Tuesday, April 10, 2012

ASPPA 403(b) Research Falls Flat

Originally posted on my Meridian Wealth Blog on October 13th, 2011


New ASPPA “Research” on 403(b) Threatens to Splinter Association
ASPPA’s Research Paper Supports Salespeople over Participants & Membership
Research Paper Falls Flat

This response to the ASPPA paper is my opinion.
On October 5th, ASPPA/NTSAA released their long touted research paper titled “Protecting Participation: The Impact of Reduced Choice on Participation by School District Employees in 403(b) Plans” along with a special website www.savemy403b.com. This research appears to be the work of their super not-so-secret group Project Albatross (NTSAA Sponsors).
What did this long awaited “study” reveal? Reducing vendor choices – bad | lots of vendor choices – good. What was far more interesting (and quite frankly, odd) was the lack of any actual study or research to back up the conclusions.
The paper written by ASPPA’s Pension Education and Research Foundation didn’t conduct a single study into participation rates and how they are affected by the offering of many vendors, a few vendors or a single vendor. Instead, the paper used studies that were not applicable and cherry picked dates from just a few school districts and twisted the data to fit the conclusions demanded by NTSAA corporate sponsors. In other words, the outcome was (in my humble opinion) predetermined.
ASPPA conveniently leaves out studies that don’t confirm their bias, such as the studies mention in the article “Too Many Choices” located here.
ASPPA must know that by putting out this paper they will upset the vast majority of their members in order to make happy a small minority of NTSSA sponsors. In the end, it’s apparent there is no supporting evidence, none. The question ASPPA members are asking now is why. Why is the leadership of a great organization now working feverishly to promote a non-fiduciary, retail environment at the expense of its long time members who have worked hard to promote the fiduciary cause? This study seriously dents the credibility of the organization.
I considered not forming a response to the research as I figured anyone who read it would immediately understand that there is no intellectual basis to confirm the foregone conclusion. However, the arrogance of trying to pass off what can only be labeled as “propaganda” as an actual research paper angered me enough to write this response.
What is missing from the paper is the debate that ASPPA refuses to engage in – should advisors who work with 403(b) plans be fiduciaries? It seems like a simple question, however there is much at stake and already considerable opposition forming within ASPPA to counter the turn against fiduciary principles taken with the absorption of NTSAA (The National Tax Sheltered Account Association).

If the answer to the fiduciary advisor question is no, ASPPA will find themselves increasingly at odds with their long time members and those in leadership positions will soon find they are being escorted out the door. If the answer is yes, ASPPA must divorce itself from NTSAA, there is no middle ground where the two organizations can meet. This is why ASPPA has chosen instead to be silent. ASPPA can’t serve two masters. Which faction will win the argument – the loyal fiduciary members or the small number of old school salespeople hawking equity indexed annuities?
Analysis of the “Data” Provided
What exactly is in this research paper that would lead one to believe that eliminating “choice” as defined by ASPPA would hurt participation rates?
The paper cites several studies from Schwab, TIAA, RAND & ING that have absolutely nothing to do with Protecting Participation and “Choice” in 403(b) plans (I’ve written a detailed analysis and will post it later). It then cites three examples of school districts that have reduced vendors and experienced a drop in participation, but doesn’t actually conduct a study to determine whether any of the findings have significance.
What follows is the only evidence ASPPA was able to provide to support their conclusion that reducing vendors hurts participation rates:
ASPPA’s “Proof” That Reducing Vendors Reduced Participation

ASPPA offers up three examples of reductions in participation occurring after vendors have been reduced, as follows:
55 Unknown school districts somewhere in Southern California
Indiana Area School District in Indiana County, Pennsylvania
Jefferson County School District in Colorado
What follows is the claim, data and my analysis (and opinions).
55 Unknown school districts somewhere in Southern California

“An analysis of employees in fifty-five school districts in Southern California shows that over 50% of workers stopped contributing to their 403(b) plans when their existing provider was no longer available.”
Data Provided:

As of January 31, 2008, participants were making contributions to 194 investment providers for the plan. Seventy-eight of these investment providers were deselected.
As of January 31, 2008, there were 10,613 participants making contributions with investment providers who not later deselected. As of January 31, 2009, there remained 8,608 participants of this group.
During the process, 201 investment providers would not agree to coordinate information with the employer and were therefore deselected. Participants were contributing amounts to 78 of these investment providers as of January 31, 2008. As of January 31, 2008, there 846 participants who were making contributions to investment providers who were later deselected. As of January 31, 2009, there remained 376 participants of this group.
Lets start with the obvious – who are the 55 school districts? This information is not provided. There are over 1,000 school districts in California; using data from just 55 non-randomly selected districts is not statistically relevant or significant. Let’s also not forget that even after this massacre of providers, 116 were still left (who these mystery districts are is beyond me, I’m unaware of any district that could legally have 194 investment providers as there was NEVER that many available for use during the time periods described as every vendor must be registered with the state of California’s 403bCompare databank). Assuming you could have 116 investment providers, isn’t that enough? Even those that support the “Choice” argument have to draw the line somewhere, right?
The key to this data however is the time frame chosen: January 1, 2008 through January 1, 2009. The reader should ask themselves if anything significant happened during this timeframe that might have had an effect on participation, like perhaps:

  1. Participants retiring – how many of those participants retired? Given that the percentage of participants who are older is usually much higher than the percentage of participants who are younger, people retiring would have a larger affect on participation rates.
  2. Layoffs. I’m sure no one who was contributing to a 403(b) was laid off during this time period.
  3. Other retirement plans. School employees also have access to a 457(b), how many switched to contributing to a 457(b) instead of a 403(b)? I happen to know of a county in Southern California or two that actively pushes to get participants into their 457(b) plans at the expense of participation in 403(b) plans. How many of these participants stopped contributions to a 403(b), but started to a 457(b)?
  4. Greatest financial collapse since the Great Depression happened during this time frame – could that have an effect on participation?
  5. Greatest housing collapse since the Great Depression was occurring during this time frame – could that have an effect on participation?
All of the above are valid reasons for lower participation, but the one ASPPA is hoping you don’t think about is the most obvious one, new IRS regulations went into effect:

  1. (6) IRS plan document requirement. January 1, 2009 was the IRS deadline for having a plan document and thus many vendors were eliminated on December 31st 2008. If a participant didn’t make a decision as to a new vendor, their contributions were stopped – but they would not have realized this until February or later when they found no money was coming out of their paycheck and going into a 403(b). Inertia may have an affect in that they do not re-start (thus it was the deselection without a mapping) and once they finally realize they are not contributing they may have started re-contributing – we don’t know because the dates are cherry picked. How many actually started contributing again once they realized they were kicked out? Why didn’t the data go through January 31, 2010?
Could it be that ASPPA cherry picked the dates to make their numbers work? After all there was NO analysis provided to determine other causes. It appears they deliberately chose dates that would support their conclusions rather than performing an actual study to determine if their conclusions had any merit.
Indiana Area School District in Indiana County, Pennsylvania

“Similarly, data reflects that the number of workers at a school district in Pennsylvania who participated in the 403(b) plan was significantly reduced when the school district switched to a single investment provider approach. The Indiana Area School District in Indiana County, Pennsylvania had nineteen investment providers in September 2008. By September 2010, after it switched to a single investment provider, nearly 40 percent of participants ceased participation in the plan.”
“Participation dropped from 118 employees participating at approximately $37,347 per month in September 2008 to 72 employees participating at approximately $25,680 per month in September 2010, reflecting a decline in participation of 38.98 percent.”
One district in one county of one state is not a sample size and is not evidence that going to a single vendor will decrease participation. Where is the analysis of other school districts that went single vendor and didn’t have a decrease in participation or how about the school districts that cut out dozens of vendors and either didn’t experience a decrease, experienced only a small decrease or even experienced an increase? The answer is that ASPPA didn’t do a study to find out this information because it wouldn’t confirm their preconceived idea that if you eliminate choice, your participation rate will plummet. So, here are a few items they left out of this “data”:

  1. Retirees?
  2. Layoffs?
  3. Financial Panic?
  4. Housing Collapse?
  5. Availability of other retirement plans?
  6. New IRS Regulations going into affect?
Just like the Southern California example, there is no information about the implementation of the single vendor program or how the program is doing today (they couldn’t call up the school district for September 2011’s data?). One data point does not a study make.
Jefferson County School District in Colorado

“Data reveals that the number of participants substantially dropped when a single investment provider model was adopted by the Jefferson County School District in Colorado (known as “Jeffco Public Schools”).
Jeffco Public Schools had previously utilized up to fifty-five investment providers for its 403(b) plan. As of January 1, 2006, they selected a sole investment provider for the district’s 403(b) plan and redirected all contributions to the new investment provider. As indicated in the chart below, data provided from 2004 through 2009 reflects a significant decline in participation. The number of contributing participants dropped by approximately 54% from 2004, when multiple investment providers were available to 2009 when a single investment provider approach was used.”

Two RFP’s of which were not provided.
There is simply no analysis and no update since 2009 as to what participation is today. We have no idea why participation dropped in this situation and no reason to believe that because it may have occurred in this district that it would occur in other districts.
Again, one district does not make a study, there has been no actual study done by ASPPA on the effects of reduced vendors on participant participation in government 403(b) plans.
The ASPPA paper concludes with “The data reflects that 403(b) plans should be structured as efficiently as possible, but without eliminating choice.”
What data reflects such a conclusion? Most of the studies cited don’t even address the topic of the number of vendors and participation rates (actually none of them do) and most apply to 401(k) plans. If anything the studies presented support my conclusion that participants should be offered fiduciary advice, not recommendations from conflicted salespeople.
Instead of helping to transform the 403(b) market to one based on fiduciary principles ASPPA is working to ensure that it remains the last bastion of conflicted salespeople. There is a reason this market is referred to as the Wild, Wild West of retirement plans. The ASPPA leadership needs to seriously rethink the path they’ve started down before they find themselves to far down it to turn back.
Speaking of ASPPA/NTSAA leadership, Brian Graff continues to refuse to answer some very simple questions that I posed just a few months ago. I have heard from quite a few ASPPA members that are VERY interested in his response. Not to beat a dead horse, but here they are again:
1. Do you believe School Employees should always have their best interest put first by any advisor they work with, in other words, a conflict-free fiduciary standard?
2. Why shouldn’t all advisors who want to work with School Employees be held to a fiduciary standard?
3. Would ASPPA be open to allowing multiple 401(k) providers for their organization with no process for “screening costs, fees or other terms or conditions” and would they support such a structure for private sector 401(k)’s? If not, why and do you believe this would violate ERISA?
4. You have stated several times that competitive bidding and/or single vendor options will not lower costs and fees and that participation rates suffer under such regimes, disregarding the fact that this is standard practice in the 401(k) world which you represent. Where is your evidence to support such conclusions?
5. In your recent NTSSA article you claimed victory over the Los Angeles Unified School District (LAUSD), please explain how, by hiring a lobbyist law firm and sending threatening letters, you were not acting as a bully for the financial services industry?
Here is a link to Protecting Participation.
Scott Dauenhauer CFP, MSFP, AIF