Friday, September 02, 2016

Orwellian NTSA Testimony From 2013

In 2013 the state of Pennsylvania was considering some changes to their retirement system which evidently called for a 401(a) plan for employer contributions. The NTSA wasn't happy about this because the money wouldn't be run through their vendors and agents, meaning no fees and commissions. The NTSA decided to lobby the legislator to get them to make changes so that they could get their cut. The testimony was rife with Orwellian doublespeak(1).

Link to full testimony.

Very early on, NTSA spokesperson Chris DeGrassi attempts to equate advisors and salespeople without ever establishing who he represents (mostly salespeople) and why the difference is important. DeGrassi says:

"Foremost among design considerations, the 403(b) plan must allow public school employees to work with a local advisor of their choice and to have the ability to choose the investment options they want"

Disregarding the ridiculous notion that working with a local advisor should be the foremost design consideration, DeGrassi emphasizes that public school employees should get to choose which advisors to work with, only he doesn't define the term advisor. 

In the NTSA world, anyone in the financial services industry is referred to as an advisor, even people who are not licensed to give advice (a large part of the NTSAs constituency). There is a big difference between someone who gives advice and someone who sells a product. A person who gives advice is subject to a fiduciary duty while people who sell products only need to ensure the product they sell is "suitable", a very big difference in duty to the end client. 

The NTSA is not advocating for fiduciary advice, in my opinion they use the term "local advisor" to gain credibility, gently misleading the public that they support a fiduciary duty. In fact, a significant part of their base is not subject to a fiduciary duty and they actively fight against such duty. I'm all for allowing public school employees to choose their own advisor, but that advisor should actually be licensed to give advice and be subject to a fiduciary duty. I challenge the NTSA to more clarity on this issue.

DeGrassi goes on in his testimony to completely disregard the current work that has been done by behavioral finance professors. He says:

"Some will argue that the best way to design a defined contribution plan is a centralized plan with a limited number of choices. NTSAA has the data to demonstrate that for the public education employees, that's the worst idea."

It's not just "some", but the vast majority of retirement plan experts that believe a single vendor system is a better way to design a retirement plan. Not only do you gain economies of scale, you also greatly simplify everything for the employee and can implement new techniques that have been proven by behavioral finance to increase participation (auto-enroll, auto-escalate). I'm not clear what data the NTSA has that would contradict the vast research that has been done by academics like Richard Thaler, Daniel Kahneman and Shlomo Bernartzi. In fact, behavioral finance is missing in action in DeGrassi's testimony. 

Further evidence that the NTSA is disregarding proven behavioral finance notions is the following statement:

"The role of the advisor in convincing someone to start saving is just as important as the advice on where to invest the savings. And, you know what, that advisor needs to get paid. In most cases, the advisor is paid from investment fees, which - yes - will be consequently higher than investment fees on products without a personal advisor."
You'll notice that DeGrassi ignores the ideas of auto-enroll, auto-escalate and qualified default investment alternatives, all important design features that have been shown to work wonders in increasing participation and creating better retirement outcomes. He fails to mention that most of the time their is no "advisor" getting paid, it's a salesperson selling products and the compensation is far to often commissions, not fees as he states. DeGrassi provides no evidence for his statement that "in most cases, the advisor is paid from investment fees", in reality the vast majority of compensation is paid as a commission, not a fee and it's earned by a salesperson, not an advisor.

You'll notice that plan design is not the only straw man DeGrassi builds, the next quote is highly misleading in my opinion:

"You will hear from some that the most important thing is to have the lowest-cost retirement options. The facts suggest otherwise. Research from the ASPPA Pension Education and Research Foundation shows that in the State of Iowa school district participation dropped by up to 50% when they went from multiple 403(b) plan options to lower-cost options without personal advisors."

While I'm sure there are some people that think the only thing that matters is fees, this does not represent a majority opinion. Unless we are talking about investment options (where most research does show that if you select solely on fees you have a higher likelihood of outperforming), most retirement design experts and consultants only advocate for lowest-cost when we talk about investment options and share classes, not in regards to plan administration. It costs money to run a plan and costs should be kept as low as possible while still meeting the needs of the plan and participants. 

As for the ASPPA research referred to, I've thoroughly debunked it here, here, and here.

DeGrassi then attacks Vanguard using a strange and misleading analogy:

"You wouldn't want to go to a mall that only had a thrift store."

Putting aside the fact that if you went to a mall and there was only a single thrift store, you wouldn't be at a mall, the inference is that buying low-cost investment options is the equivalent of buying second hand and likely inferior investments. In fact, there is significant evidence to the contrary, lower-cost investment routinely outperform higher cost investment options. In investing you don't get what you pay for. The higher the cost of an investment option, the higher the likelihood it will underperform (don't take my word for it, ask Morningstar). DeGrassi is comparing Vanguard to the Goodwill when in fact from a performance perspective, Vanguard is more similar to Tesla, but without the high costs. The analogy is so ridiculous that it's insulting to the people he is presenting too. What's wrong with a thrift store anyway?

Next, DeGrassi attempts to show that the NTSA is gung ho for disclosure:

"That is why we partnered with the NEA to create a model disclosure form for 403(b) plan services and fees so that public school employees can easily make apples to apples comparisons of their retirement savings options."

I've looked at their "model disclosure" and it is not simple and does not allow for a comparison (how can you compare a fixed annuity to mutual fund in a simple manner?) As for partnering with the NEA, this isn't exactly something to brag about as the NEA sells a high cost product. However, in an ironic twist, the NEA signed on to support and endorse the Department of Labor's Conflict of Interest rule (a fiduciary standard). The NTSA was less than supportive of the DOL's rule.

Now it starts to get bizarre. For two pages the NTSA has argued that there should not be competitive bidding for the investment options, everyone should have as many choices as possible. They support conflicted, commission based advice with no mention of any fiduciary standards, but then they state:

"Therefore we urge you to amend HB1352 to require that the proposed 403(b) plan be administered by a third party administrator that is selected through a competitive proposal process"

And,

"We also recommend that the TPA be completely independent from any organization that provides investment products to the 403(b) plan. This will ensure that there are no conflicts of interest between the organization that administers the 403(b) plan and the one that offers investment products to the plan's participants and beneficiaries." 
"The cost of the TPA is paid for by the 403(b) plan vendors" (....uh, that's a conflict.)

Is it not ironic that the NTSA advocates for no conflicts of interest with the third party administrator (TPA) but doesn't even mention conflicts for the "advisors" that are so important to the design? This is a bridge to far. It should be noted the contradiction in their recommendation. They advocate for a TPA that has no conflicts of interests, but then want that TPA to be paid by the 403(b) product vendors (falsely referred to as "investment products") that they will regulate, isn't that a conflict?

DeGrassi then ends with a truly Orwellian newspeak sentence:

"Ultimately, I am sure we would agree that the goal should be to provide Pennsylvania Public school employees with a retirement plan that is serviced by people looking out for the best interests of the participants and beneficiaries...and, not their own best interests."

The NTSA is not advocating for advisors who have a fiduciary duty at all times, but that's what they want you to believe with this sentence. Many of the vendors have no fiduciary duty and will not take on a fiduciary duty.

This type of testimony from an industry lobbying group should be balanced by retirement experts or not allowed in the first place without better disclosure. Pretending to be advocating for participants best interest while not requiring actual advisors who are fiduciaries fits the definition of doublethink.

I don't fault the NTSA for lobbying on behalf of their membership, that's their job, but when they soak their testimony in language that in my opinion is designed to mislead, I must take exception.

Scott Dauenhauer, CFP, MPAS, AIF

(1) yes, I'm aware that doublespeak was not a word Orwell used. It's a combination of doublethink and newspeak and means "saying on thing and meaning another, usually its opposite" (www.orwelltoday.com)
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