the annuity recommendation your agent is trying to sell you...this is a clue. #IncentivesMatter

Scott Dauenhauer, CFP, MPAS, AIF

Wednesday, September 02, 2015

Secrets of Insurance Sales: Sell Our Crap, We'll Pay You Back

If you don't quite understand what's behind the Department of Labor's current push to decrease conflicts of interests within the financial services industry, perhaps this e-mail I just received will give you an idea.

Basically, this company (an IMO) will reimburse insurance agents for their marketing expenses...but only if they sell certain products that pay commissions. As always, no mention of the client's best interest.

What's behind your broker/agent's recommendations? #IncentivesMatter

Scott Dauenhauer, CFP, MPAS, AIF

Tuesday, August 25, 2015

Plansponsor 403(b) "Balance" Article Lacks Balance

Plansponsor recently posted an article "Can k-12 403(b)s Find A Balance", it was anything but balanced.

The problems start in the first sentence:

"Some players in the K-12 403(b) plan marketplace say the traditional model—in which plan participants have individual relationships with advisers..."
No, plan participants do not have individual relationships with "advisers", they buy products from salespeople who are mostly Registered Representatives and Life Insurance Agents, not Advisers. There is a difference between a salesperson and an advisor and this article deliberately obfuscates this distinction ignoring the huge battle going on at the Department of Labor right now.

The article essentially advocates for the status quo in k-12 403(b), multiple vendors with no fiduciary oversight. The author quotes two people and both are advocates for multiple vendor systems where commission based, non-fiduciary products are distributed. Amazingly the "advisor" quoted in the article recommends annuities....of which his firm sells (surprise, surprise)...some balance.

While auto-enroll is mentioned, it is almost immediately dismissed in favor of one-on-one "advice" from salespeople - a model that has failed in spectacular fashion in k-12. Auto-enroll would certainly go a long way toward improving contribution rates.

The article even includes the ridiculous quote:

“I think depending on built-in assumptions, especially how long someone is going to hold on to investments, you can make an argument that buy-and-hold type investors will incur less fees in commission-based investment than fee-based over the long-term,” Wolff says."
I won't even waste the space dissecting what is wrong with this quote. But I will say, where is the "balance"? Why didn't Plansponsor interview someone who actually works in this market on a Fiduciary basis?

It feels like Plansponsor is just writing articles for their advertisers or want to be advertisers. There is no balance in this article whatsoever.

Scott Dauenhauer, CFP, MPAS, AIF

Wednesday, August 19, 2015

The Annuity Store Attempts To Bully Me

Yesterday I received the following "take down" notice from Go Daddy (my blog hosting company). The Annuity Store insurance marketing company has hired an attorney to stop my blog post from showing their e-mail advertisements and what is behind Annuity recommendations that their agents make. I posted their e-mail advertisement to show the public what they don't see - this is a public benefit. Scroll down to see the claims made.

Dear Customer,
We have received a complete DMCA complaint alleging that copyright infringement is taking place on your hosted site. This notification was submitted pursuant to the Digital Millennium Copyright Act and GoDaddy’s Copyright Infringement Policy, which can be found here:
In accordance with this policy, as well as the hosting agreement you consented to upon purchase of the service, we will need to suspend this hosting account if this matter can not resolved by removing this content within the next 24 hours or submitting a complete counter notification as described in the policy.
You have two options at this point:
In order to resolve this situation and avoid suspension of your site you will need to completely remove the content that is the subject of the copyright complaint. 
If you feel that this complaint has been made in error and you wish to contest the claim, you will need to submit a complete counter notification in accordance with the DMCA. Let us know if you require further information and/or instructions on how to file a counter notification.
Please understand that as a web hosting provider, we are not able to make legal determinations as to who is right or wrong in an infringement claim. 
Let us know if you have any other questions at this time.
Kindest Regards,
ChrisCopyright DepartmentGo Daddy Operating Company, LLCCopyrightClaims@GoDaddy.com--------ORIGINAL NOTE-----------Subject:Subject: RE: Copyright Claim (Our File No.: 5912000.204) - [Incident ID: 26678507]From:klbynum@fleckman.comDate: Mon, 17 Aug 2015 19:04:09 +0000To:copyrightclaims@godaddy.com

Your resolution
Dear Chris,In response to your email below, I am re-forwarding the Notification of Claimed Copyright Infringement on behalf of The Annuity Store with the changes you haverequested.  Should you have any questions or require any further information, please do not hesitate to contact me.Dear GoDaddy Copyright Agent:Our firm represents The Annuity Store(“TAS”) in various legal matters, including trademark and copyright matters.  We write regarding unauthorized activity on the websitehttp://www.meridianwealth.com involving one of our client’s copyrighted works.  It is our understanding that the websitehttp://www.meridianwealth.com is hosted by GoDaddy.com, LLC (“GoDaddy”) and that the activity on this site is therefore subject to GoDaddy’s Terms of Service.  Please direct all correspondence to us at the e-mailor physical addresses provided herein.In late 2014, TAS sent the attached marketing communication via email to numerous financial professionals.  Scott Dauenhauer, an independent insurance agent, financial plannerand the operator of “The Meridian Blog” hosted at http://www.meridianwealth.com, was one of the recipients of this communication. It has come to our client’s attention that Mr. Dauenhauer subsequently posted the entirety of the marketing communication on his blog at
http://meridianwealth.com/2014/12/08/insurance-secrets-whats-driving-those-annuity-recommendations/,despite the very clear indication on the communication that it was intended “for financial professional use only – not for use with the public.” Mr. Dauenhauer is not contracted through TAS, nor was his posting of the communication in its entirety on a public-facing,personal blog authorized by TAS.  TAS has a good faith belief that use of the material in the manner complained of is not authorized by the copyright owner, its agent, or the law.  Accordingly, it is the position of TAS that use of its marketing communicationin this manner constitutes a violation of its copyright in that communication.In view of Mr. Dauenhauer’s unauthorized use of our client’s copyrighted work on the referenced web site hosted by GoDaddy, in direct violation of GoDaddy’s Terms of Service, we ask that GoDaddy immediately take down the unauthorizedmarketing communication on the website at http://meridianwealth.com/2014/12/08/insurance-secrets-whats-driving-those-annuity-recommendations/and disable all access to Mr. Dauenhauer’s post regarding that communication.  We would appreciate your immediate attention to this matter and request a response to this notification within ten (10) days advising us of how GoDaddy will comply with theserequests.  Should you have any questions or require any additional information, please do not hesitate to contact me directly at this email address or the phone number provided below.   I declare, under penalty of perjury, that the foregoing information in this notification is complete and accurate, and that I am authorizedto submit this Notification of Claimed Copyright Infringement on behalf ofTAS.  Best regards,
Karla Lambert Bynum
/Karla L. Bynum/Fleckman & McGlynn, PLLC
515 Congress Avenue, Suite 1800
Austin, Texas 78701
512.476.7644 fax


I posted this on my Meridian blog back in December. The company has since tried to shut that blog down, re-posting here.

Ever wonder why that “financial planner” is recommending the product they are recommending? It could be the compensation or the extra bonuses that are offered to incentive them to sell a certain company’s product.Given these incentive plans, is the product being sold really in your best interest? I’ll let you decide. Here is a recent advert that showed up in my e-mail:

Wondering which insurance company must be sold to secure that $1,000 Visa card (and trip qualification to Italy)? Here is the small print…enlarged:

*Available only on all Allianz Life Pro+® and Allianz Life Pro+ SurvivorSM Fixed Index Universal Life Insurance Policy Applications. Offer ends 12/31/14. Exclusions may apply; contact your Annuity Store Marketer at 800-825-6094 for complete details.

Policy #P54350 & #P61843 are issued by Allianz Life Insurance Company of North America.

Guarantees are backed by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America.
Product availability and features may vary by state. New York production is not included.
Registered representative participation is subject to Broker/Dealer approval.

The Annuity Store reserves the right to alter or discontinue this promotion at any time. Agent must be in good standing. All federal, state and other tax liabilities arising from the award are the sole responsibility of the agent. VISA is not a participant in, or sponsor of, this promotion.

TAS226-38610 For financial professional use only – not for use with the public.

Notice that the marketing company doesn’t want you to know about this – marking the e-mail “For Financial professional use only – not for use with the public.” It seems to me the public SHOULD know about the incentives driving the product recommendations being made.

This practice should not be allowed.

Scott Dauenhauer, CFP, MPAS, AIF

Tuesday, August 18, 2015

Northbrook District 27 - Illinois Goes Single Vendor for 403(b)

In what is becoming a trend, the Northbrook, Illinois District 27 has chosen a single vendor for their 403(b) program. The administrator of the program will be the IPPFA (Illinois Public Pension Fund Association).

Read the Plansponsor article:

Scott Dauenhauer

Thursday, August 06, 2015

DOL Fiduciary Rule Impact on non-ERISA Government 403(b) Plans

In reading the updated Department of Labor proposal for a Fiduciary Standard I became quite disappointed that non-ERISA 403(b) plans were left out (as are all non-ERISA government plans), but the more I've studied and talked with others I've become somewhat encouraged.

If the Fiduciary Standard becomes a reality it could fundamentally change the way 403(b) plans are serviced going forward. The change wouldn't be because an "advisor" has a fiduciary duty to the participant, it's likely they still won't, but because the "advisor" would have a fiduciary duty to the participant in the event of a rollover to an IRA.

Under the new rule any advisor advising a participant to rollover their assets from the plan would become a fiduciary to that participant and also any recommendation within the IRA would be subject to the fiduciary rules, this is a huge problem for the vast majority of advisors.

Currently, recommending a rollover to an IRA is not a fiduciary act, nor is the recommendation (ok, there is some debate on this, but generally the advisor has no fiduciary duty). If the rule change goes into affect and such advice becomes fiduciary in nature the advisor will find it nearly impossible to collect a commission for the recommendation. This has the industry completely freaked out.

The effect on the 403(b) will likely be to see fewer rollovers and more exchanges within the 403(b) plan itself. A recommendation to exchange one 403(b) product for another is not subject to the fiduciary rule, but a recommendation to rollover to an IRA is. To avoid a fiduciary duty you will see more money stay within the 403(b) umbrella instead of being rolled out and you will see 403(b) providers attempting to come up with new 403(b) products to be approved within school districts.

While I am not 100% happy with the current version of the Fiduciary proposal (I'd like to see some changes to the BICE contract and some additional flexibility on behalf of the service providers in communications) I am more encouraged than I originally was. It still doesn't cover 403(b), but it will affect the 403(b) and if these plans can be structured correctly, could fundamentally alter the landscape.

As I study and learn more I'll update you on my thoughts and correct any errors made in this initial analysis.


Friday, June 12, 2015

Will Franklin Graham Now Move Samaritan's Purse 401(k) Plan?

In the wake of Franklin Graham's decision to pull the Samaritan's Purse bank accounts from Wells Fargo due to Wells Fargo's national advertising campaign that featured a lesbian couple, will Graham do the same with the Samaritan's Purse 401(k) plan?

In an op-ed in the USA Today newspaper today, Graham had the following to say about why he moved the organization's money:

"Because, in our view, Wells Fargo went beyond being gay-friendly to being a public advocate — through a national TV advertising campaign — for a lifestyle we, as a Christian organization, believe to be biblically wrong. (The ad featured a lesbian couple with their adopted child.)"
While I personally find this reasoning bigoted and ignorant, it's certainly his right to move the organization's money wherever he likes. But shouldn't this decision apply to all of the finances of Samaritan's Purse and the Billy Graham organization?

I decided to do some research to figure out who the 401(k) provider was for both Samaritan's Purse and the Billy Graham Evangelical Association. It turns out both organizations use The Principal (Principal Financial Group) according to Brightscope.com. You can check it out for yourself here. Keep in mind that this data may not be fresh, the source Brightscope utilizes may be up to two years old, which means that in fact both organizations may have made a switch in the past two years (I did not call to inquire...so keep that in mind).

If in fact The Principal is still the 401(k) provider I think Franklin has a decision to make.

In April of 2014 The Principal joined with the "It Gets Better Project" to put together a video about some of their employees who happen to be gay, lesbian and transgender. The video is below and the this link will take you to the page about the video and the project, it's very touching and The Principal clearly wants the world to know it cares about the LGBT community. I applaud The Principal for this project, it's clearly a priority to acknowledge and make their employees and customers who are LGBT feel safe and comfortable.

The Principal is not just "gay friendly", which evidently Graham is ok with, but it is a company that proudly promotes the fact that they are inclusive. They've done this in a national campaign (if It Get's Better isn't a national campaign, what is?).

According to Graham's own op-ed, this national campaign is publicly advocating for the LGBT lifestyle, not merely being "friendly." Thus, according to Graham's own logic, he needs to look for a new 401(k) provider.

Will Franklin Graham move the 401(k) plans for Samaritan's Purse and Billy Graham from The Principal to a record-keeper who is simply "gay-friendly" in order to be consistent? If so, what record-keeper out there is proud to be only "gay-friendly"? I certainly wouldn't want to be the record-keeper Graham settles on.

Put your money where your mouth is Franklin - if the 401(k) is still with The Principal, go ahead and punish them for doing the right thing, move the money. 

Scott Dauenhauer

P.S. I would hate to see The Principal lose revenue if Graham does decide to continue down this bigoted and ignorant path, so please consider them the next time you are reviewing your 401(k) provider. This is not an endorsement, just make sure you take a look at The Principal.

Tuesday, April 28, 2015

Senator Warren Launches Investigation of Rewards and Incentives Offered to Annuities Dealers Advising Retirees

For almost two decades I've written (see here and here) and railed against the standard industry practice of rewarding those who sell annuities with special trips, bonuses or other perks in addition to what sometimes are outrageous commissions.

This undisclosed conflict of interest hurts annuities, hurts the reputation of the good insurance agents and most importantly hurts the purchasers of these products. If an annuity product is good for a client, it doesn't need to come with extra perks to sell it. Finally, someone in Congress is listening to what we've been saying.

The full press release is below:

Questionable practices highlight the need for a strong conflict-of-interest rule for retirement advisors
WASHINGTON, DC - In letters sent to 15 of the country's largest annuity providers today, United States Senator Elizabeth Warren raised concerns about the rewards and incentives these companies offer to brokers and dealers who sell annuities to families and small investors. The letter explains that "annuity providers offer a vast range of perks - from cruises to international travel to iPads to diamond-encrusted ‘NFL Super Bowl Style' rings to cash and stock options - to entice sales of their products."

"I am concerned that these incentives present a conflict of interest for agents and financial advisers that could result in these agents providing inadequate advice about annuities to investors and selling products that may not meet the retirement investment needs of their buyers," Senator Warren wrote. The Senator notes particular concern about the impact on individuals who are on the verge of retirement because they have little time or ability to recover potential losses from bad investments.  

The questionable practices identified in today's letters highlight the need for a strong conflict-of-interest rule from the U.S. Department of Labor (DOL) to protect retirees by requiring advisors to act in their clients' best interests. DOL released a proposed rule earlier this month. "Annuity agents that are more interested in earning perks than in acting in their clients' best interest can place Americans' savings and retirement security at risk," the Senator wrote.

Senator Warren today asked annuity providers for information about the incentives they offer, the number and value of the incentives awarded, and the companies' policies for disclosing these potential conflicts of interest. The letters were sent to the 15 companies with the highest 2014 U.S. individual annuity sales:  Jackson National Life, AIG Companies, Lincoln Financial Group, Allianz Life, TIAA-CREF, New York Life, Prudential Annuities, Transamerica, AXA USA, MetLife, Nationwide, Pacific Life, Forethought Annuity, RiverSource Life Insurance, and Security Benefit Life.

A PDF copy of the letters is available here. Examples of the kinds of incentives companies offer to annuities brokers and dealers is available here.
Unfortunately the DOL proposed Fiduciary rule would not apply to annuity sellers who service 403(b) plans.

Scott Dauenhauer, CFP, MPAS, AIF

Thursday, April 23, 2015

Thursday, April 09, 2015

Opinion: Time To Clean Up School Employer Retirement Plan Compliance

Summary: Popular defined contribution programs for public school employees are not being run properly and may be out of compliance with IRS rules and regulations. This post explores who is charged with keeping 403(b) and 457(b) plans in compliance and where they are coming up short.

Compliance Third Party Administrators (CTPA) for public school 403(b) and 457(b) programs are charged with keeping public school employer's retirement plans in compliance with IRS regulations, but do they? It’s this author’s opinion that not all is well with these plans and Compliance TPAs may be at the heart of the problem.

I’ve written about what I term “CTPAs” many times over the years, but I am writing this post to discuss what I believe are major shortfalls in the companies that keep records for millions of public school teachers.

The term CTPA stands for Compliance Third Party Administrator, it’s an acronym I use for an entity that mostly exists to service public school 403(b) and 457(b) programs. A CTPA has many jobs, but the most basic is to keep the School Employer’s plan(s) in compliance with Internal Revenue Service rules and regulations. 

The CTPA occupies the space between the employer and the employer’s plan providers. It’s not an easy task. Unlike most defined contribution programs, many 403(b) and 457(b) programs have multiple investment providers. A typical 401(k) plan has a single provider, but a 403(b) plan at a public school employer might have 40 or more. Coordinating between all the providers is the job of the CTPA. 

A good CTPA will create and maintain a plan document, communicate generic information about the program, remit contributions from the employer to the various vendors, determine participant eligibility, process enrollments, monitor contribution limits, approve loans and distributions, coordinate some transactions across multiple employer plans and maintain confidential information in a private and secure manner. This work is normally accomplished without holding the plan’s assets (except for a short period where funds are received from the employer and forwarded to the vendor).

Why am I concerned? 

It’s my opinion that there aren’t many competent CTPAs and many of the ones that are competent are severely conflicted. I believe a significant number of school employers are not in compliance with IRS regulations as they apply to 403(b) and 457(b), ironically, CTPAs may be to blame, at least partially.

Brief History

CTPAs are an outgrowth of the Final 403(b) Regulations issued by the IRS in 2007 and made final beginning in 2009. The regulations were meant to get these plans under control and into compliance with a new set of rules. These new rules were too complex for the average public school employer to implement on their own and CTPAs rose up to fill the need. Unfortunately, in the rush to find an entity to handle the compliance, many school employers chose companies that may not have been in their or their employee’s best interest. In the school employer’s defense, there were few firms to choose from and few CFO’s had the expertise to determine competency. 

It’s been six years since the regulations went into affect and while it seems 403(b) plans are in better shape than they used to be, the operation of many of these plans is poor. Where 403(b) plans are paired with 457(b) plans the state of compliance is especially weak, if it even exists. 

Poor compliance across the two plan types is where I’d like to focus the majority of this post.

403(b) and 457(b) Plans Are Related, Should Be Coordinated

Many employers and CTPAs don’t realize that 403(b) and 457(b) plans are not independent of one another. When both plans are offered by a single employer, they must coordinate the operation of them in order to stay compliant. There are several areas where information for one plan must be shared with the other. This rarely happens. This section focuses on the five pertinent coordination points.

1. Plan Loans 

If one or both of an employer’s 403(b) or 457(b) programs offer plan loans, there must be coordination between the two plans to determine whether a participant is eligible to take a loan and what amount is available. 

Most employers and many CTPAs are unaware that there is a single loan limit across all plans and that loans in one plan affect loans in the other. For example, a participant who defaults on a loan may become ineligible for another loan. If the defaulted loan is in the 403(b) and the participant also has a 457(b) that offers loans, a loan should not be granted. But if the administrator of the 457(b) has no access to information on loans in the 403(b), they have no basis for approval or denial of such a request. If the administrator approves the loan they risk being out of compliance.

Another problem area with loans that I see is that of “self-certification,” the idea that since it’s likely only the employee knows all the information about their accounts, they are in a position to provide the needed data to make loan decisions. Self-certification is specifically not allowed by the IRS. It’s the employer’s responsibility to monitor loans across all plans and all providers.

It’s also the employer’s responsibility (which can be delegated to the CTPA) to properly default loans. This is missed in many cases because the vendor maintains the data and neither the employer or CTPA see that a loan has been defaulted if the vendor does not share the information. The vendor (who is usually competing with other vendors) does not want to upset their client (the participant) by defaulting them and this creates a conflict of interest between the vendor and what is right for the plan.      

The better CTPAs participate in data exchanges between CTPAs and vendors using a file format provided by the SPARK Institute.  These “SPARK” files contain most or all of the data that a CTPA needs to approve plan transactions.  For example, if all of the vendors in a particular plan supply outstanding loan data in SPARK files to the CTPA for the plan, the CTPA can search currently outstanding loans when a participant applies for a loan to see if the participant is eligible for the loan requested.

Another procedure used by some CTPAs is to require that all of the current 403(b) and 457(b) statements be submitted from a participant before granting a loan.  Requiring this information is not usually considered “self certification” by IRS examiners.  Reviewing these statements allows the CTPA to see if there are any other loans outstanding.  This information, when used in conjunction with SPARK file data can provide even more assurance that no loan data is missed. In my experience though, many CTPAs don’t ask for statements.
Another example of loan rules that must be addressed is the issue of defaulted loans.  According to 403(b) rules, if a participant has a loan on which he or she has defaulted, the plan cannot give the participant another loan and use the 403(b) account as collateral.  Rather, the collateral for the loan must be an external asset.  Since most employers do not want to be in the position of repossessing a participant’s car in the event of a 403(b) loan default, they may want to consider providing in the plan document and/or loan procedures that participants with defaulted loans are not eligible for future loans.  This is just one of many issues that a good CTPA will help the employer review and decide how to handle.

Loans are really just the tip of a large iceberg.

2. Unforseeable Emergencies

In the 403(b) world participants have “hardship withdrawals” which have a fairly straight forward set of rules, but 457(b) plans instead offer the much tougher to qualify and quantify “unforseeable emergency.” The IRS says the following about unforeseeable emergencies:

“Under a 457(b) plan, a hardship distribution can only occur when the participant is faced with an unforeseeable emergency. (Code § 457(d)(1)(iii))
An unforeseeable emergency is a severe financial hardship resulting from an illness or accident, loss of property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant or beneficiary. Examples of events that may be considered unforeseeable emergencies include imminent foreclosure on, or eviction from, the employee's home, medical expenses, and funeral expenses. Generally, the purchase of a home and the payment of college tuition are not unforeseeable emergencies.(Reg. § 1.457-6(c)(2)(i))
Whether a participant or beneficiary is faced with an unforeseeable emergency depends on the facts and circumstances. However, a distribution is not on account of an unforeseeable emergency to the extent that the emergency can be relieved through reimbursement or compensation from insurance, liquidation of the participant's assets, or cessation of deferrals under the plan. (Reg. § 1.457-6(c)(2)(ii))
A distribution on account of an unforeseeable emergency must not exceed the amount reasonably necessary to satisfy the emergency need. (Reg. § 1.457-6(c)(2)(iii))”

As you can see, this provision is not simple to understand or administer and leaves a vendor in the uncomfortable situation of making a client unhappy just by following the regulations. This might not be an issue with a single vendor plan, but when there are multiple vendors in the plan it puts that vendor in a non-competitive position. 

More importantly though, the ability to grant such a request requires information that may not be available to the 457(b) vendor. The 457(b) vendor, unless coordinating with the CTPA is unlikely to know whether the participant is contributing to a 403(b), whether a 403(b) loan or hardship withdrawal is available or if in fact the participant has already exhausted those avenues. Remember, the vendor can’t take the participants word for it, they need proof.

In addition, if the emergency request is granted, it’s possible that a plan provision suspending contributions will be triggered (granted, this is rare). Who will communicate this to the employer and ensure it is adhered to? The same goes for Hardship Distributions on the 403(b) side where participants are suspended (Safe Harbor plans) for a period of six months from contributing after taking a Hardship Withdrawal. This suspension applies to ALL plans of the employer, a mechanism must exist to notify the 457(b) plan administrator, it rarely exists.

3. Multiple Plan Documents

Another problem I see quite often is a public school employer who has multiple 457(b) vendors and multiple plan documents, all with conflicting provisions and no single person with authority. This situation usually occurs when school district personnel add a vendor and sign that vendor’s package of documents, trusting the vendor knows what they are doing. The process is repeated over and over as other vendors are added and suddenly there are multiple plan documents (each usually customized to the vendor). The presence of multiple plan documents represents a serious situation that could lead to real compliance issues. One plan document should govern all vendors.

4. Timing of Salary Deferrals

There is a strange rule that exists in 457(b) that doesn’t exist in other defined contribution plans and many school employers do not follow it, in fact much of the time even the vendors are unaware of the rule. The rule states that a salary reduction agreement must be in place in the month prior to the month contributions are taken from a paycheck. This is different than all other Defined Contribution plans. In a 403(b) you can make changes up to the date set by payroll and those changes can take affect in that month, this is not the case with 457(b) where a change must take place the month prior. Many CTPAs and vendors do not know this rule or if they do, don’t follow it. Some school districts don’t have systems in place to administer the rule. You can bet that this is an audit item for the IRS. It doesn’t seem like a big deal and in my opinion it’s a ridiculous rule (among many), but it’s still the rule and needs to be complied with.

5. Catch Up Rules

Another area that is difficult to administer and commonly done incorrectly is what’s referred to as the “Final Three Year” catch up provision. This catch up allows a participant to defer double the 457(b) contribution limit for a period of up to three years prior to retirement. The amount available to defer under this catch up provision can be difficult to calculate, but even when the calculation is straight forward, many CTPAs get wrong which years the participant is eligible to actually use it. 

If a participant qualifies for this catch up they are allowed to use it in the three plan years prior to the year of the plan’s normal retirement age. Again, this seems straightforward, but it isn’t. Many employers and CTPAs get this wrong by not defining Normal Retirement Age in the plan document, having multiple Normal Retirement Ages (due to multiple plan docs) and by not understanding that the three years the participant is allowed to catch up are the three years prior to the Normal Retirement Age. This means that the increased contributions must stop before the year of Normal Retirement Age starts, this is a common area for mistakes. 

It can be to the advantage of participants for the plan document to specify that the Normal Retirement Age for the 457(b) plan is the age at which the participant can elect an unreduced retirement under the state’s defined benefit plan in which the participant is a member or allow the participant to elect a normal retirement age from 55 through 70½.  However, in order to use this all 457(b) plans of the employer must use the same definition of normal retirement age.  Without a single CTPA overseeing the 457(b) plan(s) it is very difficult to coordinate the use of a single normal retirement age.

In addition, the election to use the three-year catch up can only be used once and can only be used for three successive years. Finally, this catch up is unlike the Age 50 Catch up which only requires one turn age 50 (or be 50 or older) during the calendar year to be eligible. For the three year catch up provision there must be years where the participant could have made a contribution, but didn’t. Without getting into the details, this can be a very difficult calculation and few employers or CTPA’s have the data to produce it. 

A plan could choose to not offer loans, unforeseeable emergencies or the Final Three Year catch up, thereby simplifying the administration, but this eliminates many of the benefits of offering the plan in the first place.

While there are certainly other areas of compliance that employers and CTPAs miss, the above five points are the big ones when running two plans. There is more to hiring a CTPA than just compliance as this next section will explore.

CTPAs and “Education”

No analysis of CTPA’s ability to keep a public school employer’s defined contribution plans in compliance would be complete without talking about education. Education is an important component of any defined contribution plan, but the level of education is where many CTPA’s cross the line from complying with regulations to blatantly abusing their position as an administrator to sell products. Some CTPAs exist purely to sell expensive and complex financial products to unsophisticated and unsuspecting employees - not to provide competent compliance and education.

In a piece I penned for my blog in January of this year (Public School Employers Deceived By Shifty 403(b)/457(b) Providers) I explore one such “education” meeting that in reality was a salesperson using their status as the 457(b) administrator to sell financial products to unsuspecting teachers. More and more CTPAs these days finance their operations by selling financial products, most of which the compensation is never disclosed to the employer or the employee and the where no fiduciary duty exists. “Education” becomes a thinly veiled sales presentation designed to get rollover IRA business, life insurance sales or 403(b) exchanges, this was not the intent of the 457(b). 

Employer Complacency?

Employers shouldn’t be let off the hook here. There tends to be very little involvement by most employers in the operation of the 457(b) in many school districts. This is completely understandable and there are simple solutions to relieve the employer of needing to be heavily involved, but the employers who decide to take on 403(b) and 457(b) programs and retain substantial management of them need to make sure they are following both Federal and State laws. Some state laws impose a fiduciary duty, others impose additional disclosure requirements and still others require almost nothing of the employer. Employers can help their plans stay in compliance by supplying good data on a regular basis, something I rarely see.

Employee Data, To Share or Not To Share?

Data these days is a big deal and employers are increasingly guarding that data out of concern for privacy. Securing participant (and employee) data is of the utmost concern and I fully understand employers who are wary of sharing any data with what amounts to a distributor of financial products. However, the data required to run a 403(b) and 457(b) program successfully and smoothly must originate with the employer and is vital to keeping the plan(s) running smoothly. 

In addition, ensuring all contributions are remitted electronically along with list bill data that is accurate, detailed and timely will also go a long ways in ensuring participant money is invested as quickly as possible after being taken from a paycheck. It might sound counter intuitive, but sharing data with your compliance administrator or program vendor can actually work to protect your participants’ identity and privacy. This all assumes that the employer has chosen both vendors wisely. 

If your administrator has the proper data it can better verify the participants identity and process transactions in a more secure manner than if that same data were communicated purely through the participant. I’m not advocating sharing all demographic data with all of your vendors, but I am advocating a thorough process for the hiring of your administrator that includes a detailed understanding of their security processes. If the vendor can demonstrate that the data can be kept secure and won’t be used to sell financial products, you should consider creating a process to share certain demographic data (name, address, SSN, DOB, employment status, length of service and a few other items depending on the plan type).

Conflicts of Interests with CTPAs

One thing I haven’t touched on is the conflicts of interest that exist with many CTPAs. I’ve noted that many CTPAs are simply financial product sales organizations in disguise while others claim to be “independent” when the reality is the majority of their income is derived from product vendors. This post is already longer then I want it to be, I will refer you to my post “Wild West in Government 403(b) Continues”. If that post doesn’t open your eyes to what is happening with CTPA compensation, nothing will.


In conclusion, while I believe there are several competent Compliance Third Party Administrators in operation today, I’m very concerned that a large swath of school employers are working with entities that are not actually doing compliance and are therefore jeopardizing their participants retirement and the tax qualification of the school employer’s defined contribution plans. I am also concerned that many school employers do not employ a CTPA when offering multiple plans or only employ the CTPA for one of the plans, ignoring the coordination that is required.


In the short term, the solution is to do a comprehensive evaluation of the plans offered and determine how best to manage them. Often times this means reducing providers, requiring more of surviving providers and hiring a competent CTPA. I believe most of the issues could be solved by eliminating the multiple vendor system itself. School employers who reduce vendors to one eliminate most of the issues that I discussed above, though they still may need to employ a CTPA. These plans need to be taken seriously as they may make the difference between a decent retirement and a great retirement for employees and mismanagement of the plans could lead to problems with IRS. 

Scott Dauenhauer, CFP, MPAS, AIF

Friday, February 06, 2015


Recall my piece from awhile back: ASPPA Disclosure. As well as Michael Kitces piece -  The Public Deserves A Choice, But It’s Not Fiduciary Vs Suitability. If you think the brokerage world has your best interest at heart...think again.

Supporters of the DOL's efforts scoffed at Reilly's note.

"This is as Orwellian as it gets," says Barbara Roper, director of investor protection with the Consumer Federation of America in Washington, D.C. "They will serve their clients best by defeating a regulation that would require them to do what's best for their clients?"

"If it is not in the best interests of customers, it's not advice, it’s a sales pitch," Roper continues. "That's what they are fighting for here, to portray themselves as advisors while they are being regulated as salespeople."

Raymond James CEO Calls on Advisors to Fight DOL Fiduciary Definition

Scott Dauenhauer CFP, MPAS, AIF

Thursday, January 08, 2015

Public School Employers Deceived By Shifty 403(b)/457(b) Providers

You may not know this, but if you are a public school employer and offer a 403(b) or 457(b) plan you are required to prove to the IRS that you've met with every employee every year to inform them about the plan. You might not know about this pesky requirement because it's completely made up, there is no such rule or regulation. Of course this doesn't stop what are in my opinion, deceptive providers of 403(b) and 457(b) programs, from claiming they must meet with all your employees each year.

Recently, my wife (a public school teacher) was informed that she needed to attend a mandatory meeting after school to learn about the retirement plan offered by her District. My wife had no choice but to attend the meeting (it was actually held during a normal mandatory staff meeting time). Both her and I knew it would be a couple sales reps hawking 457(b) and 403(b) products under the guise of "education" and "planning."

The reps attempted to explain the defined benefit plan (CalSTRS) and pre-tax deferrals as well as the advantage of the time value of money. They then talked about the 457(b) and 403(b) briefly, but mostly focused on the 403(b).

The whole presentation was made in order to sell 403(b) and 457(b) products for a likely commission. It was done under the guise of 457(b) regulations and likely 403(b) "Meaningful Notice" regulations, however neither plan have any sort of rule that states employees must attend sales presentations from brokers.

In addition, it was strongly inferred that each person in attendance was required to fill out a form to leave behind, you know, so that the district could be in compliance. I've provided a copy of the form below - it's what we in the industry call a "lead sheet."

In my opinion, these meetings are not designed to help a school district comply with IRS regulations or to help employees get into retirement plans - they are designed to produce product sales that generate commissions (or fees). The people making the presentation are not full time fiduciaries and are in fact sales people.

Is it really a responsible use of our public school teacher's time to subject them to sales presentations? It's one thing if unbiased and objective data is being presented by someone who does not have a financial interest in the outcome - it's another when school employees are being sold products for commissions while technically still on the clock.

I want as many school employees to be in supplemental savings programs as possible, but it should be done in an ethical manner by people without a financial incentive. At a minimum, full disclosure by the sales people should be made both in writing and orally.

Scott Dauenhauer CFP, MPAS, AIF