Showing posts with label 403(b). Show all posts
Showing posts with label 403(b). Show all posts

Wednesday, May 20, 2020

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.


Wednesday, January 15, 2020

A “Miner” Change to the Government 457(b) May Make a Major Difference To Teachers


The one constant in the defined contribution world is change. For once, Congress may have made a change that could unintentionally alter the course of teacher supplemental retirement plans.

Up until the end of 2019, there was one big difference between the 403(b) and the 457(b) that tended to favor contributing to a 403(b) over a 457(b). Thanks to a law passed at the end of 2019, that major difference is now gone and contributing to a 457(b) before a 403(b) could make more sense. In fact, it could completely change the defined contribution plan landscape for public school employees going forward.

A 457(b) is a little known plan that is similar to the 403(b) and generally the primary defined contribution option offered to state and municipal employees. The 457(b) has been available to teachers as well, but has largely been ignored in favor of the 403(b). Both plans have similar contribution limits and the ability to contribute on a pre-tax and Roth basis. The one major difference was that money contributed to a 457(b) is never subject to a 10% federal penalty if withdrawn prior to age 59 1/2 (with a few exceptions including the fact you must separate from service). A minor, but meaningful difference was that 457(b) money cannot be accessed prior to a teacher separating from service completely (meaning not just retirement, but also for subbing). 403(b) plans grant access to money without penalty at 59 1/2 regardless of employment status. This is a big advantage for teachers who plan on working past age 60. This access to money difference is what is changing and it’s due to a struggling coal miner pension fund.



The United Mine Workers of America health and pension funds, like more than 1,400 similar one-industry plans, were underfunded. Then along came The American Miners Act of 2019. This new law will help stabilize the private multi-employer pension, but it could also inadvertently nudge teachers away from the 403(b) and towards the 457(b). Let me explain…

Congress requires expenditures for new laws to be “paid for” and one way of raising money for the coal miners pension fund was to accelerate taxes on 457(b) money. Included in the new act, is a provision that allows in-service 457(b) withdrawals at age 59 1/2 leveling the playing field with the 403(b) on access. 

Currently, the favored defined contribution plan for teachers is the 403(b). But because the K-12 403(b) is not subject to ERISA fiduciary oversight, most plans feature high-cost products sold by high-commission sales agents. The New York Times and The Wall Street Journal have documented these issues. My pod partner and owner of 403bwise.org, Dan Otter, touched on the ERISA issue in a recent blog post.

By design, the 457(b) requires more fiduciary oversight which has generally led to better, lower cost investment options. It now might make more sense for teachers to contribute to the 457(b) before contributing to a 403(b). Teachers are allowed to contribute the maximum permittable to both plans. I still love the 403(b) and will continue to advocate for better 403(b) plans, but it might be time for employers (and employees) to begin favoring the 457(b) over the 403(b).






The biggest advantage of the 403(b):         Ability for ER contributions*
The biggest disadvantage of 403(b): Embedded multi-vendor system, no fiduciary

The biggest advantage of the 457(b):         No 10% penalty, ever
The biggest disadvantage of 457(b): Odd Salary Reduction rule (month prior)


The agent in the lobby or lunch room isn’t going to tell you about the 457(b) because they normally don’t get paid to do so. They might even actively try to get you to invest in the 403(b) over the 457(b).

There is one caveat, not all 457(b)s are worthy. You still need to do due diligence. In California there are two great state based 457(b) plans, CalSTRS Pension2 and CalPERS 457. Yet most school districts fail to offer either, opting instead to offer substantially lower quality 457(b) plans that pay revenue to their compliance administrator, insurance agents or both. Just like with the K-12 403(b), teachers may have to lobby their school district to get a better plan. 

*Technically 457(b) can have employer contributions, but they count toward the employee contribution limit. This can be overcome by adding a 401(a) plan.


Miners Act of 2019

With help and edited by Dan Otter of www.403bwise.org

Sunday, September 08, 2019

The Purrrfect Bark Annuity - Coming Soon

I'm pretty tough on the insurance industry, this is no secret. But I've been working behind the scenes with GTTD Life and Annuity to bring a new kind of annuity to the marketplace, a truly unique product never before seen.

I'm super excited about how this one product could dramatically change the lives of my clients and hundreds of thousands of teachers across the nation.

I call it, the Purrrfect Bark Indexed Annuity.

I know what you are thinking, how could I be pushing an indexed annuity? I finally found something I can get behind.

The key to greatness with this product lies in a special backtesting procedure I use called #datamining. It's a sophisticated machine learning program that searches for hidden patterns in data that have yet to be used to create indexes (from which one can create derivative products). As many of you know, backtesting always works as well in the past as it does in the future.

This data is then turned into an algorithm, actually two, which I named Feisty Feline and Careless Canine (for reasons that will soon become evident). The proprietary algorithm focuses on various ownership aspects of American households and the differences between cat owner and dog owner households. We are naming the index created from this data The Purrrfect Bark Index and from this index we create The Purrrfect Bark Indexed Annuity (PBIA).

The PBIA has the following features:

Spreads:     None

Caps:          None

Participation Rate: 500% of the growth of adoptions from shelters each year*

Surrender period: Variable based on the inverse average life expectancy of an index of shelter dogs****

Surrender charge: We want to disclose this, but feel it best not to overwhelm you

Guaranteed Minimum Return: 0% on 100% of premium

Commissions:  None of your god damned business, the company pays us, so there!

Way, it gets better. We are pleased to announce there is NO Barkit Value Adjustment (you may know it as the Market Value Adjustment)!

Purrrfect Riders Available:

That's A Good Boy - an optional benefit that provides for the long-term care of your pet should you pass away unexpectedly

9 Lives - this optional living benefit guarantees that your annuity will grow 9% annually for 9 years as long as you take the benefit as an income stream over 99 years**

We are confident that anyone who purchases this unique product will reap massive returns on investment. Our backtesting shows that there is no hotter index in the market than our Purrrfect Bark index.

Not a dog or a cat person? Doesn't matter, this is about more than dogs and cats, it's about earning gigantic rates of return while taking virtually no risk***. There are a lot of indexes you can use with your annuity, but none can compare to our index. Wall Street and major insurance companies are creating new indexes everyday based on absolutely bizarre ideas, we are grounding ours in something everyone can relate to, dogs and cats.


At this point you are either super excited about this product or you've figured out this is a parody. I have recently received numerous advertisements in my e-mail inbox for indexed annuities based on new and bizarre indexes. Indexes that were created just for the insurance company and for indexes that literally had fees deducted from the return so the insurance company products could appear to pay more upside than they actually do.

The absurdity of these new indexes and the failure of the insurance industry to police itself combined with the utter failure of insurance regulators when it comes to indexed products prompted me to write the above post. Don't believe me, here are a few examples of the shit that hits my inbox.








It's far past time to start regulating insurance companies and the products they market better. We are approaching absurdity. Can the average person even decipher the above two ads? How about the average agent?

The purpose of many indexed annuities today is to obfuscate, to say it's gone to the dogs would be impugning the integrity of every "good boy" out there. There is not a pooper scooper big enough to shovel the shit indexed annuity companies are pushing these days.

Scott Dauenhauer, CFP, MPAS


Are you 403(b) Wise? 403bwise.org is the place on the internet to learn, advocate and build community. Join the 403bwise Facebook Group!


*If growth in shelter adoptions is negative, the participation rate is zero.
**Income stream is non-transferrable, even at death. 
***You are taking credit risk and should take into account the rating of the insurance company. 
****We want shelter animals adopted and living long lives, so the more you adopt and keep your pet healthy, the faster your surrender charges go away. 

GTTD Life and Annuity - Gone To The Dogs Life and Annuity is Trademarked (it's not)!

Friday, September 06, 2019

Don't Fall For This 403(b) "Match" Scam

Several private universities are being sued for overcharging participants, the companies offered were low-cost providers like TIAA, Fidelity and Vanguard...yet they are still being sued.

Meanwhile, in the public K-12 market we have companies like the one featured in the ad to the left literally lying to participants and potential participants about being eligible for an employer match. They represent companies like Midland National and Life of the Southwest, companies that are not in participants best interest.

I feel like I'm in the Twilight Zone. They don't call the public K-12 market the Wild West for nothing (I wrote a book for advisors titled "Wild West: Providing Fiduciary Advice to Public School Employees").


If you are a teacher and you receive the e-mail featured above, would you not think that your school district is offering a match of 5% if you begin contributing to your employer's 403(b)? I know that's how I would read it if I weren't in the financial services business.

Lucky for you, I am in the biz and can help you decipher this scam.

First, it's extremely unlikely the school district is offering any match and it's also unlikely they have endorsed or authorized the company featured to send the e-mail (if they did, they are opening themselves to significant liability). What is really going on?

It's actually pretty simple, this is an insurance agent using (in my opinion) underhanded and dishonest methods to lure unsuspecting teachers into buying high commission, retail annuity products that are likely better for the agent selling them than they are for the actual purchaser.

The participant doesn't actually get a "match", instead they get a "bonus" paid by the insurance company for every dollar placed in the annuity product. This "bonus" doesn't come for free, you pay for it in one way or another. One way a participant might pay for the bonus is through a longer surrender period on contributions, many annuity companies will add five years to the policy's surrender period and increase the surrender charge. This allows the annuity company to keep your money longer and make up for paying the bonus by underpaying interest for an additional number of years. Another way of paying for the cost of the bonus is to pull the strings of the policy to manipulate the rate paid so that it is lower than a comparable policy.

There is no free lunch, an annuity company is NOT going to give you free money. Every dollar they "give" you will be taken away in some form or fashion.

If you receive an advertisement similar to the one above you should ignore it. Better yet forward it to the state insurance commission.

Scott Dauenhauer, CFP, MPAS, AIF


Hat Tip to Don St. Clair for sending me the e-mail.
Are you 403(b) Wise? 403bwise.org is the place on the internet to learn, advocate and build community.

Attn School Employers: Another Simple Retirement Hack

In my last post I explained how moving from dollar based salary reduction agreements (SRAs) to percentage based ones can increase participant retirement accounts. There are a number of small things that employers can do to increase the amount of money being contributed or the number of participants contributing. While a single vendor relationship combined with auto-enroll and auto-escalate would be the best route, this isn't the reality in many 403(b) plans, so coming up with simple ways to increase enrollment or contribution levels is important.


Recently, a client of mine embarked on a campaign to increase the amount of contributions from existing participants. The employers they worked with still had dollar based SRAs, but they worked with the compliance administrator to arrange for the existing participants to increase contributions without filling out a new SRA. Essentially they just needed to respond to a letter they were sent asking if they wanted to increase. It was a simple letter and had a simple way to respond and led to a $18,000 monthly increase in contributions after just one campaign, an average of $250 per person, per month.

It was just a simple nudge, but had a large impact, over $200,000 in additional contributions will be made to participant accounts each year thanks to an easy and cheap mailing.

What ideas do you have to increase participation and or contributions? Send them my way and I'll post.

Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? 403bwise.org is the place on the internet to learn, advocate and build community.


Orwellian NTSA Testimony From 2013

In 2013 the state of Pennsylvania was considering some changes to their retirement system which evidently called for a 401(a) plan for employer contributions. The NTSA wasn't happy about this because the money wouldn't be run through their vendors and agents, meaning no fees and commissions. The NTSA decided to lobby the legislator to get them to make changes so that they could get their cut. The testimony was rife with Orwellian doublespeak(1).

Link to full testimony.

Very early on, NTSA spokesperson Chris DeGrassi attempts to equate advisors and salespeople without ever establishing who he represents (mostly salespeople) and why the difference is important. DeGrassi says:

"Foremost among design considerations, the 403(b) plan must allow public school employees to work with a local advisor of their choice and to have the ability to choose the investment options they want"

Disregarding the ridiculous notion that working with a local advisor should be the foremost design consideration, DeGrassi emphasizes that public school employees should get to choose which advisors to work with, only he doesn't define the term advisor. 

In the NTSA world, anyone in the financial services industry is referred to as an advisor, even people who are not licensed to give advice (a large part of the NTSAs constituency). There is a big difference between someone who gives advice and someone who sells a product. A person who gives advice is subject to a fiduciary duty while people who sell products only need to ensure the product they sell is "suitable", a very big difference in duty to the end client. 

The NTSA is not advocating for fiduciary advice, in my opinion they use the term "local advisor" to gain credibility, gently misleading the public that they support a fiduciary duty. In fact, a significant part of their base is not subject to a fiduciary duty and they actively fight against such duty. I'm all for allowing public school employees to choose their own advisor, but that advisor should actually be licensed to give advice and be subject to a fiduciary duty. I challenge the NTSA to more clarity on this issue.

DeGrassi goes on in his testimony to completely disregard the current work that has been done by behavioral finance professors. He says:

"Some will argue that the best way to design a defined contribution plan is a centralized plan with a limited number of choices. NTSAA has the data to demonstrate that for the public education employees, that's the worst idea."

It's not just "some", but the vast majority of retirement plan experts that believe a single vendor system is a better way to design a retirement plan. Not only do you gain economies of scale, you also greatly simplify everything for the employee and can implement new techniques that have been proven by behavioral finance to increase participation (auto-enroll, auto-escalate). I'm not clear what data the NTSA has that would contradict the vast research that has been done by academics like Richard Thaler, Daniel Kahneman and Shlomo Bernartzi. In fact, behavioral finance is missing in action in DeGrassi's testimony. 

Further evidence that the NTSA is disregarding proven behavioral finance notions is the following statement:

"The role of the advisor in convincing someone to start saving is just as important as the advice on where to invest the savings. And, you know what, that advisor needs to get paid. In most cases, the advisor is paid from investment fees, which - yes - will be consequently higher than investment fees on products without a personal advisor."
You'll notice that DeGrassi ignores the ideas of auto-enroll, auto-escalate and qualified default investment alternatives, all important design features that have been shown to work wonders in increasing participation and creating better retirement outcomes. He fails to mention that most of the time their is no "advisor" getting paid, it's a salesperson selling products and the compensation is far to often commissions, not fees as he states. DeGrassi provides no evidence for his statement that "in most cases, the advisor is paid from investment fees", in reality the vast majority of compensation is paid as a commission, not a fee and it's earned by a salesperson, not an advisor.

You'll notice that plan design is not the only straw man DeGrassi builds, the next quote is highly misleading in my opinion:

"You will hear from some that the most important thing is to have the lowest-cost retirement options. The facts suggest otherwise. Research from the ASPPA Pension Education and Research Foundation shows that in the State of Iowa school district participation dropped by up to 50% when they went from multiple 403(b) plan options to lower-cost options without personal advisors."

While I'm sure there are some people that think the only thing that matters is fees, this does not represent a majority opinion. Unless we are talking about investment options (where most research does show that if you select solely on fees you have a higher likelihood of outperforming), most retirement design experts and consultants only advocate for lowest-cost when we talk about investment options and share classes, not in regards to plan administration. It costs money to run a plan and costs should be kept as low as possible while still meeting the needs of the plan and participants. 

As for the ASPPA research referred to, I've thoroughly debunked it here, here, and here.

DeGrassi then attacks Vanguard using a strange and misleading analogy:

"You wouldn't want to go to a mall that only had a thrift store."

Putting aside the fact that if you went to a mall and there was only a single thrift store, you wouldn't be at a mall, the inference is that buying low-cost investment options is the equivalent of buying second hand and likely inferior investments. In fact, there is significant evidence to the contrary, lower-cost investment routinely outperform higher cost investment options. In investing you don't get what you pay for. The higher the cost of an investment option, the higher the likelihood it will underperform (don't take my word for it, ask Morningstar). DeGrassi is comparing Vanguard to the Goodwill when in fact from a performance perspective, Vanguard is more similar to Tesla, but without the high costs. The analogy is so ridiculous that it's insulting to the people he is presenting too. What's wrong with a thrift store anyway?

Next, DeGrassi attempts to show that the NTSA is gung ho for disclosure:

"That is why we partnered with the NEA to create a model disclosure form for 403(b) plan services and fees so that public school employees can easily make apples to apples comparisons of their retirement savings options."

I've looked at their "model disclosure" and it is not simple and does not allow for a comparison (how can you compare a fixed annuity to mutual fund in a simple manner?) As for partnering with the NEA, this isn't exactly something to brag about as the NEA sells a high cost product. However, in an ironic twist, the NEA signed on to support and endorse the Department of Labor's Conflict of Interest rule (a fiduciary standard). The NTSA was less than supportive of the DOL's rule.

Now it starts to get bizarre. For two pages the NTSA has argued that there should not be competitive bidding for the investment options, everyone should have as many choices as possible. They support conflicted, commission based advice with no mention of any fiduciary standards, but then they state:

"Therefore we urge you to amend HB1352 to require that the proposed 403(b) plan be administered by a third party administrator that is selected through a competitive proposal process"

And,

"We also recommend that the TPA be completely independent from any organization that provides investment products to the 403(b) plan. This will ensure that there are no conflicts of interest between the organization that administers the 403(b) plan and the one that offers investment products to the plan's participants and beneficiaries." 
"The cost of the TPA is paid for by the 403(b) plan vendors" (....uh, that's a conflict.)

Is it not ironic that the NTSA advocates for no conflicts of interest with the third party administrator (TPA) but doesn't even mention conflicts for the "advisors" that are so important to the design? This is a bridge to far. It should be noted the contradiction in their recommendation. They advocate for a TPA that has no conflicts of interests, but then want that TPA to be paid by the 403(b) product vendors (falsely referred to as "investment products") that they will regulate, isn't that a conflict?

DeGrassi then ends with a truly Orwellian newspeak sentence:

"Ultimately, I am sure we would agree that the goal should be to provide Pennsylvania Public school employees with a retirement plan that is serviced by people looking out for the best interests of the participants and beneficiaries...and, not their own best interests."

The NTSA is not advocating for advisors who have a fiduciary duty at all times, but that's what they want you to believe with this sentence. Many of the vendors have no fiduciary duty and will not take on a fiduciary duty.

This type of testimony from an industry lobbying group should be balanced by retirement experts or not allowed in the first place without better disclosure. Pretending to be advocating for participants best interest while not requiring actual advisors who are fiduciaries fits the definition of doublethink.

I don't fault the NTSA for lobbying on behalf of their membership, that's their job, but when they soak their testimony in language that in my opinion is designed to mislead, I must take exception.

Scott Dauenhauer, CFP, MPAS, AIF

(1) yes, I'm aware that doublespeak was not a word Orwell used. It's a combination of doublethink and newspeak and means "saying on thing and meaning another, usually its opposite" (www.orwelltoday.com)
Are you 403(b) Wise? 403bwise.org is the place on the internet to learn, advocate and build community.

Will Consider Great Sales People & Recent College Grads

When I think of the qualities of a good financial advisor the first two things that come to my mind are that they should be great sales people and youthful…said no serious person ever. Yet, in a recent advertisement for a Financial Advisor for a Texas based 403(b) and 457(b) program, Voya Financial Advisors is excited to proclaim that they “Will consider great sales people and recent college grads!”. Yes, they used an exclamation point.

Here is the ad:


This position puts the winning candidate into a situation where she/he will be educating higher education professors and employees on their 403(b) and 457(b) plans. They'll also be "counseling" them on retirement and investments. You'll notice that the skills that a qualified candidate are expected to have actually have nothing to do with the skills that a good financial advisor should have and their is no real competency requirements. While they accept recent college grads, no degree seems to be required. No Certified Financial Planner designation is required, in fact no real background in financial services is needed. I'm unclear how having "access to the Voya brand" qualifies as a skill (if it does, then only existing Voya people could apply...).

If you were to make a list of qualities and competencies a financial advisor should have before working one-on-one with participants, would any of the above make your list?

I'm a Certified Financial Planner, I have a Masters Degree in Financial Planning and I've been working in financial services for over 20 years. I'm a Financial Advisor. Does it make sense to you that the person who gets hired for the above position has the same title? 

Something is wrong with this picture folks.

We should expect higher qualifications for people who are dealing with our money.

Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? 403bwise.org is the place on the internet to learn, advocate and build community.


Managed Accounts - Why The Lack of Competition?

I continue to do consulting work for non-ERISA government plans (403(b) and 457(b)) and one area of these plans that continues to bother me is Managed Accounts. Managed Accounts are also available and on the rise in 401(k) plans and enjoy Qualified Default Investment Alternative status with the Department of Labor. Yet, there is very little competition in this field.

The GAO conducted a study which was released in 2014 (find it here) which stated that only eight providers accounted for 95% of the managed account business. My experience is that Financial Engines and Morningstar/Ibbotson are the dominant providers and according to a Pensions and Investment article  they are. Financial Engines accounts for nearly 60% of all managed accounts with Morningstar at close to 22%. Two providers make up 82% of the market. 

There are over 9,000 mutual funds that we could invest in here in the United States, there are hundreds of thousands of financial advisors and depending on with whom you talk to, nearly 16,000 Registered Investment Advisors (of which managed account providers fall). Could you imagine if just two RIAs held 80% of the assets? What if just two mutual fund companies held 80% of the assets? If Vanguard was one...perhaps I'd be ok with that!

Financial Engines is the dominant player, partially because they had the first mover advantage, however one has to wonder whether that is the primary reason today. Recently, Voya Financial was sued by a participant in the Nestle 401(k) plan alleging that:

Voya devised an arrangement with Financial Engines in which it collected excessive fees for investment-advice services, and concealed “the true nature of the arrangement.”
Has Financial Engines created a situation where record-keepers have no incentive to open up their system to other managed account providers? Perhaps this lawsuit will shed some light on how record-keepers work with managed account providers.

Managed accounts, a service that is simply money management (with options for additional planning) is not treated like other money management services. Most defined contribution plans these days are open architecture, that is, they offer just about any mutual fund you could want. This allows plan fiduciaries to properly monitor their lineups and make necessary changes with little conflicts of interest. The same cannot be said for managed accounts. 

Managed accounts are incredibly difficult to monitor and if you want to replace the provider there is no way to conduct an open request for proposal process as the record-keeper determines who can be on their platform and most allow only one or just a handful. Managed accounts represent a revenue stream to record-keepers which is a major conflict of interest. 

Managed accounts need to evolve like mutual funds, they should be interchangeable and have a process to monitor that is transparent and robust. Which brings me to my next point.

There is no Morningstar for managed accounts.

Morningstar built an incredible business redistributing mutual fund company data in a manner that was useful. No such service exists for managed accounts and Morningstar is not in a position to do so given that they are one of the providers.

While managed account providers do more than just manage money, their primary role is to do just that. Yet, there are only two real options for the vast majority of DC plans to choose from? Something isn't right in this market. I've spent a lot of time analyzing these programs and the providers know they have the power to do whatever they want because there are no other options. But WHY are there no or few other options?

This question needs to be answered. Managed Accounts are not smart phones, there is no reason that two providers should be dominating this market.

For the record, I believe managed accounts can be a valuable service if done right, monitored properly and priced appropriately. I'm confident this can become a reality.

Scott Dauenhauer, CFP, MPAS, AIF
Are you 403(b) Wise? 403bwise.org is the place on the internet to learn, advocate and build community.

Think Your Retirement Plan Is Bad? Just Talk to a Teacher

"Schoolteachers and others who pursue careers of service in exchange for modest
paychecks get lightly regulated retirement plans that often charge excessive fees."

OCT. 21, 2016
Think Your Retirement Plan Is Bad? Just Talk to a Teacher

Excellent article and yours truly even has a few quotes!

Are you 403(b) Wise? 403bwise.org is the place on the internet to learn, advocate and build community.

Scott Dauenhauer, CFP, MPAS, AIF