Monday, April 29, 2013

403(b)izarre: Make It Automatic - Fiduciary Responsibility (Part IV of IV)

In the previous three parts I Introduced the Make It Automatic concept, asked who would oppose it and then addressed a common objection.  In this last part I address the issue of Fiduciary Responsibility.

The Fiduciary Liability Objection

Another objection I hear is that a fiduciary based, auto-everything defined contribution system would cost school districts money and take up staff time as well as opening them up to potential litigation.  

Valid concerns, but easily addressed.

First, by allowing any insurance agent to sell high commission, non-consumer friendly products on your campus - you are already opening yourself to such litigation.  

Of course this line of thinking moves one toward removing the program all together and that is a bad idea.  The truth is there are many things the school employer can do to alleviate the time commitment and litigation threat.

Many states (and many more are starting) now operate defined contribution plans on behalf of public employers.   These defined contribution plans can work as "multiple employer plans" where the state may become the "plan sponsor" and take on most of the responsibility and much of the liability of the defined contribution plan for the school employer.  

The school employer is expected to do their due diligence and to monitor how the program is being run, but everything other aspect (except for the payroll functions) is conducted by the state.  The state negotiates the contracts, does the compliance, monitors the investment options, processes contributions, provides relevant notices and runs the "Make It Automatic" program.  They do this without cost to the school employer (the state is paid by the fees generated by the plans and is non-profit) and more importantly at a very low cost to the school employee.

Where such a plan is not available, many employers could form a consortium and run the program in a similar manner.  Implementing a "Make It Automatic," fiduciary based plan can be extremely simple and not cost the employer much, or anything at all.  One issue is that these plans are not available in every state and some states have laws against such a system.  Whenever these laws are proposed to be changed the insurance industry spends a lot of money to stop their repeal, the status quo drives profit margins.

Why aren't these ideas catching on like wildfire?  They are, but mostly in the private sector.  

Many government plans still remain in the stone age and there is little support from employee associations and dramatic opposition from insurance companies - ironically both of which are funded by school employees.  

Where these programs are being tried, the participation rates skyrocket - it works.

The lives of school employees across American could be dramatically improved by "Make It Automatic."

Isn't it time school employees had access to an "Automatic" option?

This concludes the 4 part series Make It Automatic.

Scott Dauenhauer CFP, MSFP, AIF
The Teacher's Advocate