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? 403bwise.org 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? 403bwise.org is the place on the internet to learn, advocate and build community.

Everything Wrong With 403(b) Markets In One Slimy Vimeo Video

I subscribe to Google Alerts and recently I was alerted to a Craigslist ad that was recruiting people to sell commission based index annuities to unsuspecting teachers in Chicago.

I clicked on the link and then found a video.

It's a bit long, but gives you some insight into the thinking and compensation and marketing practices of these sales agents. No mention of doing real financial planning or teaching people to do real financial planning.

It's everything that is wrong with this industry in one video.



2015-12-23 11.22 Webinar Now from Chris Reid on Vimeo. It's time these practices were stopped. These people are not fiduciaries, they do not have educators best interest in mind. Nor are they qualified to provide competent financial planning (as demonstrated by a lack of credentials).

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

Scott

Look Out Teachers, LSW Has You In Its Crosshairs

I find all sorts of interesting things on the internet these days. Sometimes they are sent to me in my e-mail inbox, but the item I found and posted below is very different than incentive trips I've seen in the past. What's so different you ask? The following phrase:

"Sales in Individual Retirement Accounts or ERISA governed qualified plans paid on or after June 9, 2017 will not count towards the qualification criteria established for certain incentives." 

This means that insurance agents attempting to sell National Life Group insurance products AND who want to earn a trip to Buenos Aires, Argentina can only qualify for that trip by selling the products outside of IRAs and 401(k) plans (also ERISA 403(b)s).

This puts the crosshairs on two groups of people, those with assets outside of qualified (ERISA) plans (usually senior citizens) and public school employees through their 403(b) and/or 457(b). As I've written in the past, government 403(b) plans are not subject to ERISA and thus NOT subject to the new Department of Labor Fiduciary Rule. Teachers are quite literally not protected. Worse, they are among a shrinking group of people who aren't...which puts them directly in the crosshairs of insurance agents who need to make their quotas.

Be careful out there educators, never work with anyone who is not a fiduciary 100% of the time and who is not willing to put that in writing.

LSW Non-ERISA Trips by Scott Dauenhauer, CFP, MSFP, AIF on Scribd

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

Yet Another Hidden Annuity Compensation Conflict

The conflicts in annuity compensation seem endless. This is why I generally tell people to avoid them. I've got another conflict to add to the growing list, deferred compensation.

Insurance companies want loyalty and they design their compensation systems to reward it. I recently came across F and G Annuity and Life's deferred compensation scheme and thought it was a good demonstration of hidden conflicts in the recommendation that might be coming from your annuity agent.

Agents that aren't captive (meaning they can sell any insurance companies products) sometimes end up as independent, but captive. Confused? Let me explain.

Imagine you have two products you can sell. One rewards you with bigger commissions, amazing trips and other perks, but only if you sell enough products from that company during a specific time frame. If the agent anticipates making $2 million a year in premium sales, the perks available to that agent by selecting only one company to distribute can be significant versus if that agent sold products from two (or more) insurance companies. It's possible that the agent could miss qualifying for big perks at both companies even though they sell more in premium than agents who did receive the perks (but kept all their business in one place).

Back to F and G Annuity and Life.

F and G Life has a deferred compensation program for agents who use distribute their products, it's called the Power Producer Program. This program rewards loyalty. It rewards the agents who concentrate their sales with F and G and it presents a significant conflict of interest when the agent is choosing which product to sell to a customer. Should they sell the product that doesn't qualify them for contributions into a deferred compensation program (for the agents retirement) or one that does?

This is a conflict that the NAIC should eliminate (among many, many others). There should not be an incentive to sell one product type over another.

Here is the outline of the Power Producer Program as explained in an F and G brochure:

Each year we set a Power Producer qualification level. Producers earn credits throughout the calendar year and can combine both their annuity and life sales. The 2019 qualification level to earn one credit is 1.75 million points. $1 of FIA premium is equal to 1 point and $1 of life premium, up to target, is equal to 15 points. The Power Producer credit is determined each year, but each credit is typically worth between $3,000-5,000.

The deposit amounts are cumulative and below is an example. By qualifying for just one credit a year, from 2013-2018, F&G would have contributed $80,000 on your behalf to a non-qualified deferred compensation plan.

The current qualification period is January 1 - December 31, 2019. 

Insurance is an important part of your financial plan and insurance regulation in the United States has failed the consumer. While I don't expect you'll receive an honest answer, always ask how your agent will be compensated and if selling the product they want you to buy qualifies them for trips, commissions, other perks and deferred compensation.

Here is an image from the brochure and a link to it.

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

F & G Life Power Producer Program

Annuity Chart They Don't Want You To See

Sometimes I just type random annuity words into google to see what comes up. You'd be surprised.

This weeks treasure is a document from The Annuity Source, Inc. and it lists all the latest annuities they are selling and the commission rates.

It's marked "For Agent Use Only. Not For Consumer Distribution", but it's available on the open net...so, here it is (18 pages of annuity products and their commission schedules):

Annuity Commissions

NEA Still Not Practicing What It Preaches

The NEA Valubuster Plan Is Up To 21x The Cost of Their Own 401(k)

Fifteen years ago I exposed the National Education Association's (NEA) poor practices when it comes to the 403(b) in a piece titled "Does The NEA Practice What It Preaches?". Very little has changed. The NEA's wholly owned subsidiary NEA Member Benefits Corporation continues to operate, market and profit from the selling of 403(b) products to their members, all the while installing a top notch retirement plan for themselves.

It's Time For The SEC To Regulate Indexed Annuities

Indexed Annuities Need More Regulation

Indexed Annuities are big business and are the path to big profits, yet they are essentially unregulated and sold by people who have no requirement to put their client's interest ahead of their own. It's time that Indexed Annuities and the people who sell them become properly regulated.

Teachers Now In Insurance Agents Crosshairs After DOL Rule

The long awaited Department of Labor (DOL) Conflict of Interest rule was finalized this morning.

This is a good thing. In fact, it's a great thing.

The DOL managed to do something many thought impossible in this day of special interests dominating Washington. I am proud of the DOL and wish them a sincere congrats. It was a job well done and a long, hard fight. Unfortunately, the new (some would say revolutionary) rule does not apply to non-ERISA retirement plans such as the 403(b) and 457(b), plans which millions of government employees contribute to instead of a 401(k).

Conflicts in Fixed Annuities: Incentives Part II - The Trips, The Amazing Trips!

Do you know what incentives lurk behind the products our nation's educators are sold in their retirement programs?

It doesn't take much time searching the internet to find some of these incentives.  I receive e-mails everyday detailing where I can go if I sell enough of XYZ product.

One major conflict of selling most fixed annuities is insurance agents may be incentivized to sell products of a single company (or several products from a single Insurance Marketing Organization) in order to qualify for special perks.

These perks might be exotic trips, cash or even Apple products. 

There is no law against offering special perks and insurance companies are within their right to offer agents big incentives to sell their products.  However, it's my opinion that this is a major conflict of interest that should be disclosed and potentially even banned.

Fully paid for vacations to exotic locales could certainly persuade an agent to sell one annuity product or another or to sell an annuity when another financial product would be more appropriate. Educators should be aware of the incentives behind products sold to them. In a perfect world there would be no incentives, only the best interest of the client and a fully disclosed compensation scheme separate from the recommendation.

Qualifying for exotic trips is one of the biggest lures for getting insurance agents to sell the products of an insurance company or from an Insurance Marketing Organization (or IMO, an entity that essentially wholesales annuity products).  Sell enough of a certain product or of a collection of products and the agent may end up with a trip to any number of locations.

Many companies offer trips and other perks as incentives to sell their products.

What follows are the destinations for this year and the last few years for those who qualified for one big name insurance company:

2014 Hayman, Great Barrier Reef; Sydney, Australia

2013 Big Apple Bonus - New York City

2013 The Ritz-Carlton, Key Biscayne Florida

2012 Fairmont Orchid Resort, Kohala Coast, Big Island of Hawaii

2011 Riviera Maya, Mexico

2010 Florence, Italy

Another insurance company has a “Leaders’ Club,” which awards a Mediterranean cruise for those who produce enough annuity premium. The cruise is on the Crystal Serenity Ship and cruises to Italy, Greece and Turkey from April 20th to May 7th, 2014!

This company also had a qualifying trip for 2013 to the Four Seasons in Lanai, Hawaii, not bad.

I’ve attached various documents I’ve found from Insurance Marketing Organizations below. It's a cornucopia of great vacation locales:

Ireland

Ritz Carlton in Hawaii

Puerto Rico

Spain

Portugal

Alaskan Cruises

Riviera

Whistler

The list never ends.

Here's a link from an e-mail I just received, check out the headlines:

Silverado Resort and Spa in Napa ValleyExplore all that the Napa Valley has to offer in your limousine wine tasting excursion. Later, you can unwind with a soothing fireside massage or full service spa.
Pebble Beach LodgeEnjoy this world-renowned resort, while indulging in two rounds of golf at the infamous Pebble Beach courses.

All of these trips are achieved by selling annuities to our nation’s educators.  I think it's reasonable to ask if this is appropriate.  The issue has certainly been addressed before in the financial services industry.

Back in 2003 the National Association of Securities Dealers (NASD), now the Financial Industry Regulatory Authority (FINRA) fined Morgan Stanley $2 million dollars for conducting sales contest that “offered or awarded various forms of non-cash compensation to the winners, including tickets to Britney Spears and Rolling Stones concerts, tickets to the NBA finals, tuition for a high-performance automobile racing school, and trips to resorts.”

That was over a decade ago, yet a similar practice in the fixed annuity industry is not only allowed, but seemingly encouraged (Morgan Stanley never admitted or denied the charges). Why is this okay?

Why are our nation’s educators retirement savings being invested by such conflicted sales agents? In my opinion,  this is not acceptable. The industry answer is a disclosure document that is light on disclosure, does not disclose incentives behind the sale and misses the point entirely.  An industry spokesperson from ASPPA/NTSAA was recently quoted:

“We maintain that improving transparency is a far better approach to improving the 403(b) marketplace, than taking away public school employees retirement choices.”

How convenient. Parade around a confusing disclosure document that doesn’t actually disclose pertinent items like exotic trips and whether or not the agent is acting as a fiduciary rather than addressing the actual problem.  Having said that, I think that insurance companies, insurance agents and insurance marketing organizations should be transparent about what incentives are behind the sales of their products.

Since fixed annuities are insurance products, they are regulated at the state level - they are not securities and thus out of the purview of the SEC or FINRA. Perhaps the Consumer Financial Protection Bureau should get involved. For what it’s worth, I’m calling on the fixed annuity industry to make changes to the sales incentives they offer.

I call on all insurance companies that offer products to our nation’s educators to do the following immediately: 

Stop offering additional incentives for the sale of your products

Stop offering your products through IMO’s who offer such incentives

Set commissions on a level basis and disclose them fully

Don't allow agents who sell your products to represent themselves as advisors

Insurance agents, you are not innocent in this - I call on you to do the following:

If possible, stop doing business with companies who offer exotic trips in exchange for recommending their annuities.

If offered a special incentive, kindly decline

Disclose to clients the existence of such incentives

Make your voice known on this topic

I’m willing to bet my e-mail inbox will be silent.

I want to make clear that not all insurance agents are evil, greedy, commission and perk hungry.  I've met many qualified agents whom I respect and even refer my clients to when appropriate.  A good insurance agent can be very valuable (though less so in the fixed arena).  But if you are in education and the person selling you something is licensed to only sell you that product, you might look elsewhere.  As the saying goes, when all you have is a hammer, everything looks like a nail.

I’ve listed links to a bunch of the documents I found on the internet referring to special trips. The links are likely to be dead soon (if they aren’t already)...so, I’ve pdf’d the documents and made them all available to you using my own host. All the documents were obtained on the open internet - no passwords, no firewalls, the information was freely available to anyone.



Scott Dauenhauer CFP, MSFP, AIF
@403bAdvocate
The Teacher's Advocate



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