Monday, April 11, 2016

American Retirement Association Opposed CA Auto-Enroll For Public Employees

You'd think that an organization with the word "retirement" in their name would actually support...retirement. This is not the case in California where the American Retirement Association's "premier" associate the National Tax-Deferred Savings Association (NTSA) has written a letter opposing Senate Bill 1297 which is aimed at easing the ability of public employers (including teachers) to auto-enroll their employees into quality supplemental retirement plans.

The NTSA was joined by VALIC, Lincoln Investments, American Fidelity and PlanMember Services. The NTSA is an organization that claims the following companies as "strategic partners":

The letter, dated April 6th, 2016 is reproduced below and makes several claims that (from my reading of the bill and understanding of California law) are false. 

What follows is the letter and then my counterpoints:

My counterpoints:

1. SB1297 does not represent a “substantial public policy change”

SB 1297 does not allow employers to unilaterally impose auto-enroll/auto-escalate (which is allowed in private sector). Even after this bill is passed, the status quo remains on auto-enroll, it must be negotiated with the employee representative organizations (unions, association, etc.). Current law allows for auto-enroll, it just must be negotiated. This bill simply relieves the employer of liability for the investment option chosen if auto-enroll is successfully negotiated. 

2.  State and Local government employees are not currently able to “freely choose where and when to invest their own dollars”

Most state and local government employees are required to place “their own dollars” into a public pension that they are automatically enrolled in once they become employed. They have no choice in the matter. In terms of supplemental retirement plans, the vast majority of California’s state and local government employees are only allowed to save supplemental pre-tax dollars in a 457(b) and there is no law in California that requires the 457(b) to offer any more than a single vendor. In fact, many, if not most state and local governments only have a single vendor for their 457(b) plans because doing so allows for lower costs, better services and a higher probability of successful retirement outcomes. The NTSA is simply misleading with such a statement.

3. The market for supplemental retirement programs is anything but competitive when it comes to 403(b).

It is only the 403(b) plan in California that is subject to insurance code Section 770.3 and this code section does NOT allow public school employees the right to “designate the licensed agent, broker, or insurance company for the purchase of an annuity”. 770.3 has limitations such as the legal requirement to register with the CalSTRS run 403bCompare website and disclose product provisions. The local employer can also decide not to offer certain vendors (though there are pretty strict limits on this). So while 770.3  does rule the land, there are exceptions to it and this law does nothing to change it.

While there are a lot of companies offering 403(b) products, very few of them are low cost or high quality. The vast majority could not be sold in a plan that had a fiduciary requirement. In fact, some of the products currently sold in public schools would be prohibited transactions if government 403(b) plans were subject to ERISA. While there are some low-cost options available, the top providers are insurance companies that sell products distributed by agents and brokers with no fiduciary responsibility. The inability to select vendors has created a system that puts the interests of agents and brokers above that of public school employees. Public school employees do not currently have “freedom of choice”, they only have the freedom to choose among a select group of products, most of which are toxic to their retirement. They have no ability to choose whether they want their money to go to Vanguard or Fidelity.

SB 1297 doesn’t actually address the poor, non-fiduciary conditions that exist in the 403(b) in California. It leaves insurance code section 770.3 intact and does not even create an exception to it. It is currently legal in California (see AG Opinion No. 06-408 issued August 25, 2008 preferred providers) to auto-enroll into a 403(b) of a single vendor as long as employees still have the right to move that money. School employers are allowed to have a preferred vendor. This bill does not change that.

4.  Behavioral Finance supports auto-enroll

The academic record is filled with evidence that auto-enroll has a dramatic effect on success when it comes to retirement outcomes. The evidence also shows that the more choices offered a participant, the less likely they are to do anything. The current status quo in California as it relates to insurance code section 770.3 is hurting employees, not helping and there is plenty of academic research to support this statement, including by professors that work in California. Even so, this bill doesn’t change the status quo, public school employees will continue to be subject to a law that actively works against them and is supported by a group of insurance companies that have no fiduciary responsibility to those participants.


SB 1297 does not change existing law in any form as it relates to insurance code section 770.3 and does not change the status quo as to auto-enroll except providing an employer relief of liability in the case that they successfully negotiate auto-enroll with employee representative organizations.

The NTSA, their members and the other companies supporting this letter of opposition are not telling the truth about this bill and even if they were, there message would be "preserve our interests (vendors) over the interests of public employees". 

Scott Dauenhauer, CFP, MPAS, AIF