Sunday, September 08, 2019

The Purrrfect Bark Annuity - Coming Soon

I'm pretty tough on the insurance industry, this is no secret. But I've been working behind the scenes with GTTD Life and Annuity to bring a new kind of annuity to the marketplace, a truly unique product never before seen.

I'm super excited about how this one product could dramatically change the lives of my clients and hundreds of thousands of teachers across the nation.

I call it, the Purrrfect Bark Indexed Annuity.

I know what you are thinking, how could I be pushing an indexed annuity? I finally found something I can get behind.

The key to greatness with this product lies in a special backtesting procedure I use called #datamining. It's a sophisticated machine learning program that searches for hidden patterns in data that have yet to be used to create indexes (from which one can create derivative products). As many of you know, backtesting always works as well in the past as it does in the future.

This data is then turned into an algorithm, actually two, which I named Feisty Feline and Careless Canine (for reasons that will soon become evident). The proprietary algorithm focuses on various ownership aspects of American households and the differences between cat owner and dog owner households. We are naming the index created from this data The Purrrfect Bark Index and from this index we create The Purrrfect Bark Indexed Annuity (PBIA).

The PBIA has the following features:

Spreads:     None

Caps:          None

Participation Rate: 500% of the growth of adoptions from shelters each year*

Surrender period: Variable based on the inverse average life expectancy of an index of shelter dogs****

Surrender charge: We want to disclose this, but feel it best not to overwhelm you

Guaranteed Minimum Return: 0% on 100% of premium

Commissions:  None of your god damned business, the company pays us, so there!

Way, it gets better. We are pleased to announce there is NO Barkit Value Adjustment (you may know it as the Market Value Adjustment)!

Purrrfect Riders Available:

That's A Good Boy - an optional benefit that provides for the long-term care of your pet should you pass away unexpectedly

9 Lives - this optional living benefit guarantees that your annuity will grow 9% annually for 9 years as long as you take the benefit as an income stream over 99 years**

We are confident that anyone who purchases this unique product will reap massive returns on investment. Our backtesting shows that there is no hotter index in the market than our Purrrfect Bark index.

Not a dog or a cat person? Doesn't matter, this is about more than dogs and cats, it's about earning gigantic rates of return while taking virtually no risk***. There are a lot of indexes you can use with your annuity, but none can compare to our index. Wall Street and major insurance companies are creating new indexes everyday based on absolutely bizarre ideas, we are grounding ours in something everyone can relate to, dogs and cats.

At this point you are either super excited about this product or you've figured out this is a parody. I have recently received numerous advertisements in my e-mail inbox for indexed annuities based on new and bizarre indexes. Indexes that were created just for the insurance company and for indexes that literally had fees deducted from the return so the insurance company products could appear to pay more upside than they actually do.

The absurdity of these new indexes and the failure of the insurance industry to police itself combined with the utter failure of insurance regulators when it comes to indexed products prompted me to write the above post. Don't believe me, here are a few examples of the shit that hits my inbox.

It's far past time to start regulating insurance companies and the products they market better. We are approaching absurdity. Can the average person even decipher the above two ads? How about the average agent?

The purpose of many indexed annuities today is to obfuscate, to say it's gone to the dogs would be impugning the integrity of every "good boy" out there. There is not a pooper scooper big enough to shovel the shit indexed annuity companies are pushing these days.

Scott Dauenhauer, CFP, MPAS

Are you 403(b) Wise? is the place on the internet to learn, advocate and build community. Join the 403bwise Facebook Group!

*If growth in shelter adoptions is negative, the participation rate is zero.
**Income stream is non-transferrable, even at death. 
***You are taking credit risk and should take into account the rating of the insurance company. 
****We want shelter animals adopted and living long lives, so the more you adopt and keep your pet healthy, the faster your surrender charges go away. 

GTTD Life and Annuity - Gone To The Dogs Life and Annuity is Trademarked (it's not)!

Friday, September 06, 2019

Attn School Employers: A Simple Change That Has Profound Affects

Reform in the 403(b) public K-12 market is long overdue and yet, it probably isn't coming anytime soon. But there is at least one thing that school employers could do right now that is relatively simple and which could help improve the retirement security of millions of public school employees. What's even better is that it's non-controversial.

Most school employers still have participants fill out their "salary reduction agreements" using a specific dollar amount for the deferral. Almost no 401(k) plans do this. Most 401(k) plans have participants contribute to their defined contribution plan using a percentage of salary. Public school employers should do the same.

I can't tell you why public K-12 still uses flat dollar amounts for contributions, I just know that they continue to do it and it's to the detriment of their employees. 

Let me explain.

When a participant elects to contribute say $250 per pay period to their 403(b) the amount will never change unless that participant fills out another agreement. People being who they are, when faced with filling out paperwork or not filling out paperwork tend toward the latter. Ten years after starting contributions the amount going into the 403(b) account each pay period is still $250. But what about if the participant had instead contributed a percentage of salary?

I ran the numbers and if a participant's salary was $55,000 and it rose by 3% annually and that participant contributed the same dollar amount but expressed in a percentage form (5.5% in this case) the participant would be contributing over $1,000 more per year within just ten years. Mind you, the participant never had to adjust their payroll, they didn't have to do anything. A participant would have contributed 47% more after 25 years using the percentage method over the flat dollar method.

Imagine if we layered in auto-increases!

I'm willing to bet that even the NTSA would agree with me on this point.

School district personnel, if you're reading this, let's get this done!

Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

Don't Fall For This 403(b) "Match" Scam

Several private universities are being sued for overcharging participants, the companies offered were low-cost providers like TIAA, Fidelity and Vanguard...yet they are still being sued.

Meanwhile, in the public K-12 market we have companies like the one featured in the ad to the left literally lying to participants and potential participants about being eligible for an employer match. They represent companies like Midland National and Life of the Southwest, companies that are not in participants best interest.

I feel like I'm in the Twilight Zone. They don't call the public K-12 market the Wild West for nothing (I wrote a book for advisors titled "Wild West: Providing Fiduciary Advice to Public School Employees").

If you are a teacher and you receive the e-mail featured above, would you not think that your school district is offering a match of 5% if you begin contributing to your employer's 403(b)? I know that's how I would read it if I weren't in the financial services business.

Lucky for you, I am in the biz and can help you decipher this scam.

First, it's extremely unlikely the school district is offering any match and it's also unlikely they have endorsed or authorized the company featured to send the e-mail (if they did, they are opening themselves to significant liability). What is really going on?

It's actually pretty simple, this is an insurance agent using (in my opinion) underhanded and dishonest methods to lure unsuspecting teachers into buying high commission, retail annuity products that are likely better for the agent selling them than they are for the actual purchaser.

The participant doesn't actually get a "match", instead they get a "bonus" paid by the insurance company for every dollar placed in the annuity product. This "bonus" doesn't come for free, you pay for it in one way or another. One way a participant might pay for the bonus is through a longer surrender period on contributions, many annuity companies will add five years to the policy's surrender period and increase the surrender charge. This allows the annuity company to keep your money longer and make up for paying the bonus by underpaying interest for an additional number of years. Another way of paying for the cost of the bonus is to pull the strings of the policy to manipulate the rate paid so that it is lower than a comparable policy.

There is no free lunch, an annuity company is NOT going to give you free money. Every dollar they "give" you will be taken away in some form or fashion.

If you receive an advertisement similar to the one above you should ignore it. Better yet forward it to the state insurance commission.

Scott Dauenhauer, CFP, MPAS, AIF

Hat Tip to Don St. Clair for sending me the e-mail.
Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

Attn School Employers: Another Simple Retirement Hack

In my last post I explained how moving from dollar based salary reduction agreements (SRAs) to percentage based ones can increase participant retirement accounts. There are a number of small things that employers can do to increase the amount of money being contributed or the number of participants contributing. While a single vendor relationship combined with auto-enroll and auto-escalate would be the best route, this isn't the reality in many 403(b) plans, so coming up with simple ways to increase enrollment or contribution levels is important.

Recently, a client of mine embarked on a campaign to increase the amount of contributions from existing participants. The employers they worked with still had dollar based SRAs, but they worked with the compliance administrator to arrange for the existing participants to increase contributions without filling out a new SRA. Essentially they just needed to respond to a letter they were sent asking if they wanted to increase. It was a simple letter and had a simple way to respond and led to a $18,000 monthly increase in contributions after just one campaign, an average of $250 per person, per month.

It was just a simple nudge, but had a large impact, over $200,000 in additional contributions will be made to participant accounts each year thanks to an easy and cheap mailing.

What ideas do you have to increase participation and or contributions? Send them my way and I'll post.

Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

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"


"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" (
Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

Will Consider Great Sales People & Recent College Grads

When I think of the qualities of a good financial advisor the first two things that come to my mind are that they should be great sales people and youthful…said no serious person ever. Yet, in a recent advertisement for a Financial Advisor for a Texas based 403(b) and 457(b) program, Voya Financial Advisors is excited to proclaim that they “Will consider great sales people and recent college grads!”. Yes, they used an exclamation point.

Here is the ad:

This position puts the winning candidate into a situation where she/he will be educating higher education professors and employees on their 403(b) and 457(b) plans. They'll also be "counseling" them on retirement and investments. You'll notice that the skills that a qualified candidate are expected to have actually have nothing to do with the skills that a good financial advisor should have and their is no real competency requirements. While they accept recent college grads, no degree seems to be required. No Certified Financial Planner designation is required, in fact no real background in financial services is needed. I'm unclear how having "access to the Voya brand" qualifies as a skill (if it does, then only existing Voya people could apply...).

If you were to make a list of qualities and competencies a financial advisor should have before working one-on-one with participants, would any of the above make your list?

I'm a Certified Financial Planner, I have a Masters Degree in Financial Planning and I've been working in financial services for over 20 years. I'm a Financial Advisor. Does it make sense to you that the person who gets hired for the above position has the same title? 

Something is wrong with this picture folks.

We should expect higher qualifications for people who are dealing with our money.

Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

Managed Accounts - Why The Lack of Competition?

I continue to do consulting work for non-ERISA government plans (403(b) and 457(b)) and one area of these plans that continues to bother me is Managed Accounts. Managed Accounts are also available and on the rise in 401(k) plans and enjoy Qualified Default Investment Alternative status with the Department of Labor. Yet, there is very little competition in this field.

The GAO conducted a study which was released in 2014 (find it here) which stated that only eight providers accounted for 95% of the managed account business. My experience is that Financial Engines and Morningstar/Ibbotson are the dominant providers and according to a Pensions and Investment article  they are. Financial Engines accounts for nearly 60% of all managed accounts with Morningstar at close to 22%. Two providers make up 82% of the market. 

There are over 9,000 mutual funds that we could invest in here in the United States, there are hundreds of thousands of financial advisors and depending on with whom you talk to, nearly 16,000 Registered Investment Advisors (of which managed account providers fall). Could you imagine if just two RIAs held 80% of the assets? What if just two mutual fund companies held 80% of the assets? If Vanguard was one...perhaps I'd be ok with that!

Financial Engines is the dominant player, partially because they had the first mover advantage, however one has to wonder whether that is the primary reason today. Recently, Voya Financial was sued by a participant in the Nestle 401(k) plan alleging that:

Voya devised an arrangement with Financial Engines in which it collected excessive fees for investment-advice services, and concealed “the true nature of the arrangement.”
Has Financial Engines created a situation where record-keepers have no incentive to open up their system to other managed account providers? Perhaps this lawsuit will shed some light on how record-keepers work with managed account providers.

Managed accounts, a service that is simply money management (with options for additional planning) is not treated like other money management services. Most defined contribution plans these days are open architecture, that is, they offer just about any mutual fund you could want. This allows plan fiduciaries to properly monitor their lineups and make necessary changes with little conflicts of interest. The same cannot be said for managed accounts. 

Managed accounts are incredibly difficult to monitor and if you want to replace the provider there is no way to conduct an open request for proposal process as the record-keeper determines who can be on their platform and most allow only one or just a handful. Managed accounts represent a revenue stream to record-keepers which is a major conflict of interest. 

Managed accounts need to evolve like mutual funds, they should be interchangeable and have a process to monitor that is transparent and robust. Which brings me to my next point.

There is no Morningstar for managed accounts.

Morningstar built an incredible business redistributing mutual fund company data in a manner that was useful. No such service exists for managed accounts and Morningstar is not in a position to do so given that they are one of the providers.

While managed account providers do more than just manage money, their primary role is to do just that. Yet, there are only two real options for the vast majority of DC plans to choose from? Something isn't right in this market. I've spent a lot of time analyzing these programs and the providers know they have the power to do whatever they want because there are no other options. But WHY are there no or few other options?

This question needs to be answered. Managed Accounts are not smart phones, there is no reason that two providers should be dominating this market.

For the record, I believe managed accounts can be a valuable service if done right, monitored properly and priced appropriately. I'm confident this can become a reality.

Scott Dauenhauer, CFP, MPAS, AIF
Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

Lincoln Investment Planning Agrees to Buy Legend Group

Lincoln Investments, a company that caters to 403(b) plans has agreed to take the Legend Group off of the hands of troubled Broker/Dealer Cetera Financial Group in a deal that will bring Lincoln's total assets to $30 billion.

I'll just say that I don't recommend you work with either company and that these two companies deserve each other. I assume Planmember will be the next one rolled up?

Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

Think Your Retirement Plan Is Bad? Just Talk to a Teacher

"Schoolteachers and others who pursue careers of service in exchange for modest
paychecks get lightly regulated retirement plans that often charge excessive fees."

OCT. 21, 2016
Think Your Retirement Plan Is Bad? Just Talk to a Teacher

Excellent article and yours truly even has a few quotes!

Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

Scott Dauenhauer, CFP, MPAS, AIF

Idiot Commenters - Part I

The New York Times wrote an excellent piece this weekend on some of the problems facing public school 403(b) retirement plans. I was quoted twice and have provided background and analysis in the development of the story. You can read it at the following link:

Some readers have responded in the most idiotic manners and I feel like I need to respond, so I'll highlight a few and respond, this is the first.

Michael Callahan of Ocean City, NJ on October 22, 2016 commented:

"I am supposed to feel bad for people who get pensions for which they personally do not pay in ONE DIME? Who get summers off, and week breaks every winter and spring? Who get Tiffany health plans, again which they hardly contribute to? Try living in the real world, folks Then get back to me with your insufferable whining."

If one business pays an employe $5,000 a month with no benefits and another business pays their employees $3,000 per month plus $1,000 toward their healthcare and $1,000 toward their retirement is one business paying more than the other for their employee? Are the employees of the latter company not paying anything toward their healthcare or retirement? Setting aside the issue of taxation for the moment, the answer is no and yes.

The idea that benefits are not part of compensation is an absurd notion and ignores basic math, yet, this commenter seems to think that because an employer pays directly a portion of healthcare or retirement that the employee is somehow getting something for free, they are not, they've simply agreed to receive their compensation in a different form.

Of course the statements is mostly false anyway. My wife is a teacher and each paycheck has a deduction $684.15 for health and dental insurance.  The employer pays an additional $773 per paycheck. If the employer did not provide health insurance they'd be able to pay an additional $773 to my wife (of which she'd use to buy health insurance).

Stating that teachers "do not pay in one dime" to their pensions or health care is just pure ignorance. My wife currently pays 10.25% of her paycheck into her defined benefit plan and the school district contributes almost 13% (rising to 20% in 2020). If the school district didn't have to pay the 13% to my wife's retirement DB plan, that money would be available to pay her an increased salary. That's how it works, it's not as if teachers who forgo a pension would also continue to receive lower pay.

As for the whole "they get summers off...and breaks"...again, pure ignorance. This person has no clue how much work many teachers do on their breaks, during their summers and after hours (like grading papers, creating curriculum, doing continuing education on their own dime, etc.). In addition, this idiot also doesn't understand the stresses that come with teaching and that by taking breaks they come back more refreshed and better able to do their jobs. When teachers are less stressed they are better at what they do - that is, they are better at teaching our nation's youth. Finally, why wouldn't we want to pay our nation's instructors a professional wage, isn't their job one of the most important?

Maligning a group of people who on average are paid less is a petty and uniformed position that deserves to be mocked.

According to Michael Callahan, our teachers deserve to have poor 403(b) plans. I beg to differ, they work to hard and have to tough a job to also be subjected to retirement programs designed to loot their retirement. The only insufferable whiner here is Mr. Callahan, shame on him.

Our public school employees deserve better and I applaud the Times for exposing this racket. 

Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

Idiot Commenters - Part II - Teachers Have Pensions, We Don't

There have been over 900 comments on the recent New York Times article "Think Your Retirement Plan is Bad? Talk To A Teacher" and I've been making my way through them, slowly. There are many good comments, but some are downright idiotic.

The comment I want to focus on in this post is not so much idiotic as ignorant.

Ohana from Bellevue, WA writes:

I find it really hard to be sympathetic towards a group of people who are eligible for pensions. This is a great article in terms of exposing abuses in the 403bs, but please don't ask me to feel sorry for teachers. Almost no one other than government employees get pensions these days. Teachers are sitting pretty, 403b abuse or no.
My response:

I can't tell you how often I see this argument. Teachers have a pension, I don't, therefore I don't care or feel sorry if they are mistreated, this is a bullshit way of thinking.

Wikipedia defines a pension as follows:

pension is a fund into which a sum of money is added during an employee's employment years, and from which payments are drawn to support the person's retirement from work in the form of periodic payments. 
While I recognize there are some funding differences, doesn't Social Security fit this definition? Of course it does. Nearly every citizen in the United States (with the exception of teachers in about 13 states....hint, hint) has a pension plan, it's called Social Security and it's pretty good. Many teachers don't contribute to Social Security, thus their pension is all they will have. Many teachers also contribute to Social Security and receive a pension, but typically those who contribute to Social Security have a smaller pension than those who don't. Regardless, the very people who are complaining that they don't have a pension and teachers do...have a pension.

Let's step aside from the Social Security comparison for a moment and focus on the idea that because someone has a pension that it's somehow ok for them to be financially abused. This is an absurd notion. Teachers are not "sitting pretty". Sure, some are, but shouldn't that be our goal? Shouldn't we WANT the best for our teachers so that we can attract and retain the best and then reward them for doing a job that is incredibly important? But explain to me how it makes it ok that teachers are taken advantage because they might have a pension that may be more generous than yours? This is just spite. EVERYONE deserves the opportunity to save money in a manner that is low-cost and fiduciary in nature and most Americans are under a system that promotes such ideals (though much of the time they are not lived up to and way to many Americans are not covered by a plan at all), but teachers are NOT under such a system, their plans are specifically excluded from the same consumer protections that most Americans have.

I'm tired of this ridiculous notion that teachers deserve what they get because they have access to a pension, it's not only ignorant, it's cynical and I'm not going to sit back and listen to it anymore without a response.

Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

An Annuity for the Teacher — and the Broker

Tara Siegel-Bernard takes down a 403(b) beast in this article spotlighting some conflicts of interests and poor business practices by AXA, a company that caters to teachers.

An Annuity for the Teacher-and the Broker

Here are a few of the most egregious parts:

“From the teacher’s standpoint, they really miss out getting quality advice,” said Mr. Bergeron, 27, who sold the plans for Axa Advisors’ retirement benefits group. “People who are in the schools pitching them and positioning themselves as retirement specialists are really there just to sell them one product.”
When all you have is a hammer, everything looks like a nail.

“Teachers are still being preyed upon by salespeople,” said Dan Otter, founder of the advocacy and educational site, and a longtime teacher now working at the University of New Mexico. “The problem is their first experience with a 403(b) is in a sales environment.”

"Many of these practices are plainly stated on Axa’s website, including the fact that brokers are paid more to sell annuities than to sell mutual funds. Axa said that reflected the complexity of selling annuities."
Selling annuities is not more complex, you have to go through the same process regardless of what product is ultimately recommended. Complexity is just an excuse. 

It gets much, much worse.

To qualify for Axa’s health insurance plan and retirement benefits, moreover, brokers must sell a certain amount of proprietary insurance-related products, including annuities.
Justin Victor, a certified financial planner who left Axa in 2008 after three years, recalls the intensity of that pressure. “I am not going to lie,” he said. “When you have your health insurance on the line in the commission-based financial advisory world, you will do whatever you can to get a commission.” 
Axa said certain tax rules required its insurance sales representatives to solicit and sell mostly insurance products, including annuities, so they could receive employer-provided benefits.
This is a huge conflict of interest and not acceptable as a business practice in today's modern financial  system. No one should have their health insurance at risk because they didn't rip off enough teachers for the month. This is an unconscionable business practice.

Go and read Tara's second article in the series, it's another great one. 

Scott Dauenhauer, CFP, MPAS, AIF
 Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

Social Security Is Not a Windfall for Government Employees

Social Security Is Not a Windfall for Government Employees

Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.


You may have noticed that I've posted very little in the past six months, even amidst a torrent of 403(b) news. There is a reason and I'll do my best to explain.

I've been fighting for better 403(b) plans since 1998. I've not been alone in the fight (if you want to read about those who have fought along side of me, pick up my book here). I understand that this fight is not exactly akin to fighting for Civil Rights or other important issues, but it is a meaningful fight and one that needs to be waged. It's just that sometimes you get tired of it, even when you are winning.

To be honest, 2016 burned me out fighting for the 403(b) - despite it being one of the most successful years we've had. It's not the first time I've 403(b)urned out, it won't be the last.

Some of the symptoms of 403(b)burnout:

Not wanting to write about it.

Not wanting to think about it.

Getting a headache when you do think about it.


Did I mention...despair...

There are more, but those will suffice. Mind you, I didn't give up the fight, I simply took a breather.

Even while feeling the effects of 403(b)urnout I recorded podcasts (some great podcasts by the way and you can listen to them here) and posted articles and answered reporters phone calls. But my heart wasn't always in it. I remember 15 years ago how nervous I was to talk to a reporter and how much I would fret about getting quoted, the second half of last year I almost didn't want to talk to any reporter (except for the amazing and under-appreciated Tara Siegel-Bernard of the NY Times who should win a Pulitzer for her work on 403(b) last year). This was not a problem with the reporters (though Tara did make it difficult to talk to anyone else!), it was me.

I love the 403(b) fight and will continue to wage it, but probably once every three or four years I get 403(b)urnout and I just need to let it run its course. It's taking longer this time, but just writing about it is making it easier. I do take solace in the fact that we've picked up so many allies in the past few years who have willingly taken up the fight and when I'm down, they are up. I know that our numbers are growing and that I'm not that important anymore, this actually helps. We are not done fighting and neither am I, but if you don't see me for a few months every few's ok, I'm just recovering from a bout with 403(b)burnout!

2017 is a new year and there is a lot of potential, for all those out there fighting for positive changes in the government 403(b) world, I commend you and I'm ready to get back on the horse and do battle.

Scott Dauenhauer

Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

Attention California School Districts: You ARE Fiduciaries For Your 457(b) Plans

This isn't the first time I've written about this topic and it won't be the last...unfortunately. If you are a board member or a district administrator for a California public school, it's highly likely you are ignoring a significant responsibility and this leaves you open to lawsuits.

Despite what you've been told (in all likelihood by your compliance administrator) you ARE a fiduciary in regards to the 457(b) plan you offer your employees. You don't have to take my word for it, one of the nation's top ERISA attorneys made the case...back in 2006. Yes, you were warned over a decade ago.

It's been over a decade since Fred Reish co-authored  a white paper titled "Fiduciary Duties and Obligations in Administering 457(b) Plans under California Law" and almost nothing has changed in California public schools, in fact, in many instances it has gotten worse. The paper is embedded below.

I'm often tasked by new public education clients to perform due diligence on their available 457(b) options with their employer and in most cases i'm horrified by what I find, it's a wasteland. It's also very likely a violation of California law.

Before I go further, I urge you to goto to learn more about the unique defined contribution plan available in public schools, commonly referred to as a 457(b) or a Deferred Compensation plan.

I recently began reviewing the plan options at one of the largest school districts in the state and what I found was horrifying. It was a who's who of terrible investment options, none of which were vetted by the school district. Perhaps if the school district understood their responsibility, they'd do a better job. That's what this post is about.

In August 2006, the above mentioned white paper was released to "thunderous applause and its effect was immediate and far reaching, completely altering the landscape of school district retirement plans for decades to come" said no one. In reality, the paper had a small impact among a few consultants (myself included) and a few school districts, otherwise it went completely unnoticed.

I'm not going to summarize the paper for you, you can read it in the embed or download it yourself, but here is the major take away:

Under the Internal Revenue Code, 457(b) plans can be sponsored by governmental entities and by tax-exempt entities.2 ERISA provides a statutory exemption for government plans, including governmental 457(b) plans, from its fiduciary and prohibited transaction provisions.3 As a result, state law governs the fiduciary requirements for the operation and investment of 457(b) plans sponsored by governmental entities.

While ERISA does not regulate the conduct of fiduciaries of government plans, it is the most detailed, comprehensive, and developed body of law concerning the management of retirement plans. As a result, courts often look to ERISA authorities for guidance on fiduciary issues. Further, the California Constitution and Government Code place duties and obligations on fiduciaries (e.g., retirement boards) that are virtually identical, in both concept and wording, to those in ERISA. Thus, to the extent the state law is not well-developed or particularly informative, this White Paper discusses guidance under ERISA.

Subsections (a), (b) and (c) of Article XVI, §17 of the California Constitution contain the provisions governing the fiduciary duties for the administration of public pension and retirement systems.4 One obvious question is whether 457(b) plans are subject to these provisions. This is answered in Section 53609 of the Government Code, which provides that deferred compensation plans are “public pension or retirement funds” for purposes of Article XVI, §17 of the California Constitution. In particular, Section 53609 provides:

“Notwithstanding the provisions of this chapter or any other provisions of this code, funds held by a local agency pursuant to a written agreement between the agency and employees of the agency to defer a portion of the compensation otherwise receivable by the agency's employees and pursuant to a plan for such deferral as adopted by the governing body of the agency, may be invested in the types of investments set forth in Sections 53601 and 53602 of this code, and may additionally be invested in corporate stocks, bonds, and securities, mutual funds, savings and loan accounts, credit union accounts, life insurance policies, annuities, mortgages, deeds of trust, or other security interests in real or personal property. Nothing herein shall be construed to permit any type of investment prohibited by the Constitution. Deferred compensation funds are public pension or retirement funds for the purposes of Section 17 of Article XVI of the Constitution.” [Emphasis added.]

Thus, if a plan includes deferred compensation funds, section 53609 would apply the requirements of Article XVI, §17 to the fiduciaries of the plan. Since 457(b) plans are deferred compensation plans for state and local governments, 457(b) plans satisfy the definition of public pension and retirement funds for purposes of the California Constitution. This means that the retirement boards, and their members, who are responsible for 457(b) plans (for ease of reference, we refer to retirement boards, committees or other responsible fiduciaries of 457(b) plans as the “board”) are fiduciaries subject to the duties and obligations under Article XVI, §17. 

There you have it, don't take my word for it, take Fred Reish's word. I realize the above might sound like another language, but the bottomline is that you ARE a fiduciary, whether you like it or not and you better start acting like one before an employee realizes that they are being ripped off (and trust me, they are being ripped off big time).

Please read the paper and learn what your duties are and then go and improve your plan. If you are looking for an example of how to run your plan, look no further than the Los Angeles Unified School District, you can view their plan and website here. If you are looking for an entity that you can trust to run your 457(b) in a fiduciary manner, the California State Teachers Retirement System can accomplish this for you here (full disclosure, I do consulting work for CalSTRS).

It's time to take this responsibility seriously for two reasons: one, it's the law and two (more importantly), it's the moral and ethical thing to do.

Feel free to e-mail me with any questions.

Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

403(b) Hack: Why You Might Want To Leave A Few Dollars In Your 403(b), Even If You're Retired And Don't Want It

When public school employees retire they should think twice before rolling their 403(b) money (or 457(b)) over to an IRA. I'm not talking about the hordes of insurance agents and brokers who are trying to sell you poorly structured products so they can take fancy trips, that's of course a good reason not to rollover, but there is another, potentially powerful reason why you should keep at least some money in a 403(b)/457(b) as long as you are retired.

When the financial crisis hit in 2008, interest rates were pretty high on mostly safe products, but that quickly changed as rates plummeted to nearly zero. Insurance companies who offered 3 and 4% guarantees were caught off guard and quickly shut down product lines and restricted new money. As the years went on, it became more difficult to find a product with a good rate and a high degree of safety. But there were still some products that didn't restrict new money and other companies that came out with new 403(b) products that had higher rates than similar IRA products, in some cases substantially higher. In other words, some 403(b) products offered higher rates than IRA products or had lower fees.

A client of mine had money in an IRA and we wanted to put some of it in a fixed account type product, but rates were terrible. The best we could find was 1.35%. I knew of a 403(b) with no surrender fees and a fixed account that was paying a net rate of 3.5% from a highly rated insurance company (yes, no commissions, no surrender fees, no surrender period), but my client was retired and if you're retired and you don't have an existing 403(b) you cannot open a new one. Then my client showed me an old policy that he had forgotten about. It was a 403(b) with a school district he had worked in years before (like 25 years earlier). It dawned on me, he was still a member of that school district's plan, the fact that he was retired had no bearing, he was still a participant because the vendor was still active and his policy meant he was part of the plan.

Since my client was a participant in the plan and that plan had the 403(b) option that paid the 3.5% rate, I opened a new 403(b) (remember, he is allowed to open it because he is still a participant in the plan due to him still holding that old 403(b)) and moved IRA money into it and started earning that higher rate.

My client earned in excess of 2% more than he could have gotten in an IRA because we didn't settle. We didn't require all his money be kept at one place for ease of accounting, it was a little more work on my part, but it was the right thing to do and made my client significantly more money. It's what a fiduciary does.

The moral here is that even if you find a great IRA to roll your money into, don't roll everything over. Leave some money in your 403(b) or your 457(b) just in case an option later comes along that can't be found anywhere else. Think of it almost as an insurance policy. Yes, it's a pain (another statement, another login an another RMD), but that pain just might pay off in the end like it did for my client.

Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

That TIAA Loan Lawsuit & My Opinion

TIAA is being sued for a loan scheme that benefits TIAA, not participants and my opinion is that TIAA is in the wrong. This doesn't mean they broke the law, but they lose the moral and ethical credibility they had accumulated by using a technique that the rest of the 403(b) industry uses, but most 401(k) plans did away with long ago.

Here is a link to the lawsuit.

According to Plansponsor:

"A new lawsuit argues the practices used by the Teachers Investment and Annuity Association (TIAA) to credit portions of interest payments made by participants on loans taken from their own retirement accounts back to the firm—rather than to the borrowing participant—violate the Employee Retirement Income Security Act (ERISA)."

I have first hand experience with this particular loan scheme. A client of mine was also taken advantage of by it several years back, though I did not learn of it until recently.

The Basics 

In most 401(k) plans when a loan is taken, the money for the loan comes directly from the balance of the participant who is taking the loan. In effect, they are borrowing the money from themselves. They pay interest, but that interest is paid back to their 401(k) account (it's this interest that is double taxed when withdrawn, not the entire loan payment, as is commonly misreported), so they are paying interest to themselves. The interest rate doesn't really matter because it's all going back to the participant anyway.

TIAA's loan process works differently (or at least it did, they've made changes to some, but apparently not all plans). When a participant took a loan from my client's 403(b) program they were not taking a loan from themselves, instead they were taking a loan from TIAA (technically TIAA's General Account). TIAA would secure this loan by liquidating assets in the 403(b) and placing them into an escrow account that is invested in an interest bearing annuity (the TIAA Traditional normally). The amount of the escrow would be 110% of the loan amount and as the loan is paid back, the money in the escrow account is released back to the participant's account to be invested (though my experience is the money is deposited to the CREF Money Market account where it earned very little interest). While the mechanics might look the same, there is a subtle difference.

TIAA Gets A Cut Of Your Loan Repayments 

The TIAA loan process is designed so that they earn a portion of the interest that you pay. TIAA loans you the money and might charge a rate of say 4.50% (the lawsuits cites several different rates from 4.17 - 4.42%) while placing your own money in an interest bearing account that might be paying 3%. The participant's net interest rate is then the difference between what is being paid in interest (3%) and what is being charged (4.50% for example) or 1.50%. In the lawsuit, TIAA was getting a spread above 1% for risk-free loans (remember, the participant over-collateralized the loan, so there is no possibility of default). In a normal 401(k) loan you might pay a higher interest rate, but at least you are paying that interest back to yourself, the net spread is 0%, but with TIAA it might 1% or more. This is in my opinion no different than stealing.

I was unaware that TIAA was doing this until TIAA failed to win a bid for a client of mine and had to transition the assets to a new provider, TIAA refused to move the loans due to the collateralized loan issue.

TIAA will likely fight this and claim it's a standard industry practice, this is no defense in my opinion and schemes like this should be illegal. There is no reason a recordkeeper should be earning money on plan loans other than the cost to actually process and monitor the loan (normally participants pay a loan origination fee).

I've looked up to TIAA over the years as one of the good companies in the industry and I still support the company in many ways. But this is one issue (there are more that I won't get into, but...Nuveen acquisition) where I stand against TIAA and call for them to do the right thing.

If you have TIAA as a recordkeeper you need to inquire as to how they handle loans and begin the process to change to the normal 401(k) style loans immediately.

Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.

Opinion: Why I'm Skeptical On The NTSA's Fiduciary Press Release

Right about the time that the New York Times was beginning to release their stories on the significant issues in the land of 403(b), a trade organization (the NTSA - The National Tax-Deferred Savings Association) that represents 403(b) vendors, insurance agents, brokers and some Investment Advisors told Plansponsor magazine that they would change their policy as it pertains to "Fiduciary". The Plansponsor article is short on details but begins:

The National Tax-deferred Savings Association (NTSA) has formally affirmed its support for a fiduciary standard for all not-for-profit organizations, and the extension of the Labor Department’s fiduciary rule to governmental 403(b) plans and participants.
I've not seen a copy of the actual policy and can't find it on their website, in fact, if it wasn't for the Plansponsor article I wouldn't know about this, I literally can't find any mention of it on the NTSA website (NTSA - help me out). I'm reaching out to the Director, Chris DeGrassi to clarify, get a response and to invite him onto the Teach and Retire Rich podcast to explain the new policy. I've reached out twice before and have not rated even an e-mail response.

What strikes me about the policy change is that it doesn't seem to actually impose any fiduciary standard on the NTSA's members now or at any time in the future, only a vague support of a policy that they already know won't be extended to government organizations. This feels like slight of hand to me. The NTSA publicly states they support the extension of a policy that they know has no chance of happening while not actually implementing any Fiduciary standards within their own organization (again, if I'm wrong on this, I'd invite Mr. DeGrassi to correct me and provide the documentation, I couldn't find any).

Some people within the organization have told me that the NTSA is changing to embrace Fiduciary, but I have a hard time believing that based on who their sponsors are. But don't take my word for it, here are some excerpts from one of their members who by law must act as Fiduciaries at least in some situations, Lincoln Investments (who just bought Legend Group, the company mentioned by the NY Times articles):

From the Lincoln Investments Disclosure Booklet (emphasis mine):

Overall compensation to your Advisor, as a result of your investments with us, may be in the form of commissions, concessions, advisory fees, distribution fees, persistency fees, and contest prizes, such, as cash bonuses, trips and gifts. As a registered representative, your Advisor typically will share in the compensation from the product sponsors that is received by us in the form of commissions or concessions as may be described in a prospectus, for the sale of such securities as mutual funds and variable annuities to you. We also receive from some product sponsors an ongoing distribution or servicing fee (also known as 12b-1 fees) of 1% or less for as long as your money remains invested in their product(s) that may be shared with your Advisor. As an Advisory Representative, your Advisor shares in the advisory fees paid by you for our advisory services; and he/she may also share in the ongoing 12b-1 fee of 1% or less that may be received from the product sponsor(s) in which you are invested. As a general insurance agent, your Advisor shares in the compensation received by us for the sale of insurance products to you, such as, life, health, disability, long term care, and fixed annuity products. 
The majority of Lincoln Investment's revenue comes from the commissions, concessions and distribution fees associated with the sale of mutual funds, variable annuities, stocks, bonds and insurance to our clients. 
Your Advisory Representative may have more than one relationship with you – one as an Advisory Representative over an advisory account and one as a Registered Representative/Agent over a non-advisory account where he or she may receive a sales commission for the sale of securities or insurance products which shall be in addition to any advisory fees earned on your advisory assets. In these situations, our Advisory Representative may have greater financial incentives to offer you both investment and /or insurance sales as well as advisory services. 
It's difficult to think that given the above, Lincoln could be considered a Fiduciary. But this points out what many don't know about the term, Fiduciary. Fiduciary can have many meanings and there is currently a battle to define and redefine the term into something that is less restrictive, we can't allow this to happen. The above is disturbing and should be all the evidence you need to reject working with the company, but what follows is the best evidence that the throwing around of the term Fiduciary is simply a marketing gimmick:

Lincoln Investment offers sales contests that may provide additional incentives to your Advisor to offer one product or service over another. Lincoln Investment offers sales contests based on such criteria as gross compensation to the Advisor, net sales of Lincoln Investment and Capital Analysts managed advisory programs, net sales of Advisor managed programs, and net sales of third party managed advisory programs. These contests may provide your Advisor with an incentive to offer you fee-based advisory services over commission-based brokerage services. Top achievers in these contests may receive Lincoln Investment-sponsored trips, cash prizes, bonus commissions, extra club points, monetary donations in their name to a charity of their choice or other nominal prizes. No contest is offered which will award the Advisor based upon a specific investment product or on a specific product sponsor. Lincoln Investment will not accept any business that is not deemed suitable for the investor. Lincoln Investment’s Advisors may also be licensed and appointed with various insurance companies to offer insurance products to you. Although Lincoln Investment does not offer specific product sales incentives for securities products, issuers of non-securities insurance products, such as fixed annuity issuers, may offer sales incentives to our Advisors in the form of cash bonuses and trips if certain sales thresholds are met. You should ask your Advisor about these incentives at the time of sale. 

There is no scenario where the above is ok, these are not statements made by true fiduciaries. It gets even worse though. If a product provider wants access to Lincoln reps, they have to pony up. I encourage you to read the above linked document under "Additional Compensation", you'll find items that will blow your fiduciary mind. Bottom line, it's pay to play at this organization in my opinion and according to the evidence in this document.

Lincoln states the following:

Overall, in 2015, additional compensation revenue received by Lincoln Investment from Sales and Marketing Support, Administration Services, and Due Diligence Seminar expense reimbursement fees represented .0404% of total investor assets or $4.04 of additional compensation to Lincoln Investment for every $10,000 in an investor’s account. 
I've been a Fiduciary since 2001 and this is not fiduciary behavior. Disclosure is not enough. These are easily eliminated conflicts of interest, yet they continue to exist.

My point is not really about Lincoln, it's about the NTSA saying one thing but apparently allowing another. DeGrassi stated in the Plansponsor article that:

"America’s teachers need and deserve access to the best, and most transparent financial advice as they work to prepare for their future, and NTSA’s members have long been an integral part of that planning."
I'll agree with him on the first part, but to say that the NTSA has been an integral part of pushing for better fiduciary rules is in no way an accurate statement. I've been fighting for a fiduciary standard for everyone for years and specifically in 403(b), the NTSA has opposed me for as long as I can remember. There might be some great advisors (true fiduciaries at Lincoln Investments) and if so, they should be joining me in this fight to rid their firm of these hideous conflicts.

I certainly hope they are turning over a new leaf, but if so, the above items in the disclosure document shouldn't be allowed. If the NTSA truly wants to lead on Fiduciary, then set out clear policies for members and vendors. Almost all of the above would not be allowed under the DOL rule - certainly not sales contests.

Once again, if anything I said in this post is inaccurate, I invite Mr. DeGrassi to correct me and provide the evidence to support, I would gladly retract any statement not supported by evidence. My opinion remains though that the NTSA is only giving lip service to Fiduciary, not fighting to make it happen.

Mr. DeGrassi will you come on the Teach and Retire Rich Podcast?

Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? is the place on the internet to learn, advocate and build community.