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 The one major difference was that money contributed to a 457(b) is never subject to a 10% federal penalty if withdrawn prior to age 59 1/2 (with a few exceptions including the fact you must separate from service).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

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."

By TARA SIEGEL BERNARD

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

Attention California School Districts: You ARE Fiduciaries For Your 457(b) Plans

This isn't the first time I've written about this topic and it won't be the last...unfortunately. If you are a board member or a district administrator for a California public school, it's highly likely you are ignoring a significant responsibility and this leaves you open to lawsuits.

Despite what you've been told (in all likelihood by your compliance administrator) you ARE a fiduciary in regards to the 457(b) plan you offer your employees. You don't have to take my word for it, one of the nation's top ERISA attorneys made the case...back in 2006. Yes, you were warned over a decade ago.


It's been over a decade since Fred Reish co-authored  a white paper titled "Fiduciary Duties and Obligations in Administering 457(b) Plans under California Law" and almost nothing has changed in California public schools, in fact, in many instances it has gotten worse. The paper is embedded below.

I'm often tasked by new public education clients to perform due diligence on their available 457(b) options with their employer and in most cases i'm horrified by what I find, it's a wasteland. It's also very likely a violation of California law.

Before I go further, I urge you to goto www.457bwise.com to learn more about the unique defined contribution plan available in public schools, commonly referred to as a 457(b) or a Deferred Compensation plan.

I recently began reviewing the plan options at one of the largest school districts in the state and what I found was horrifying. It was a who's who of terrible investment options, none of which were vetted by the school district. Perhaps if the school district understood their responsibility, they'd do a better job. That's what this post is about.

In August 2006, the above mentioned white paper was released to "thunderous applause and its effect was immediate and far reaching, completely altering the landscape of school district retirement plans for decades to come" said no one. In reality, the paper had a small impact among a few consultants (myself included) and a few school districts, otherwise it went completely unnoticed.

I'm not going to summarize the paper for you, you can read it in the embed or download it yourself, but here is the major take away:

Under the Internal Revenue Code, 457(b) plans can be sponsored by governmental entities and by tax-exempt entities.2 ERISA provides a statutory exemption for government plans, including governmental 457(b) plans, from its fiduciary and prohibited transaction provisions.3 As a result, state law governs the fiduciary requirements for the operation and investment of 457(b) plans sponsored by governmental entities.

While ERISA does not regulate the conduct of fiduciaries of government plans, it is the most detailed, comprehensive, and developed body of law concerning the management of retirement plans. As a result, courts often look to ERISA authorities for guidance on fiduciary issues. Further, the California Constitution and Government Code place duties and obligations on fiduciaries (e.g., retirement boards) that are virtually identical, in both concept and wording, to those in ERISA. Thus, to the extent the state law is not well-developed or particularly informative, this White Paper discusses guidance under ERISA.

Subsections (a), (b) and (c) of Article XVI, §17 of the California Constitution contain the provisions governing the fiduciary duties for the administration of public pension and retirement systems.4 One obvious question is whether 457(b) plans are subject to these provisions. This is answered in Section 53609 of the Government Code, which provides that deferred compensation plans are “public pension or retirement funds” for purposes of Article XVI, §17 of the California Constitution. In particular, Section 53609 provides:

“Notwithstanding the provisions of this chapter or any other provisions of this code, funds held by a local agency pursuant to a written agreement between the agency and employees of the agency to defer a portion of the compensation otherwise receivable by the agency's employees and pursuant to a plan for such deferral as adopted by the governing body of the agency, may be invested in the types of investments set forth in Sections 53601 and 53602 of this code, and may additionally be invested in corporate stocks, bonds, and securities, mutual funds, savings and loan accounts, credit union accounts, life insurance policies, annuities, mortgages, deeds of trust, or other security interests in real or personal property. Nothing herein shall be construed to permit any type of investment prohibited by the Constitution. Deferred compensation funds are public pension or retirement funds for the purposes of Section 17 of Article XVI of the Constitution.” [Emphasis added.]

Thus, if a plan includes deferred compensation funds, section 53609 would apply the requirements of Article XVI, §17 to the fiduciaries of the plan. Since 457(b) plans are deferred compensation plans for state and local governments, 457(b) plans satisfy the definition of public pension and retirement funds for purposes of the California Constitution. This means that the retirement boards, and their members, who are responsible for 457(b) plans (for ease of reference, we refer to retirement boards, committees or other responsible fiduciaries of 457(b) plans as the “board”) are fiduciaries subject to the duties and obligations under Article XVI, §17. 

There you have it, don't take my word for it, take Fred Reish's word. I realize the above might sound like another language, but the bottomline is that you ARE a fiduciary, whether you like it or not and you better start acting like one before an employee realizes that they are being ripped off (and trust me, they are being ripped off big time).

Please read the paper and learn what your duties are and then go and improve your plan. If you are looking for an example of how to run your plan, look no further than the Los Angeles Unified School District, you can view their plan and website here. If you are looking for an entity that you can trust to run your 457(b) in a fiduciary manner, the California State Teachers Retirement System can accomplish this for you here (full disclosure, I do consulting work for CalSTRS).

It's time to take this responsibility seriously for two reasons: one, it's the law and two (more importantly), it's the moral and ethical thing to do.

Feel free to e-mail me with any questions.

Scott Dauenhauer, CFP, MPAS, AIF

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

Reish White Paper by Scott Dauenhauer, CFP, MSFP, AIF on Scribd

403(b) Hack: Why You Might Want To Leave A Few Dollars In Your 403(b), Even If You're Retired And Don't Want It

When public school employees retire they should think twice before rolling their 403(b) money (or 457(b)) over to an IRA. I'm not talking about the hordes of insurance agents and brokers who are trying to sell you poorly structured products so they can take fancy trips, that's of course a good reason not to rollover, but there is another, potentially powerful reason why you should keep at least some money in a 403(b)/457(b) as long as you are retired.


When the financial crisis hit in 2008, interest rates were pretty high on mostly safe products, but that quickly changed as rates plummeted to nearly zero. Insurance companies who offered 3 and 4% guarantees were caught off guard and quickly shut down product lines and restricted new money. As the years went on, it became more difficult to find a product with a good rate and a high degree of safety. But there were still some products that didn't restrict new money and other companies that came out with new 403(b) products that had higher rates than similar IRA products, in some cases substantially higher. In other words, some 403(b) products offered higher rates than IRA products or had lower fees.

A client of mine had money in an IRA and we wanted to put some of it in a fixed account type product, but rates were terrible. The best we could find was 1.35%. I knew of a 403(b) with no surrender fees and a fixed account that was paying a net rate of 3.5% from a highly rated insurance company (yes, no commissions, no surrender fees, no surrender period), but my client was retired and if you're retired and you don't have an existing 403(b) you cannot open a new one. Then my client showed me an old policy that he had forgotten about. It was a 403(b) with a school district he had worked in years before (like 25 years earlier). It dawned on me, he was still a member of that school district's plan, the fact that he was retired had no bearing, he was still a participant because the vendor was still active and his policy meant he was part of the plan.

Since my client was a participant in the plan and that plan had the 403(b) option that paid the 3.5% rate, I opened a new 403(b) (remember, he is allowed to open it because he is still a participant in the plan due to him still holding that old 403(b)) and moved IRA money into it and started earning that higher rate.

My client earned in excess of 2% more than he could have gotten in an IRA because we didn't settle. We didn't require all his money be kept at one place for ease of accounting, it was a little more work on my part, but it was the right thing to do and made my client significantly more money. It's what a fiduciary does.

The moral here is that even if you find a great IRA to roll your money into, don't roll everything over. Leave some money in your 403(b) or your 457(b) just in case an option later comes along that can't be found anywhere else. Think of it almost as an insurance policy. Yes, it's a pain (another statement, another login an another RMD), but that pain just might pay off in the end like it did for my client.

Scott Dauenhauer, CFP, MPAS, AIF

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

That TIAA Loan Lawsuit & My Opinion

TIAA is being sued for a loan scheme that benefits TIAA, not participants and my opinion is that TIAA is in the wrong. This doesn't mean they broke the law, but they lose the moral and ethical credibility they had accumulated by using a technique that the rest of the 403(b) industry uses, but most 401(k) plans did away with long ago.

Here is a link to the lawsuit.

According to Plansponsor:

"A new lawsuit argues the practices used by the Teachers Investment and Annuity Association (TIAA) to credit portions of interest payments made by participants on loans taken from their own retirement accounts back to the firm—rather than to the borrowing participant—violate the Employee Retirement Income Security Act (ERISA)."

I have first hand experience with this particular loan scheme. A client of mine was also taken advantage of by it several years back, though I did not learn of it until recently.


The Basics 

In most 401(k) plans when a loan is taken, the money for the loan comes directly from the balance of the participant who is taking the loan. In effect, they are borrowing the money from themselves. They pay interest, but that interest is paid back to their 401(k) account (it's this interest that is double taxed when withdrawn, not the entire loan payment, as is commonly misreported), so they are paying interest to themselves. The interest rate doesn't really matter because it's all going back to the participant anyway.

TIAA's loan process works differently (or at least it did, they've made changes to some, but apparently not all plans). When a participant took a loan from my client's 403(b) program they were not taking a loan from themselves, instead they were taking a loan from TIAA (technically TIAA's General Account). TIAA would secure this loan by liquidating assets in the 403(b) and placing them into an escrow account that is invested in an interest bearing annuity (the TIAA Traditional normally). The amount of the escrow would be 110% of the loan amount and as the loan is paid back, the money in the escrow account is released back to the participant's account to be invested (though my experience is the money is deposited to the CREF Money Market account where it earned very little interest). While the mechanics might look the same, there is a subtle difference.

TIAA Gets A Cut Of Your Loan Repayments 

The TIAA loan process is designed so that they earn a portion of the interest that you pay. TIAA loans you the money and might charge a rate of say 4.50% (the lawsuits cites several different rates from 4.17 - 4.42%) while placing your own money in an interest bearing account that might be paying 3%. The participant's net interest rate is then the difference between what is being paid in interest (3%) and what is being charged (4.50% for example) or 1.50%. In the lawsuit, TIAA was getting a spread above 1% for risk-free loans (remember, the participant over-collateralized the loan, so there is no possibility of default). In a normal 401(k) loan you might pay a higher interest rate, but at least you are paying that interest back to yourself, the net spread is 0%, but with TIAA it might 1% or more. This is in my opinion no different than stealing.

I was unaware that TIAA was doing this until TIAA failed to win a bid for a client of mine and had to transition the assets to a new provider, TIAA refused to move the loans due to the collateralized loan issue.

TIAA will likely fight this and claim it's a standard industry practice, this is no defense in my opinion and schemes like this should be illegal. There is no reason a recordkeeper should be earning money on plan loans other than the cost to actually process and monitor the loan (normally participants pay a loan origination fee).

I've looked up to TIAA over the years as one of the good companies in the industry and I still support the company in many ways. But this is one issue (there are more that I won't get into, but...Nuveen acquisition) where I stand against TIAA and call for them to do the right thing.

If you have TIAA as a recordkeeper you need to inquire as to how they handle loans and begin the process to change to the normal 401(k) style loans immediately.

Scott Dauenhauer, CFP, MPAS, AIF

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

Opinion: 403(b) Vendor Reps and The CFP Designation

The CFP is being used as bait.

Note to reader: I've chosen to redact the name of the company that I'm writing about for two reasons. The first is that this company has a history of threatening lawsuits against financial advisors who write about them negatively and second, I honestly don't believe this company stands alone, most of the commission-based vendors in the 403(b) space have similar or worse conflicts of interests that their CFPs will face.

Recently, a representative of an insurance company with a significant presence in the 403(b) market gave a presentation at my wife's school (she is a teacher at a middle school in Southern California). I asked her to record and send me the audio. When I received the audio and listened to it what struck me was not the typical methods used to get people to work with him, but that he touted one of his credentials.

The representative said that when it comes to a financial plan, "If you don't have one, I'm a Certified Financial Planner." Mind you, this visit was supposed to inform the teachers only about their 457(b) plan, but that's not what's bothering me today. The representative's statement came as a surprise to me because being a Certified Financial Planner (CFP) has specific requirements that working as an insurance agent of an insurance company or even working as a representative of a typical broker/dealer would make difficult if not impossible to fulfill. I thought to myself, this guy is holding himself out to these teachers as if he is in the same business that I am in, teachers won't be able to tell the difference. He's holding himself out to be a fiduciary. I don't see how that is possible.

Don't get me wrong, I think everyone who is in the financial planning business should be a CFP, and I commend the representative for attaining the designation. However, when your primary business is the sale of products, it's nearly impossible to put the best interest of the client ahead of your own, let alone that of your firm, yet that is what being a CFP entails (at least it will, starting in October of 2019).

My wife also sent me a flyer that was put out by the representative and while it listed his name and insurance license number (as well as another paragraph of disclosures) the CFP designation was nowhere to be found. This struck me as odd. The CFP is a real accomplishment, and it provides at least some credibility, why would he mention it out loud, but not in writing? I suspect the company he works for might not want it in writing.

Let's step back for a moment, I left something out.

The Certified Financial Planner designation is the premier financial planning designation in the industry, but, it's not the planning equivalent of the CPA or the CFA, at least not yet. Currently, the CFP designation does not have a strong fiduciary duty requirement. A fiduciary duty requires the advisor to place the client's interests ahead of themselves and their firm. This is one area where the CFP falls short of other professional designations, but this is changing starting in October of 2019 when the updates to the Standards of Conduct are scheduled to take effect.

In the new CFP Standards of Conduct, the first standard is a Fiduciary Duty (A.1). The language is pretty strong (stronger than the SEC Regulation Best Interest by far):

"At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client. The following duties must be fulfilled:


Duty of Loyalty. A CFP® professional must:

i. Place the interests of the client above the interests of the CFP® professional and the CFP® Professional's Firm;

ii. Avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the client, obtain the client's informed consent, and properly manage the conflict; and

iii. Act without regard to the financial or other interests of the CFP® professional, the CFP® Professional's Firm, or any individual or entity other than the client, which means that a CFP® professional acting under a Conflict of Interest continues to have a duty to act in the best interests of the client and place the client's interests above the CFP® professional's.

b. Duty of Care: A CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client's goals, risk tolerance, objectives, and financial and personal circumstances."

Here is a link to the full Standards: CFP Standards of Professional Conduct

The Duty of Loyalty within the CFP Standards of Conduct is quite strong and rather unambiguous. I suspect complying with this standard while working for a major 403(b) vendor is going to be extremely difficult, if not impossible.

I pulled up the SEC disclosure document for the company the representative speaking at my wife's school works to get an idea of what sort of conflicts he might encounter. What I found was shocking even to me, I see no possible way a person who works for this company could continue to hold themselves out as a CFP.

One reason I'm doubtful they won't be able to fulfill their fiduciary duty is due to the bait and switch system this particular (and I suspect many) 403(b) vendors have in place to fool you into believing you are receiving advice from a fiduciary. I've excerpted an incredible few paragraphs that discloses a considerable conflict of interest. It's the ultimate bait and switch:

"A client may enter into a financial planning engagement with (company name redacted) by signing a financial services client agreement and, in most cases, agreeing to pay a fee in exchange for those services. We offer both fee and non-fee financial planning programs, although in either case (company name redacted) and the Financial Professional generally will receive commissions in their insurance agent, broker-dealer and registered representative capacities if the client decides to purchase any products through the Financial Professional."

Here's where the bait and switch comes in:

"The financial plan or advice will not include investment advice, analysis or recommendations regarding specific securities, or investment or insurance products. Upon delivery of a financial plan or advice to a client, the client will review the plan or advice and provide acknowledgment of their receipt of said plan or advice. Acknowledgment of plan or advice delivery may be done by obtaining a signed delivery receipt or via an electronic acknowledgment. Acknowledgment of receipt will end the financial planning advisory relationship between the client and us.

However, because our Financial Professionals are also registered representatives of (company name redacted), a registered broker-dealer, and licensed insurance agents of (company name redacted), they are able to identify products and securities offered by (company name redacted), its affiliates and various carriers that may be suitable for implementing the plan or advice.

These product-specific implementation recommendations may be prepared in a separate written document, generally following plan delivery. Any document in which they may be set forth is not part of the plan or advice. (company name redacted) generally will receive commissions (or, in some cases, advisory fees) if the client decides to purchase any products through the Financial Professional, and the Financial Professional will receive a portion of any commissions received in his or her capacity as a registered representative of a broker-dealer or as an insurance agent. Clients have no obligation to purchase any products through (company name redacted), its affiliates or other carriers."

Allow me to translate.

First, you should know that insurance agents and registered representatives of broker/dealers owe no fiduciary duty to their client when acting in those capacities (this is not to say they won't, simply that they are held to a different standard). They are required by law to offer suitable recommendations, which allows them the flexibility to sell you almost anything. The products do not have to be in your interest, let alone your best interest. Yet, these individuals are allowed to call themselves "Advisors," "Financial Consultants," "Financial Planner" and all sorts of other professional sounding names.

Without getting technical, your financial planner should work as a fiduciary 100% of the time.

The "Advisor" in the above paragraphs is not a true advisor since they won't commit to acting in your interest at all times. What the company is attempting to disclose above is that when writing and delivering the financial plan they will act as a fiduciary. This is not the controversial part. You are likely paying them a fee for the plan, they are acting in a fiduciary capacity to deliver it. What you might not understand from the above disclosure is that after the plan is delivered, your "advisor" is no longer a fiduciary to you. It's quite clear when they state "Acknowledgement of receipt will end the financial planning advisory relationship between the client and us." The company means this quite literally, they now no longer are working in your best interest as a fiduciary. The next paragraph states "… our Financial Professionals…are able to identify products and securities offered by (company name redacted), its affiliates and various carriers that may be suitable for implementing the plan or advice." This is the point in the relationship where your advisor transforms into a salesperson of the companies product.

Don't believe me? Read the next paragraph of their ADV:

"These product-specific implementation recommendations may be prepared in a separate written document, generally following plan delivery. Any document in which they may be set forth is not part of the plan or advice. (company name redacted) generally will receive commissions (or, in some cases, advisory fees) if the client decides to purchase any products through the Financial Professional, and the Financial Professional will receive a portion of any commissions received in his or her capacity as a registered representative of a broker-dealer or as an insurance agent."

Recommendations for how to implement the plan ARE delivered at the same time as the plan, but they are NOT part of the plan ("any document in which they may be set forth is not part of the plan or advice"). They can't be; otherwise, they would be fiduciary in nature. The advisor is no longer acting in the capacity of an investment advisor, but as an insurance agent or registered representative (or both) of the company and is now selling you commission based products or fee-based products that have significant conflicts.

There is no possible way, in my opinion, a Certified Financial Planner can operate under such a regime come October 1, 2019.

While this company does say that you can continue on in an "advisory capacity" by being placed into one of their fee-based programs, the conflicts of interest involved in these fee-based programs are significant, and again, in my opinion, there is no way a CFP could operate in such an environment.

One disclosure, in particular, got my attention:

"(Company name redacted) and its Financial Professional may receive non-cash compensation from investment advisory asset management program sponsors. Such compensation may include such items as gifts of nominal value, an occasional dinner or ticket to a sporting event, or reimbursement in connection with educational meetings or marketing or advertising initiatives. Such sponsors may also pay for education or training events that may be attended by Financial Professional and (company name redacted) employees."

In other words, there are incentives in place to recommend one particular "asset management" program over another.

It gets worse. Check out the following provision:

"Financial Professional and their managers may receive higher levels of cash compensation or other incentives for selling products issued by (company name redacted) and/or its affiliates ("proprietary products") rather than products issued by third parties. Among other things, they may qualify for certain benefits, such as health and retirement benefits, based solely on sales of these proprietary products."

You read that right. It appears that health insurance could be subject to a proprietary sales requirement at this company. Since the disclosure doesn't go deeper into what this means, we can only infer that if an "advisor" doesn't sell enough proprietary products, they will have to pay for health insurance out of pocket. This is a very tough conflict to endure, an advisor shouldn't have to make this type of decision. In my opinion, a CFP designee cannot operate under the new Standards of Conduct while working in such an environment.

So what will CFP designee holders do? What will companies do? I've emailed the company that the representative works for to ask them what they will do, I've yet to receive a response. I can only see a few paths. The CFP designee resigns or stops holding themselves out as a CFP.

Why do I hold this view? I don't believe these companies have the foresight to create the room necessary for their representatives to be true fiduciaries. It conflicts with their business model. Let me give you an example. What follows is an excerpt from the CFP Code of Standards and Professional Conduct:

Sound and Objective Professional Judgement

"A CFP® professional must exercise professional judgment on behalf of the client that is not subordinated to the interest of the CFP® professional or others. A CFP® professional may not solicit or accept any gift, gratuity, entertainment, non-cash compensation, or other consideration that reasonably could be expected to compromise the CFP® professional's objectivity."

Contrast this provision with the following excerpt from the (company name redacted) (SEC Disclosure document):

(Company name redacted) ADV:

"(company name redacted) and its Financial Professional may receive non-cash compensation from investment advisory asset management program sponsors. Such compensation may include such items as gifts of nominal value, an occasional dinner or ticket to a sporting event, or reimbursement in connection with educational meetings or marketing or advertising initiatives. Such sponsors may also pay for education or training events that may be attended by Financial Professional and (company name redacted) employees."

This provision directly conflicts with the CFP Code of Conduct policy. Can a (company name redacted) representative who intends to comply with the CFP Code of Conduct successfully operate in the (company name redacted) environment? It would seem very difficult. I'm not saying they can't, but they would face a callous work environment without significant help from (company name redacted). Perhaps (company name redacted) is going to create this space, if so, they should outline it publicly and soon as their Form ADV disclosure document is a landmine for a fiduciary.

If you come across a salesperson who represents themselves in writing or orally as a CFP Designee, you must ask them how they intend to comply with the CFP Code. While this situation might resolve itself, if a representative from a 403(b) vendor represents themselves as a CFP, you should be very skeptical.

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

Bob Toth: 403(b) and the Fiduciary Rule

Attorney Robert Toth has a quick piece on 403(b) plans and the new Department of Labor Conflict of Interest Rule. Here's an excerpt:

Non-ERISA 403(b) plans

 

Arguably, the plan participants most exposed to inappropriate product placement are those in public school plans.  Yet, these participants  are  excluded from much of the fiduciary rule’s protections, except where an adviser makes the recommendation to rollover those funds to an IRA. This is the same for state university 403(b) plans, as well as non-ERISA 403(b) plans for private tax exempt orgs-including “non-electing” church 403(b) plans (churches can elect to be covered by ERISA). Why? Because these plans  are not subject to ERISA, and 403(b) plans are excluded from Code Section 4975 (which is the prohibited transaction section under the Tax Code which makes the DOL rules apply to non-ERISA IRAs). This non-application really does have the potential to have a number of ancillary effects on those products, which constitute a significant percentage of the marketplace. I would also think it would serve as further incentive for the DOL to limit the application of the 403(b) “safe harbor” rules which are otherwise used to prevent ERISA’s application to certain 403(b) plans.

 My only critique is that Bob believes the Rule applies to rollover advice from a 403(b) and in a previous webcast Attorney Fred Reish said he doesn't believe it does. This will have to be sorted out.

Scott Dauenhauer, CFP, MPAS, AIF

Last Week Tonight Promotes Fiduciary

HBO's John Oliver and his Last Week Tonight show spent it's time last night taking down the Financial Advisor industry in a segment that named names and took no prisoners. Watch it below (might not be safe for work):

Scott Dauenhauer, CFP, MPAS, AIF
(and yes, a Fiduciary!)

403bWise Launches Site Re-Design and Expansion

Top 403(b) education, advocacy and news site 403bWise.com has launched a re-design and an expansion.

Since 2000, 403bWise.com has provided unbiased information on 403(b) plans to our nation's educators. In addition, the site has helped advocate for better 403(b) plans. 403bWise is the best known 403(b) site on the internet (much to the consternation of the insurance industry) and today it just got better, with promises of additional improvements in the future.

How Is This Still A Thing? Annuity Ads

John Oliver has a segment on his HBO show Last Week Tonight named “How is This Still a Thing?” and lately I’ve been scratching my head wondering the same thing about annuity advertisements.

8% Annuity Returns? Hmmm…curious.

I received an e-mail from this company (above) the other day advertising “Annuity Returns” of 8%+. If you are a consumer and you see such a high interest rate compared to what the rest of the world is paying ($7 Trillion in assets globally currently trading at negative rates) are you not likely to click to investigate further? Who wouldn’t.

It's a F**k n' Great Life at F & G Life - Puerto Rico!

http://wealthmarkadvisors.com/fg-2016-power-producer-conference

St. Regis in Puerto Rico Anyone? Just Sell F&G Annuities...Sad.

If you want a great vacation in Puerto Rico all you need to do is sell $1.5 million in annuity products from F & G Life.

Yes, that's right, for selling on average only $125,000 per month of annuities (that's maybe 1  - 5 victims) an agent can get a 4 night stay at a top resort in Bahia Beach, Puerto Rico.

It's an F'n Great Life at F & G Life! But for the teachers it's just F'n Gallows.

The Safe Income Plus Fixed Index Annuity sold by F & G, the surrender period is 11 years. The commission is 7.25% AND also may qualify for the trip featured in this post.

Let's review. An agent sells $1.5 million of this product to its base of clients and receives potentially over $100,000 in commission plus a trip to the St. Regis in Puerto Rico. That's quite an incentive to sell F & G Life Indexed Annuity products. I wonder if this product would sell at all if not for the high commission and potential for an amazing vacation? My opinion is that it wouldn't.

Do you know what's behind the recommendation of your "advisor"? This type of incentive needs to be stopped. The insurance industry is hooked on Indexed Annuity products and the commissions and incentives that come with those sales, it's their crack.

If F & G has such great annuity products, wouldn't they sell themselves? Wouldn't real advisors WANT to recommend their products?

In this low interest rate/high volatility environment the ability of an index annuity provider to support a decent rate of return to the end client is severely restricted. Add in generous commissions and luxurious trips and it's nearly impossible for the end client to get a reasonable rate of return.

Yes, index annuities are great for retirement, just not yours (they're great for the agents retirement)!

Scott Dauenhauer, CFP, MPAS, AIF

Confessions of an Equity Indexed Annuity Salesperson?

Response letters to potential regulatory changes can be a gold mine. I was recently reviewing some old responses to an SEC rule that would bring Equity Indexed Annuities (EIA) under the umbrella of the SEC and require insurance agents who sell them to be registered (Registered Reps of a FINRA Broker/Dealer).

One agent for a company called #ValuTeachers wrote a response and I'm excerpting it below. Please consider that if I were to write a parody response letter to the SEC (posing as an insurance agent selling these products) it probably wouldn't look much different. The entire letter is at the end.

Claim/Statement #1

"To make the equity index annuity a security product would damage the ability of people who need this particular product to receive a fair representation of the product."

My Response:

Two things, first, no one NEEDS an EIA product, no one. Second, a sales agent that is highly motivated to sell a particular product because of its high commissions and potential luxury vacation rewards is NOT capable of providing a "fair representation" of anything. If this agent is truly concerned about representing any product fairly, he should be lobbying for the end to commissions in exchange for product sales.

Claim/Statement #2

"It would first make thousands of current Life insurance representatives have to get securities licensed to continue selling the product. Most will not do so leaving the current clients that they have stranded. This rule has not been thought through with the clients' best interest in mind. If so the SEC would realize the need to keep this an insurance product which is already being regulated by the insurance departments in the various states. If we force thousands of life insurance representatives to get licensed what if they choose not to."

My Response:

An insurance agent who advises clients on what to do with their investments, including talking about the stock market, should certainly be regulated more than the state insurance commission regulates. 

This agent claims that if forced to register as a representative or an advisor, most insurance agents would rather abandon their clients than register. What exactly does this say about such agent or agents in general (I know a lot of insurance agents who are good people and would never abandon their clients)? It says they are lazy and really don't care about their client (note, I don't believe all insurance agents are lazy, just ones that agree with this particular agent). If they really cared, they'd not abandon their clients over a specific product requirement. I find it ironic that this agent believes the SEC should have "the client's best interest in mind" but that the agent shouldn't be required to put the client's best interest first...notice he is not arguing for a fiduciary standard. If thousands of insurance agents choose not to register in order to sell EIAs, fewer EIAs will be sold and more investors/savers will have been protected.

Claim/Statement #3

"Many questions come to my attention in thinking of the client. 1. Are current insurance agents out of compliance for taking care of their current client base when they call and have questions about a product sold to them by their insurance agent but they are not securities licensed? 2. If the insurance agent is not securities licensed but continues in servicing their client and a registered representative files a complaint with the SEC because the insurance agent is discussing securities without a license how can you regulate that? 3. Should the thousands of clients that have billions of dollars in these products be penalized by having their friend and trusted advisor that is an insurance agent no longer be able to help them with their equity index annuity? 4. Will the SEC pay the surrender charges incurred by clients when a registered representative transfers them out of their current equity index annuity and into another product? 5. Will the SEC be able to monitor the activity of the sell of equity index annuities as it has shown it's lack of ability to look into it's current obligations. The headlines are evidence to this very fact! WALL STREET CRISIS! Where is the SEC now that everyone has made their money and left."

My Response:

This rambling and nonsensical statement goes after Registered Representatives as criminals and again builds a straw man. Insurance agents will not abandon their clients and source of income if forced to register, they'll register and if they don't, someone else will steal their clients. This is not an attempt to avoid needless regulation, it's an attempt to stay essentially unregulated. The insurance industry still allows what amount to kickbacks in their sales process and allowing such a system to continue is the real purpose of this agent in my opinion, a perpetuation of a corrupt system.

Claim/Statement #4

"It has been my experience in dealing with securities licensed people that the only thing that everyone needs is to put money in the market and securities. Any fixed annuity is almost below them when in fact often times people instruct them to give them a safe investment. Whoops! Insurance companies sell insurance products and broker/dealers sell securities products. This is not a time when we need to be arguing over what type of product should the equity index annuity be but whether or not the SEC a federal organization that cannot even handle it's current obligations be given authority to regulate even more that they cannot." 

My Response:

So this agent's limited experience now makes him an expert on all products sold across the industry. He presents no evidence. He does get one thing right, insurance companies sell insurance products! But B/D's sell all sorts of products, not just market based securities. If you only have an insurance license, all you can sell is fixed annuities (which are not investment, but savings products), it's the same old adage, if all you have is a hammer, everything looks like a nail. I'm certainly not going to argue that the products B/Ds sell are good for clients, but the main reason (left unspoken), in my opinion that this ValuTeachers/LSW agent doesn't want additional regulations is because it will end up cutting his commissions and all the perks received from the insurance companies. This is about the gravy train, not the regulatory train.

Claim/Statement #5

"It is evident with the current crisis on Wall Street that the SEC should spend more time regulating Wall Street and leave the insurance products to the insurance companies."

My Response:

Umm, AIG anyone? They were an insurance company, right? Nuff said.

Claim/Statement #6

"I urge you to give careful consideration to this rule and see through the mere attempt at increasing the number of people paying fees to the SEC. The product is harmless in most cases to the investor. There have been abuses as there have been in the selling of mutual funds to investors who have said they do not want any risk. The SEC handles the registered representative that does wrong and the insurance departments are handling the insurance agents that do wrong."

My Response:

The SEC doesn't regulate brokers (Registered Representatives), FINRA does (technically there is some overlap). Can anyone with a straight face really say that the state insurance departments have a handle on the sale of Equity Indexed Annuities? Anyone who reads this blog knows they don't. These products do cause harm and are mostly sold because of the high commissions and lack of any need to register combined with sales contests that send agents to Cabo, Maui, Monte Carlo...etc.

Conclusion

I've reprinted the letter below, I found it on the net, here. This letter provides some insights into the way EIA agents think. They are attempting to defend their turf and their income, but we need to make sure that the defense of their income doesn't come at the expense of the client. EIAs need more regulation.
Scott Dauenhauer, CFP, MPAS, AIF

ValuTeachers Letter to SEC

Welcome To The Fight — A Teachable Moment

I recently had the pleasure of meeting Tony Isola, a former teacher who has decided to pursue a career helping his former colleagues overcome terrible products and a more secure retirement. Tony’s new blog is called A Teachable Moment and he recently posted his introduction, here is a clip and a link to the blog:

Revenge of the Teachers | A Teachable Moment

Please welcome Tony to the fold of 403(b) Warriors.

Scott Dauenhauer, CFP, MPAS, AIF

MStar Simon: Seeking Contract Clarity for 403(b) Decision-Makers

My friend Scott Simon recently posted an updated review of a 403(b) contract with a school district, interesting stuff here:

Seeking Contract Clarity for 403(b) Decision-Makers

FIDUCIARY DEBATE WAR RAGES – ADVISOR OR SALESPERSON?

Recall my piece from awhile back: ASPPA Disclosure. As well as Michael Kitces piece -  The Public Deserves A Choice, But It’s Not Fiduciary Vs Suitability. If you think the brokerage world has your best interest at heart...think again.

Supporters of the DOL's efforts scoffed at Reilly's note.

"This is as Orwellian as it gets," says Barbara Roper, director of investor protection with the Consumer Federation of America in Washington, D.C. "They will serve their clients best by defeating a regulation that would require them to do what's best for their clients?"

"If it is not in the best interests of customers, it's not advice, it’s a sales pitch," Roper continues. "That's what they are fighting for here, to portray themselves as advisors while they are being regulated as salespeople."

Raymond James CEO Calls on Advisors to Fight DOL Fiduciary Definition


Scott Dauenhauer CFP, MPAS, AIF

The Fleecing of 403(b) Participants Parts 1 - 4

Scott Simon, writer for Morningstar Advisor (and a financial advisor himself) has written a series of articles on how teachers are getting fleeced in their 403(b) retirement plans. What follows are links to the Four part series.

Scott does a good job of laying out the issues and though I don't totally agree with his solutions, the information is worthy of a read through. Educators, school districts, and unions need to know this stuff.

Fleecing 403(b) Participants (Part 1)

Fleecing 403(b) Participants (Part 2)

Fleecing 403(b) Participants (Part 3)

Fleecing 403(b) Participants (Part 4)

Scott Dauenhauer, CFP, MSFP, AIF