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

Chris DeGrassi of NTSA

Well this is out of left field. I think Tara Siegel Bernard's New York Times articles are having an affect. Less than a week after two scathing articles about the non-ERISA 403(b) market were released, a major trade organization for 403(b) sales agents has come out in support of extending the Department of Labor's Conflict of Interest rule to government 403(b) plans.

The full release is below and can also be read here.

What is left unsaid is who in the organization supports this, many of the members of the organization were against the rule and some are currently part of trade groups that are suing to have it overturned. Further, the release didn't say that the members would be encourage to follow the DOL rule regardless of whether it was implemented for government or not.

Maui, Cabo or Sicily...Choose Your Annuity Incentive!

Ever wonder what's behind those annuity recommendations? Here's a taste.

I've posted a few of the potential trips that annuity producers can take this year and next for selling fixed annuities.

Do you want to goto Maui? Just sell $3.5 million in annuity premium and you'll get a stay at the Ritz-Carlton! Even better, if you sell enough you could take a trip across to the next island, Lanai for three more days. Here is a video from American Equity about what an agent can expect.

You can also check out their website:

http://marketingcenter.american-equity.com/aspx/Campaign.aspx?n=32&c=10

Perhaps Maui and Lanai are to far away, maybe you'd like something similar, but a little closer to home and with an advantageous exchange rate. Los Cabos, Mexico is behind door number 2! Amernican National will send you and a guest to The One and Only Pamilla resort.

2017 Cabos Conference

Perhaps beach destinations aren't up your ally. Maybe you want a little more culture. After all, whenever one things of an annuity salesperson they think "cultured"! Well, LSW (National Life Group) has all the culture you can handle with a trip to Sicily.

NLG Sicily Chairman's Club 2016 Qualification Flyer

Next time someone is pitching you an annuity, ask them about their compensation and what trips it might qualify them for (then watch their face turn white). This shit needs to stop.

These companies must be good because they have America or National in there name...good grief.

Scott Dauenhauer, CFP, MPAS, AIF

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

Podcast #26: NTSA & NEA

As a follow up to my recent posts regarding the NTSA and the NEA, Dan and I discuss the latest developments in the 403(b) world. You can find our latest podcast here.

Reference materials:

NEA Making Big Bucks From Members Selling Expensive Annuities

NTSA Continues Shameful Campaign Against California Public Employees

NEA Making Big Bucks From Members By Selling Expensive Annuities

NEA Member Benefits Reported Annual Fees of $2.7 Million

The NEA's wholly owned subsidiary NEA Member Benefits receives a base fee of $2.7 million per year (escalating each year depending on specific unmentioned milestones) to promote the expensive NEA Valuebuilder 403(b) product(s).  

NTSA Continues Shameful Campaign Against California Public Employees

There is only one thing more scary to the insurance 403(b) industry than the word Fiduciary, auto-enroll.

This is my opinion.

Back in 2012 I spoke at a Town Hall in North Carolina to announce a new statewide 403(b) program that was just passed by the state legislature (yes, North Carolina did pass one law that we can all get behind). The audience was a group of insurance companies and insurance agents and they were angry, very angry. They did not like that the state wanted to offer a fiduciary based 403(b) program for teachers and they made their displeasure known.

American Retirement Association Opposed CA Auto-Enroll For Public Employees

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

Debunked ASPPA Study Used To Push Industry Agenda in Michigan

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

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

Warren Commission: Villas, Castles, and Vacations

Senator Elizabeth Warren began an investigation of insurance company non-cash compensation methods several months ago, what she found will be shocking to most people, but not to those of us who've been following the unethical sales practices of the annuity industry for decades.

Titled Villas, Castles, and Vacations: How Perks and Giveaways Create Conflicts of Interest in the Annuity Industry, the document outlines some of the incredible perks that insurance agents receive in addition to commissions when they sell annuity products. Warren hinted at some of these perks in a Senate Banking Committee back in April, you can watch her below:

In this report Warren attempts to discover the entirety of non-cash compensation, though she isn't entirely successful, here's an excerpt:

"Kickbacks pose an especially dangerous problem. When companies can offer kickbacks to agents for recommending high-cost financial products, and when those kickbacks are hidden from the customers, the likelihood that consumers will be duped into buying bad products increases sharply. 

To explore the prevalence of this type of conflict of interest, in April 2015 Sen. Elizabeth Warren (D-MA) opened an investigation, asking fifteen leading annuity providers for information on whether they offered non-cash incentives such as lavish cruises, luxury car leases, and other perks to annuity sales agents to promote their products and whether their customers were aware of the agents’ compensation arrangements."

Reading this report one wonders how the insurance industry continues to get away with such unethical and clearly conflicted business practices, it's a testament to the power of that industry and Warren is confronting them head on.

Dan Otter of 403bwise.com and I recently did a podcast on such compensation practices and you should be able to listen to it soon by going to www.teachandretirerich.com and clicking the podcast link.

I encourage you to watch the above video and then dive into Warren's report.

2015-10-27 Senator Warren Report on Annuity Industry

It's time to put a stop to these unethical compensation practices.

Scott Dauenhauer, CFP, MPAS, AIF