Monday, April 04, 2016

Debunked ASPPA Study Used To Push Industry Agenda in Michigan

Back in 2011 I thoroughly debunked an ASPAA (now the American Retirement Association or ARA) research paper which claimed that reducing vendors in 403(b) plans leads to a drop in contributing participants.

The research paper did not prove the assertion, yet the paper is still being used by members of ARA and their sub-organization the National Tax-Deferred Savings Association (NTSA) to "prove" that adding more vendors will increase participation in a Michigan 457(b) program.

A PlanMember Services (a group of brokers who work in the 403(b) and 457(b) marketplace) representative testified in front of the Michigan House of Representatives (rather a committee) on March 9th and said the following:

“The unintended consequences of pension reform have caused limited financial advice for new teachers,” Williams told the committee.Most people will only contribute the amount needed to get the matching funds and consequently their retirement is woefully underfunded. Today, there are 20,000 school employees, most of whom have no idea where their money is invested, and what they need to do to successfully retire.”
A press release by the rep testifying, Rich Williams, went on to state:

"Research compiled by the National Tax-Deferred Savings Association in Arlington, Va. shows that eliminating employees’ choice significantly reduces participation in voluntary retirement plans. In Southern California, for example, 50% of workers stopped contributing to their 403(b) plans when their existing provider was no longer available. In one Colorado school district, the number of contributing participants dropped by approximately 54% when a single-provider approach was adopted."
This "research" continues to be cited even though it's conclusions are clearly not supported by the evidence. After the NTSA sponsored paper was released I wrote a blog post debunking the findings and methodologies that led to the author's conclusions. You can read the post here.

The point of the Michigan bill is to open up the state's 457(b) plan so that other vendors can offer their products. This proposal is said to be in the interest of participants, but in fact it's only in the interest of the vendors and agents promoting the idea. It goes against everything we know about behavorial finance.

Participants in the Michigan plan benefit from a single vendor program that has significant economies of scale. Opening the plan up to many vendors will lead to higher costs, poorer quality products and an onslaught of non-fiduciary salespeople trying to get in front of teachers and other state employees to sell them other products.

This idea that teachers (or new teachers) don't have an outlet for advise is not supported. An entire industry of fiduciary based advisors is springing up to serve the needs of new and existing educators all while offering a variety of compensation methods, none of which involve the receipt of commissions.

Why is the ARA/NTSA pushing state plans to offer multiple vendors when they know it will lead to higher costs, lower participation and worse outcomes? Why is the ARA/NTSA still allowing their members to cite studies that have been exposed as false?

Perhaps their members should be asking these questions.

A better question is how the ARA continues to support the agenda of a sub-organization, the NTSA, which conflicts with the ARA so starkly on almost all issues of Fiduciary duty.

My friend, Tony Isola over at the ATeachableMoment blog wrote a brilliant piece on this as well.

Scott Dauenhauer, CFP, MPAS, AIF