Secret Lower-Cost 403(b) Products That We Hope You Never Have To Use

Low-quality vendors sometimes offer secret lower-cost programs

Photo by Kristina Flour on Unsplash

There is an old saying, in the land of the blind, the one-eyed man is king. There is a similar saying in the world of 403(b) advocates, in the land of bad 403(b)s, the less-bad 403(b) is king. Ok, no one really says that, it just sounded good in my head, but there is truth in that statement.

We come across a lot of products at 403bwise and most are pretty awful. We tend toward recommending a list of vendors we know to have reasonable fees, these vendors are:

Aspire

CalSTRS Pension2 (only in California)

Fidelity

ICMA-RC

TIAA

Vanguard

There are many 457(b) plans run by states that we like as well (as well as several states with 401(k)s that are offered to teachers - Idaho, Colorado, North Carolina).

But what happens when we come across a school employer who has both bad 403(b) and 457(b) choices? 

Our first recommendation is to begin lobbying your employer for better options (see our resources page), the second is to consider contributing to a Roth IRA if you qualify (insert link). Roth IRAs are simple to set up, low in cost (basically free at Fidelity) and allow you great freedom in investment options, but if you are going to contribute more than the Roth limit, have an existing low-quality 403(b) and or you don’t qualify for a Roth, you’ll want to research if your employer offers a vendor with a secret lower-cost program.

It sounds mysterious and the vendors offering them would prefer they stay that way. While these programs are not advertised by the school employer or the vendors who offer them, they can be a refuge for those desperate to lower the costs in their 403(b). 

The vendors offering these programs are not offering them out of the goodness of their own heart, quite the opposite. They are offering them in order to keep quiet the people who might otherwise advocate for better choices in the 403(b) overall, it’s a way to silence those who have become wise to the 403(b). The vendor is thinking that if they just give in and satisfy this small group of agitators, they won’t become a bigger group demanding even bigger change (which might be a prelude to the vendor being removed). To some extent, this has worked, but as 403bwise is proving, it won’t work for long.

Who offers these programs?

So far I’ve been able to identify three providers, though it seems that the programs are not nationwide. There are likely to be other secret low-cost programs offered in particular states, if you come across them, let me know.

Lincoln Investment’s RetirementSolutions Participant Directed Program

This program is offered only in New Jersey, though I’m told it’s also offered in a few other select school districts, but I’ve not been able to identify them. If you have information on these other districts, please let me know. In researching the program the rumor was that this program was put together by the New Jersey Education Association, though I’ve not been able to find any evidence of this.

This product is essentially a clone of the Vanguard 403(b) product, it charges a flat fee and offers almost every major Vanguard fund (usually Admiral share class). I do not believe Lincoln pays any of the compliance fees on behalf of the school district, though I could be wrong.

This is a good way to get access to low-cost Vanguard investment options when you have no other choice.

Annual flat dollar fee: $60

Annual asset based fee:          0.00%

How to access: You simply e-mail inquiries@lincolninvestment.com and ask for the PDP application and they will e-mail it to you (with a gentle reminder from Lincoln that you really should re-consider doing this on your own). You’ll still need to process a salary reduction agreement separately.

Who can access:          As far as we can tell, only school employees in New Jersey.

PlanMember Participant Choice

For those not familiar with this company, they are now partially owned by AXA/Equitable, a notorious player in the 403(b) world. You will often hear the benefits of fee-based accounts and the word fiduciary is thrown around, but don’t mistake these representatives for full time, fee-only fiduciaries. 

This program is not “low-cost”, it’s better labeled “lower-cost”. It’s not the best option out there, but it does offer very good investment options with mostly institutional share classes where possible. Vanguard, DFA and American funds are all available along with a few T. Rowe Price funds. Think of it more as a curated, not crafted mutual fund list.

You can find information about it on 403bCompare, here.

Annual flat dollar fee: $50

Annual asset based fee:         0.35%

How to access: You can goto the 403bCompare page for this product and attempt to e-mail them for access to an application. I’ve done this, but have yet to receive a response. Here is the e-mail edelivery@planmember.com for PlanMember. you’ll still need to process a salary reduction agreement separately.

Who can access: Since this program is disclosed on 403bCompare, we assume it’s offered in California, but we see no reason why it wouldn’t also be offered nationwide anywhere that PlanMember (or potentially AXA/Equitable) has a payroll slot. We are working to get an official statement from PlanMember.

NEA Direct Invest offered through Security Benefit

This is a program that almost no one knows about but is probably the most widely available low-cost product offering in the nation. As far as we can tell, very few teachers use it and it’s not easy to get your money into it if someone hasn’t already set it up at your school employer. However, once it’s setup, it seems to work well and you are not bombarded with advertisements for other Security Benefit products (at least, I’m not).

For those who don’t know the history with the NEA and Security Benefit, the two have been selling high cost financial products for decades together and the relationship appears quite profitable for both. A wholly owned subsidiary of the NEA, NEA Member Benefits receives an annual base fee of $3,827,256 (see prospectus here) in exchange for promoting Security Benefit products and I suspect that number is higher, though NEAMB will not disclose how much they are paid be each of the vendors they work with, so I can’t be sure.

Dan Otter and I had conversations with the NEA many years ago about how bad their product offerings were, we like to think this had some influence on them starting this NEA Direct Invest offshoot product. The NEA does very little to market the product as they make the money selling higher margin products, but they have assured me that whereever Security Benefit has a payroll slot, this product will be available (note: this doesn’t mean the school employer will allow it).

My very first blog post, nearly twenty years ago was an expose on the NEA Valuebuilder program, you can read it here.

While I’m not a fan of the investment lineup (they offer Vanguard index funds alongside BNY Mellon index funds that pay Security Benefit revenue and which are 4 - 12 times higher in cost for the exact same investment) the great part about this program is that it does offer access to a few good Vanguard funds with a low annual fee (which can be waived). You can build a globally diversified portfolio by using the Vanguard Total Stock and Total International Stock funds combined with either a money market or a bond fund. It’s not perfect, but it’s better than most of the junk in the 403(b) marketplace. We would love to see them revamp the lineup to add a few more Vanguard funds and removed the high cost BNY Mellon funds (BNY Mellon S & P 500 fund cost 0.50% versus the Vanguard Index 500 at 0.04%).

Annual flat dollar fee: $35, waived for balances of $50,000 or more

Annual asset fee:         None (which is quite amazing, though this is due to all the other high cost funds in the lineup subsidizing the Vanguard funds)

How to access:         You can enroll online here, you’ll still need to process a salary reduction agreement separately. It can take 6-8 weeks to get the account set up if you’re the first to do so in a district.

Who can access:         As far as we can tell, anyone, even if not a union member.

What Should You Watch Out For?

These programs are often used as marketing lists. Expect to be bombarded with “information” about the company offering the program and trying to get you into their advisory services that are much more expensive. With that said I’ve been pleasantly surprised that the NEA Direct Invest program does not currently do this (my wife has an account with them and yes, it’s possible they’ve simply removed her account from the lists so that I don’t see any marketing, but I’m skeptical that’s the case). I do not have accounts with Lincoln or PlanMember, so I don’t have first hand experience and can’t say for sure they will market to you, though it’s common sense to think they will.

These programs might be acceptable, in some cases even good deals, but do not mistake them for good players in the industry, in my opinion, they are not. None of these companies in my opinion are high quality. The salespeople they employ are not full time fiduciaries and the companies didn’t set these accounts up out of altruism, in my opinion they did it to perpetuate the status quo.

Compliance fees are generally paid by these vendors on the participants behalf, they likely won’t be with these products. Many school districts hire a third party to perform tasks in order to keep their plan in compliance with IRS regulations, this isn’t cheap and the fees are often passed onto the vendors. The higher cost, lower quality vendors might absorb these fees given their higher profit margins, but there is no way to absorb such fees and not lose money with lower-cost options. You might end up paying $75 to 100 a year in flat fees between the vendor and the compliance fees. While this isn’t ideal, you’d pay a similar fee with using Vanguard. If you don’t have any other good options, paying these flat fees is cheaper in the long term than paying high asset-based fees.

You should consider whether the 457(b) is a better option for you and check to see if that plan is offered with better terms. Many states offer solid 457(b) options (and as mentioned earlier, a few like North Carolina, Idaho and Colorado offer great 401(k) options as well). 

Don’t Stop Advocating for Better Choices

If your school employer only offers poor 403(b) choices, but one of them happens to be from the above companies and you decide to take advantage, great, but don’t stop there. Advocate and Educate. Work to add a good vendor to your list. Help educate your HR staff and fellow employees on the benefits of a low-cost provider. It might not be easy, but it’s the right thing to do and you could literally save your colleagues hundreds of thousands of dollars over their lifetimes.

Account Closure Fees

The NEA Direct Invest does not seem to have account closure fees, however Lincoln charges $60 (as of May 2020) if you were to close this account. PlanMember as of May 20th does not show an account closure fee on 403bCompare, which means that if you have this account as of this date, they cannot charge an account closure fee if your account is associated with a California school district (a vendor cannot charge a fee that is not disclosed), however outside of California a fee may be assessed, so find this out first. I’ve had this issue with PlanMember in the past charging a termination fee not disclosed on Compare. After initial resistance, they realized they had no choice but to reverse the fee. Check the custodial agreement for language regarding termination fees.

Loan Availability and Fees

The NEA Direct Invest allows loans, but charges an arm and a leg. You will pay a $100 setup fee and $50 per year for your loan.

The Lincoln program charges $60 to setup a loan and a $60 annual fee to maintain it.

PlanMember is silent on loans, which doesn’t mean they don’t offer or charge, just that it’s not currently disclosed on 403bCompare.

Conclusion

I hate writing blog posts like this. The fact that teachers have to do so much work to find a reasonably cost retirement plan is ridiculous. The fact that the National Education Association continues to offer their own employees a Vanguard retirement plan while promoting high-cost, low-quality products to their members is infuriating. My wife is a member of the NEA and we are both supporters of our local, state and yes, even the national (NEA) union. We don’t believe unions are perfect, but in many respects they work hard to protect teacher’s rights. Why they have chosen to do the opposite in this case is hard to say, but we hope to change their mind.

If you don’t have good 403(b) options in your school district, work as a 403(b) advocate to get better options for you and your colleagues. In the meantime, maybe one of the above programs will provide a bridge to when that day comes.

CARES Act: 403(b)/457(b) Escape Hatch - A Potential $500K Fee Savings Strategy

An Escape Hatch From Your Costly 403(b) or 457(b)

The Covid-19 pandemic has created an opportunity for teachers (and school employees) to potentially lower the costs in their 403(b) and 457(b) by significant margins, this escape hatch will only work in 2020. While we welcome the opportunity, we wish it didn’t take a pandemic and we would trade this opportunity in a split-second to have not ever have heard the term coronavirus.

Coronavirus Related Distributions

What I’m referring to is a provision of the CARES Act that allows certain individuals who have been affected by COVID-19 to withdraw up to $100,000 from their IRA, 403(b), 457(b) or 401(k) without paying the normal 10% federal penalty if under the age of 59 1/2. In addition, there are no mandatory withholdings for defined contribution plans and the withdrawal can be paid back for up to three years with taxes being spread over three years.

The key to this strategy is that he distribution can be paid back to any “eligible retirement plan”, not just the account it came from.  An eligible retirement plan is defined in section 402(c)(8)(B) and includes 403(b), 401(k), 457(b) and IRAs.

The Significance to Teachers 

The effect of this new law is that in 2020 a teacher can make a qualified distribution from their high-cost 403(b) and then subsequently repay that distribution to a low-cost IRA, potentially savings hundreds of thousands of dollars in fees over their lifetime. This provision represents a huge opportunity for teachers who have been stuck in expensive, poorly run 403(b) programs.

Example

A 45 year old implementing this strategy with a moderate risk portfolio could save over $500,000 in fees over their lifetime if they lived to 100, over $350,000 living to age 85. These are astounding figures (and they underestimate the potential fee savings).

Is It Really That Simple?

Yes and no. The strategy is completely legal and rather straight forward, but whether one qualifies for the distribution is the key, and as of early April, there is still some ambiguity. 

You must meet certain distribution qualifications set forth as follows:

1. You or your spouse must have been diagnosed with (COVID-19) by a test approved by the Centers for Disease Control and Prevention, or

2. You must have experienced adverse financial consequences as a result of: being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate). 

While the law allows you to self-certify to the above, you do need to fall into one of these categories and proof could be requested at a later date, presumably from the IRS. With that said, the term “adverse financial consequences” is a pretty broad term. The law anticipates that your financial condition might change, hence the ability to repay the distribution for up to three years. 

My biggest concern is how the term quarantine will be defined by the IRS. There has been no word from Treasury as to how they view the term and most laypeople would define it broadly. Given participants are allowed to self-certify, it seems reasonable that they can rely on a layperson’s understanding of quarantine. Most people consider being required to “shelter in place” or “shelter at home” to effectively be a quarantine even though it might not meet the technical definition (of which there is none yet in regards to this law).

Questions Remain

The question remains what the penalty would be for taking a distribution that is later deemed not qualified. Would the penalty only apply for monies NOT returned to an eligible retirement plan? If yes, there is no risk, but we don’t yet know the answer to this question. To be safe, if you decide to pursue this strategy, you need to actually meet the distribution qualifications and be able to prove it.

Given that the government doesn’t lose a penny of tax revenue in this transaction even if one in retrospect doesn’t qualify, it would seem odd to me that the IRS would crack down on people using this strategy. However, I cannot predict how the IRS will operate a year from now and you should seek the advice of your CPA or tax preparer.

Amendments Not Automatic

It turns out that COVID-19 related distributions are an optional plan feature, meaning your employer does not have to adopt them, however the plan doesn’t need to immediately amend their plan document, according to employee benefits legal firm Holland and Knight:

“Changes can be implemented and become effective immediately, but will not need to be adopted as an amendment to the applicable plan document until on or before the last day of the first plan year that begins on or after Jan. 1, 2022. Governmental plans have an additional two years to adopt amendments.”

Your school employer has until 2024 to amend their documents. A number of compliance administrators have already pushed out these amendments via “negative consent”, meaning they will be automatically adopted unless the employer objects. While a few have objected, the vast majority seem to be allowing such amendments.

How To Escape From Your Bad 403(b)

With the technicals out of the way, let’s now dig into how to trigger your escape hatch.

This will require paperwork, some of which might not yet be available, though my anecdotal research is showing it should be ready with most vendors now or very soon. 

You will need a distribution form from your current vendor and a transaction request form from your compliance administrator. You will be requesting a “coronavirus-related distribution”. This is NOT a hardship withdrawal, it’s very important that this is labeled as a “coronavirus-related distribution.”

You will submit the transaction request form and the distribution form to your compliance administrator who will approve and send on to your current 403(b) or 457(b) vendor. The vendor should process and send you a check for up to $100,000 which you will deposit to your bank account, not another retirement plan. Remember, this money is a distribution related to experiences of adverse financial consequence, if you quickly deposit the money to another retirement account it’s an indication you didn’t need the money in the first place.

Once you have determined that the money will not be needed and you feel safe to deposit that money back into a retirement plan, you will need to open an IRA at your favorite mutual fund or brokerage company. Once this account is opened you will “repay” the distribution to that account (technically it will be coded as a trustee-to-trustee transfer). 

There you have it, up to $100,000 per individual rescued from a high-cost 403(b) or 457(b).

Items to Consider

This is a taxable distribution. While you have the ability to repay this money back to an eligible retirement plan within three years, you must actually do so in order to avoid paying the taxes owed. If you do so in 2020, you will have no tax issues. If you wait till 2021 or later, you will have to pay taxes over the tax years 2020, 2021 and 2022 unless you elect to pay it all in 2020.

You will be out of the market for at least a week, potentially longer. The 403(b) world is a mess. Transactions in good times take weeks, sometimes months to occur and with the ongoing volatility in the stock market you could be out of it for several weeks and miss out on gains (of course the opposite is true). This needs to be taken very seriously.

Be careful what you are giving up. Just because you CAN take money out of your retirement plan, doesn’t mean you should. Some annuity contracts are worth keeping. These are generally the ones with good minimum guarantees and where the insurance company is strong.

You will be facing surrender charges, in some cases large ones. These surrender charges must be weighed against the benefits. Generally, it makes sense to pay surrender charges when taking money out of variable annuity products (though you should understand any guarantees that might be available to you before doing so) and it usually makes sense as well with indexed annuities, but make sure you do the proper analysis.

You might not need to use this escape hatch. You already have the ability to “exchange” one 403(b) for another 403(b) within your school district’s plan. Research if there is another vendor available that is low-cost and high quality. We like Vanguard, Fidelity, CalSTRS Pension2, Aspire and a few others. Post your vendor list to the discussion board at 403bWise or on the Facebook group.

As far as I can tell, you can only take up to $100,000 for a Coronavirus related distribution once, even if repaid (if anyone has contra opinion and a cite, please provide). This means that if you take the distribution and repay it later using the above strategy and then have a need, you won't be eligible again (though you could potentially take a loan if you have assets still in the DC Plan).

Potential For Abuse

This is already being used by unscrupulous indexed annuity insurance agents. Teachers have already reached out to Dan Otter and myself with e-mails showing agents attempting to use the above provision to sell high-cost, toxic products, please send any e-mails or advertisements that you see to us and also warm your colleagues.

Scott Dauenhauer, CFP, MPAS, AIF

402(c)(8)(B) - Eligible Retirement Plan

(B) Eligible retirement plan The term “eligible retirement plan” means—

(i) an individual retirement account described in section 408(a),

(ii) an individual retirement annuity described in section 408(b) (other than an endowment contract),

(iii) a qualified trust,

(iv) an annuity plan described in section 403(a),

(v) an eligible deferred compensation plan described in section 457(b) which is maintained by an eligible employer described in section 457(e)(1)(A), and

(vi) an annuity contract described in section 403(b).

If any portion of an eligible rollover distribution is attributable to payments or distributions from a designated Roth account (as defined in section 402A), an eligible retirement plan with respect to such portion shall include only another designated Roth account and a Roth IRA.

Blacklisted: How The NTSA Stifles Dissent

Gaylord Rockies - NTSA Summit Conference Location

About a month ago I signed up to go to the NTSA (National Tax-Deferred Savings Association) Summit in Denver, Colorado, it starts this weekend. Yesterday, I received the following e-mail from Brent Neese, the Executive Director of the NTSA:

As you can imagine, I was shocked.

Yes, I’ve been critical of the NTSA for years (for good reason, see links below), but I’ve attended two NTSA conferences in the past with no issues and have successfully navigated dozens of conferences over the 20+ years I’ve been in the business. In fact, many of the conferences I attend, I am one of the speakers (most recently at one put on my the Securities and Exchange Commission - RISE 2.0). My intentions at this conference were no different than at others: listen, learn, network and report. 

So why am I suddenly a threat to the Leadership at the NTSA? I’d like this explained, so far I've received no explanation.

At no time have I made “unfair or biased mischaracterizations of the Association (or) their members”. I’ve made critiques based on solid evidence, usually in relation to research the organization puts out that is not based in reality. 

The real issue here is that the NTSA doesn’t want my voice heard. Anyone who is outspoken has to be marginalized and cast out. Worse, the organization won’t even engage in a dialogue. Both the current Executive Director and the incoming President have been asked to come onto the Teach and Retire Rich podcast to point out anything that I’ve said that they feel is wrong. The requests are met with silence. 

An organization that is under the American Retirement Association should encourage outside thinkers, not stifle their voice.

Contrary to this Executive Directors e-mail, many members of the NTSA were perfectly fine with me attending, in fact they were shocked when they learned that I had been blacklisted.

Keeping me out of the conference leads me to believe there are things that might be said out loud that they’d rather the public not hear. This should disturb every member of the American Retirement Association. 

What is the NTSA attempting to hide?

I’ve spent the past 20+ years fighting for better retirement plans for teachers and for a fiduciary duty in 403(b) plans. I won’t stop because a lobbying group decides my voice shouldn’t be heard. 

The more likely explanation is that this is retaliation. I've been very critical of their largest sponsor - Security Benefit, the company that runs the NEA 403(b) products (they are NOT good products in my opinion). It's retaliation for appearing and speaking at the SEC RISE 2.0 conference. It's retaliation for being quoted in New York Times and Wall Street Journal articles that are critical of government 403(b) plans. This is my opinion, based on how I've been treated, perhaps I'm wrong.

The offer still stands though. If anyone at the NTSA has the guts to come on The Teach and Retire Rich podcast, we are ready and waiting - in fact, we suddenly have some time available starting Saturday.

Scott Dauenhauer, CFP, MPAS, AIF

Below are all the posts over the years I've made about the NTSA. You'll notice I don't use ad hominem - each post attacks THE ISSUE, not the people.

If there are any Statistics professors out there who agree with the NTSA and disagree with me in regards to The Swimming Pool Dilemma post, I'd be interested in why.

NTSA and the Swimming Pool Dilemma

Opinion: Why I'm Skeptical On The NTSA's Fiduciary Press Release

Orwellian NTSA Testimony from 2013

NTSA Supports Extension of Fiduciary Standard to Governmental 403(b) Plans

TRR Podcast #26: How @NTSA403B + @NEAToday make saving in #403b hard

NTSA Continues Shameful Campaign Against California Public Employees

American Retirement Association Opposed CA Auto-Enroll For Public Employees

Debunked ASPPA Study Used To Push Industry Agenda in Michigan

NTSA Attack on Ohio Bill Follow Up

NTSA Attacks 403(b) Bill In Ohio In Bizarre E-Mail Missive

Top 403(b) Providers In Major School District Still Have 18% Surrender Charge

NTSAA Changes Name to NTSA

Farewell, About Time and WTF?

NTSAA Resorts to Auto-Enroll to Boost Membership

ASPPA/NTSSA “Study” Rebutted With Own Example – Claims Defamation

Is ASPPA Really Interested in Disclosure? Here is Their Chance To Prove It

My Challenge to ASPPA’s Brian Graff (and it’s not “silly”)

ASPPA/NTSSA Releases The Hounds, Resorts to Personal Attacks

ASPPA 403(b) Research Falls Flat

Borzi & Graff – Two Different Views on “Choice”

NTSAA/ASPPA False “Choice”, Censorship & Graff Radio Silence

5 Questions Brian Graff & ASPPA/NTSAA Should Answer Publicly

The Perfect Storm - School Districts Beware

Attn School Employers: A Simple Change That Has Profound Affects

NTSA, AXA and VALIC Team Up To Mislead CT ASBO Leaders