Monday, April 15, 2013

403(b)izarre: Make It Automatic - Money and Power (Part II of IV)

In Part I of Make It Automatic I introduce the concept of automating retirement savings and the fact that their is opposition to the idea.

Part II explores the opposition and what drives it.

There is much opposition to the "Make It Automatic" idea and for the only two reasons that matter - money and power.

Last year I witnessed a 403(b) insurance agent ask a high level state employee (who administers the defined contribution programs) to make the following pledge:

"Will you promise not to support any legislation that allows for or requires auto-enrollment?"

While the question may have been worded slightly different, you get the picture.

The 403(b) agent was actively lobbying the state to not implement a program that would improve retirement outcomes for hundreds of thousands of school employees, all so he could continue selling his high-commission, low-quality products.  It never occurred to him that increasing the number of participants in a plan from the sub-30% range to above 90% would produce three times the number of potential clients (or in his case, victims).

A true financial planner who does the right thing for their clients will never be threatened by "automatic enrollment," as their clients will always value them more than as just an "enroller."

Recently, a large school district had a meeting with a gathering of 403(b) agents who were angry that they could not have full access to school district campuses.  They made it clear they would find their way onto campuses regardless of district policies.  This, in the wake of Newtown and other campus shootings is a bizarre behavior.

Putting aside the issue of safety, do we really need more distractions for our school employees during their work hours?  We send our kids to school to learn and our nation's school teachers (and employees) have a lot to fit into their schedule, particularly in the light of furloughs and shortened school years.

Allowing 403(b) salespeople onto a school campus is a further distraction and unwarranted.  What other employer allows salespeople to wander their places of business?

The outcry from these agents is always the same - "without us there would be nobody in these plans."

The 403(b) has been around longer than the 401(k) and yet most public school programs languish with participation rates well under 30% - in that respect there IS almost nobody in these plans.

Auto-enroll, auto-escalate and auto-default helps to solve the problem.  It removes salespeople from the campus, increases participation in the plans to the point where the minority are those NOT in the plan and increases the savings rate each year.  In 50 years of the 403(b), insurance agents have not come close to achieving any such numbers.

This is not to say that a qualified professional shouldn't be involved in a 403(b) program.

Between a Rock and a Hard Place

Power is the other thing keeping 403(b) programs in the stone ages.  There are organizations that purport to support school employees but then actively work against reforms that would serve to create better retirement outcomes.  They are more concerned about controlling or providing 403(b) programs than they are about making those programs work for the benefit of their members.

Misunderstanding the 403(b)

It is thought by many unions and associations that represent school employees that efforts to reform and strengthen 403(b) programs will be the first step in tearing down defined benefit programs.  This line of thinking has sound logic and I am sympathetic to it.

There is no doubt that public sector defined benefit plans are under constant attack.  For some, moving public employees to "defined contribution only" plans is a life mission (it is not mine, I fully support reasonable public defined benefit plans and will fight to protect them).  It only makes sense that the first step in such a conversion would be to first insure that the defined contribution plan that is being proposed is solid.  Thus, many unions see supporting reforms of 403(b) plans as supporting the enemy, looking like they are giving in or moving toward acceptance of such a transition toward eliminating the defined benefit.

I understand this concern, it's valid and it must be addressed head on.

My response to those who feel this way is that there is no reason you can't have both systems strong.

There is every reason to believe that a strong defined contribution system could bolster the defined benefit system - even potentially aiding in increasing the funding levels.

Think about it, a school employee who has saved all their life (through "Make It Automatic") will have a much simpler decision when it comes to retirement.  They will not have to work as long to meet their retirement goals and may retire sooner.  Not only does this take pressure off the defined benefit system (from paying out higher benefits), but it takes pressure off the school employer as they can replace that higher salary with a new teacher with a lower starting salary (not to mention getting new people into the workforce).

A strong defined contribution system has the potential to strengthen school employer budgets and defined benefit plan funding levels.

In Part III of Make It Automatic I will explore a common refrain against implementing "Make It Automatic,"-  that it's to paternalistic.

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