New public employees should work to 65

Article - Opinion - California Focus: New public employees should work to 65

Here is an article written by Keith Richman that is advocating all new public employees work till 65. This might be a good idea for most public employees, but I do not believe it is a good idea for public school teachers.

For one thing, I am doubtful that there will be much cost savings in getting educators to work an extra 2 - 10 years till age 65. Assume that a 60 year old educator who wants to retire today has a total compensation package of $90,000, and a new teacher has a total compensation package of say $45,000. The present value of the difference in compensation is about $200,000.......I say let that educator retire.

I work with a lot of educators and on average, by the time they reach 55 they are getting tired. They haven't lost their passion for kids, its just that 30 years of being in the classroom can really wear someone down. Don't get me wrong, just because a teacher has reached the age of 55 doesn't mean they are no longer effective, in fact many of them have more energy than I feel I do at times. It's just that there are some educators who reach these stages and feel that continuing to teach will begin to wear on them physically and mentally, they need a break. They need to retire.

Allowing an educator who has spent his or her life serving the children to retire on a timeline that is reasonable (the current system is reasonable) not only encourages more and better teachers to enter the profession, but it encourages those teachers who feel like they just can't do it anymore to retire with grace. Imagine if we forced a teacher who simply didn't want to teach to continue to teach, just so they wouldn't be impoverished in retirement.....is this best for our educators and our students?

Perhaps I see where Mr. Richman is going with this. A teacher who is forced to teach till age 65 might be more worn down and statistically may not live as long.......thus reducing the pension liability.

I'm all for fiscal responsibility, in fact my stomach churns when I see the deficits being piled up everywhere I look, but when it comes to our teachers in California, we need to take a hard look at so-called "simple solutions", they may not turn out to be so simple.

Scott Dauenhauer, CFP, MSFP, AIF
949-916-6238
www.meridianwealth.com

The American Spectator

The American Spectator

Provocative article about the now closed Social Security loophole that allowed educators to get spousal benefits by working only one day in a job covered by social security. The cost to the government is in the billions.

This article is referring to the Government Pension Offset (GPO) which affects social security benefits of spouses who work in the public arena and are covered by a public pension, but don't pay into social security. What the article leaves out is how unfair the GPO is to educators. Let me give you an example:

Suppose Sally went to work in the private sector and paid into social security, Sally's husband stayed at home with the kids and raised them, not ever working in a paying job or in a job paying into social security (notice how I didn't say "not working!"). John, who stayed at home, is not eligible for social security benefits on his own, instead the he is eligible based upon Sally's contributions. Sally's contributions INCLUDE a spousal benefit. John will recieve 50% of the amount that Sally receives and upon Sally's death, John's benefits from social security will be the same as what Sally was recieving.

The key in this story is that John is eligible based on his spouse, Sally, even though he never worked. Sally's contributions earned her a spousal benefit for her husband. Now, let's suppose that instead of staying home all those years with the kids, John went to work after the kids were old enough to goto school. John in fact went to work as a teacher. He paid into his state teachers pension fund, but in his state he was not required to pay into social security. When John retires he will NOT be eligible for a social security spousal benefit based on Sally's contributions (technically he might be eligible for something, there is a formula, but that is beyond our discussion).

The only difference between the two situations is that John worked in a public pension system and didn't contribute to Social Security. In both situations John didn't contribute to social security, but in one he recieved a benefit, in the other he didn't. This makes no sense. Either Sally earned a spousal benefit or she didn't - which is it?

The teachers in The American Spectator are made out to be criminals - they are not, they are simply trying to collect on something that should rightfully be theirs. They went through a perfectly legal process to gain these benefits and they shouldn't be punished or have these benefits taken away - they are not criminals like Dennis Koslowski.......to whom they were compared.

My only concern is that its a bit unfair that those 20,000 teachers got to do it, and the hundreds of thousands of others didn't. I agree that it is a major drain on social security, but that is a funding problem. Social Security if fundamentally flawed in its operation and needs to be reformed, but the same can be said for the Governement Pension Offset.

To all you Texas Criminal Teachers (TCT's) out there.......You have at least one supporter! I do ask one thing of you, perhaps think about spending a little bit of that extra money you receive on helping the rest of the teachers get reform for the GPO.

ScottyD

Teachers Sue Metlife

nwi.com

A story about teachers who were allegedly lied to, misled, and are now fighting back. There are more and more stories coming out about teachers who have had enough with being misled by the entities they trust.

Is the NEA next? It seems to me that the NEA is much worse.

I'll follow this lawsuit and keep you up to speed. If I remember correctly there is another union in California that endorses Metlife......

ScottyD

WHAT TEACHERS MAKE

The dinner guests were sitting around the table discussing life.

One man, a CEO, decided to explain the problem with education. He argued, "What's a kid going to learn from someone who decided his best option in life was to become a teacher?"

He reminded the other dinner guests what they say about teachers:
"Those who can, do. Those who can't, teach."

To stress his point he said to another guest; "You're a teacher, Bonnie. Be honest. What do you make?"

Bonnie, who had a reputation for honesty and frankness replied, "You want to know what I make? (She paused for a second, then began...)

"Well, I make kids work harder than they ever thought they could. I make a C feel like the Congressional Medal of Honor. I make kids sit through 40 minutes of class time when their parents can't make them sit for 5 without an I Pod, Game Cube or movie rental...
You want to know what I make?" (She paused again and looked at each and every person at the table.)

I make kids wonder.
I make them question.

I make them criticize.
I make them apologize and mean it.
I make them have respect and take responsibility for their actions. I teach them to write and then I make them write. I make them read, read, read. I make them show all their work in math.
I make my students from other countries learn everything they need to know in English while preserving their unique cultural identity. I make my classroom a place where all my students feel safe. I make my students stand to say the Pledge of Allegiance to the Flag, because we live in the United States of America. Finally, I make them understand that if they use the gifts they were given, work hard, and follow their hearts, they can succeed in life.

(Bonnie paused one last time and then continued.) "Then, when people try to judge me by what I make, I can hold my head up high and pay no attention because they are ignorant... You want to know what I make?

I MAKE A DIFFERENCE. What do you make?"

THIS IS WORTH SENDING TO EVERY TEACHER YOU KNOW.
THERE IS MUCH TRUTH IN THIS STATEMENT:
"Teachers make every other profession "
--
Karen E. Clarke

NEA Valuebuilder AKA ValueKiller Articles

With the recent announcement of the NASD partnering with the NAIC and the NEA Member Benefits (distributor of the high cost NEA Valuebuilder Variable Annuity) I thought it appropriate to link to a few articles that mention this horrible product.

LA Times Article - Unions Advice is Failing Teachers

San Diego Union Tribune Article - Saving For Retirement Harder wtih New 403(b) Law

403bWise Article

Scott Dauenhauer, CFP, MSFP, AIF
www.meridianwealth.com

NASD Partners with NEA Valuebuilder?

NASD - Press Room - News Release - 11/8/06

This has to be a joke. This link will take you to a press release that announces a grant that will involve the NEA Member Benefits with investment education. What follows is my e-mail to the NASD:


"I wanted to convey to you my shock with regards to the NASD partnering with NEA Member Benefits. The NASD should be investigating the NEAMB, not partnering with them. The NEA has been selling the NEA Valuebuilder product - an excessively priced Variable Annuity and Mutual Fund program to its members for years. This program is worse than the one Spitzer busted in New York (ING and NYSUT). The NEAMB is an RIA and they are not fulfilling their fiduciary responsibility to the plan. There is excessive revenue sharing, poor oversight, and kickbacks to unions and agents involved. You should not be endorsing NEAMB, by doing so you are endorsing an entity that exists to transfer retirement assets from its members to the NEAMB (probably to subsidize other programs). You should be sending subpoena's, not endorsements."

This is absolutely ridiculous. NEA Member Benefits has been ripping off teachers for about a decade now and they are getting rewarded for it by regulators, what world are we living in.

Scott Dauenhauer, CFP, MSFP, AIF
www.meridianwealth.com

Plan Sponsor: Revenue Sharing

Magazine Articles [PLANSPONSOR.com]

If you read this article you would think that a revolution is happening, it isn't. Providers are not rushing to disclose revenue sharing agreements, they are only doing so when forced and they are being dragged kicking and screaming along the way.

Instead of figuring out the best way to disclose revenue sharing agreements (Let's be honest, Kickbacks), why don't we simply do away with them?

Scott Dauenhauer, CFP, MSFP, AIF
www.meridianwealth.com

News Articles [PLANSPONSOR.com] - FL Pension Plan Accuses ING of Revenue Sharing Fraud

News Articles [PLANSPONSOR.com] - FL Pension Plan Accuses ING of Revenue Sharing Fraud

This is why I don't believe revenue sharing should be used in DC plans.

Scott Dauenhauer, CFP, MSFP, AIF

Government Retiree Health Benefits Cost Could Top $100 Billion

Ventura County Star: County News

This is a good article on governement retiree health care costs. It basically is telling us that the taxpayers are going to have to cough up about another $100 billion over the next 20 - 30 years to pay benefits promised, but not reserved for by governement entities in California. Ouch. That is a lot of money - as the old saying goes, a billion here, a billion there, pretty soon it adds up to a lot of money!

It's not just the public sector that has these problems, the private sector does too. It is all these unfunded liabilities that may end up bring two enemies together on a single issue - Government run healthcare. The private sector would like nothing else than to pawn off its liabilities to the government, this way they could become more competitive (so the saying goes) with companies whose home nation pays these costs. The public sector will have a hard time finding the money to fund these obligations and raising taxes is not something that keeps a politician in office for long. Thus unions and quite possibly corporate interests may come together to lobby for a government run healthcare system in order to get out of benefits they promised, but never saved up for.....in the end we (the taxpayer) still foot the bill.

I believe our health care system could use quite a bit of reform, but I don't believe government is the answer.

I also don't believe former state republican senator Keith Richmann's answer is the right. He advocates moving the retirement age from 60 to 65 or 70 for all public employees. While I do generally support a rise in retirement age, I don't believe Richmanns ideas make sense. Why keep an employee who wants to retire on the books? They'll be less productive, they'll get paid more (remember, government rewards longevity) than a new employee would (by probably a 2 - 2.5 to 1 margin), and at least in school districts could do harm to our children (a teacher who is sick of teachings won't do as good a job). These negatives outweigh the positives of a forced extension. However, I am in agreement that something needs to be done.

Scott Dauenhauer, CFP, MSFP

ICI Comment Letter to IRS on Efforts to Simplify 403(b) Rules, February 2005#TopOfPage

ICI Comment Letter to IRS on Efforts to Simplify 403(b) Rules, February 2005#TopOfPage

ICI Comment Letter.........

Scott Dauenhauer, CFP, MSFP, AIF

SIA Lobbying Letter to Treasury

403(b) proposed regulations - Google Search

It seems nobody in the industry likes the new regs. Perhaps it is because they know that under the new regs the "wild, wild, west" mentality will begin to be tamed.

Scott Dauenhauer, CFP, MSFP, AIF

ASBO Lobbys the IRS

403(b) proposed regulations - Google Search

Some additional interesting information from another oranization lobbying to change some of the proposed regulations.

Scott Dauenhauer, CFP, MSFP, AIF

Annuity Industry Begs IRS - Will They Succeed?

D & H

The annuity industry is not happy about the proposed 403(b) regulations and they are making themselves heard. In June of this year their lobbyist send a letter to treasury requesting a new delayed effective date and special grandfathering rules that appear to benefit the industry.

It looks like they got their first wish, the effective date has been pushed to January 1st, 2008. However there has not been any talk about a grandfathering clause.

Stay tuned.

Scott Dauenhauer, CFP, MSFP, AIF

CA braced for teacher retirement boom

Global Pensions

California Teachers are going to be retiring in mass over the next five to ten years.

ScottyD

CalPERS panel urges rate boost

Politics - CalPERS panel urges rate boost - sacbee.com

When I first started in the business of working with educators I can across the CalPERS Long Term Care program and generally liked it. I even recommended it because the premiums were so low.

However, as I learned more about long term care insurance and learned more about the CalPERS plan I began to recommend that clients buy a policy from a private insurer. My reasoning was that CalPERS was not charging enough and that they would have to raise premiums at some point, in addition, they are not an insurance company and are required to abide by the same rules that govern insurance companies. I didn't like the lack of safeguards nor the fact that premiums would have to increase.

I thought CalPERS was basically attempting to buy the business with low premiums. I want to make clear that I am not accusing CalPERS of market manipulation. I actually believe their intentions were sincere and they thought their policies were priced appropriately.

The fact remains that I am not an actuary, yet I knew several years ago that the premiums would have to rise, sure enough in 2003 CalPERS raised the premiums by an average of 17%.

Even after the premium raise I remained skeptical, and still do. Now CalPERS is proposing to raise the premiums by nearly 34%. This means that for every $100 in premiums, policyholders will be paying $57 more than they were paying in 2002, a 57% increase. Had policyholders known this they may have opted for a private insurance policy that was more expensive at the time, but provided better benefits and a better future in terms of rate increases.

I want to make something very clear - I do not sell Long Term Care Insurance and I don't recieve any money from the insurance industry or insurance agents. I don't have a vendetta against CalPERS because I lost insurance sales, I am just concerned for the public employees who purchased this policy in good faith.

It is my opinion that CalPERS is in over its head and needs to reform the Long Term Care Insurance Plan. My advice is that they do not institue the 34% increase yet, instead they embark upon a plan where they outsource their long term care program to a private insurer and continue to sell it as a private labeled plan. The private insurer chosen can then put together an accurate assesment of the real costs and a discussion of rate increases can continue. I believe rates must be increased, but I don't feel comfortable with the management of this plan by CalPERS.

Just my two cents...

Scott Dauenhauer, CFP, MSFP, AIF

Changing 403(b) Plans for Changing Times

A good friend and colleague of mine, Barbara Healy helped pen this piece about the what to expect and how to proceed in the new world of 403(b). Everybody who is a decision maker of a 403(b) plan should read this.

Scott Dauenhauer, CFP, MSFP

Reproduced with permission from the Benefits & Compensation Digest, Volume 43, No. 12, December 2006, pages 1, 19-23 published by the International Foundation of Employee Benefit Plans (www.ifebp.org), Brookfield, WI. Statements or opinions expressed in this article are those of the author and do not necessarily represent the views or positions of the International Foundation, its officers, directors or staff. All rights reserved.

What's a Plan? Gray v. Prudential

403(b)-457 Plans Blog: What's a Plan? Gray v. Prudential

The typical teacher will not find this linke of interest, but those in the 403(b) marketplace and district plan administrators will.

ScottyD

School District Goes Extra Mile to Disclose Fees

School District Goes Extra Mile to Disclose Fees | workforce.com

Contrast this article with the last one (from Florida). At least LAUSD is disclosing revenue sharing. The next step is to completely eliminate it.

ScottyD

FL Sheriff Sues Nationwide Over Fees

News Articles [PLANSPONSOR.com] - FL Sheriff Sues Nationwide Over Fees

Revenue sharing is a standard practice in the industry, that doesn't make it right. It is my belief that all fees should be disclosed AND who recieves those fees. In addition those fees should be benchmarked and evaluated annually.

The reason revenue sharing is so prevalent is because most vendors DON'T want the participants to actually see the fees being paid to the vendor, if they did they would freak out.

My belief is the fees should be explicit, employees should see them and they should be educated as to what the fees are.

ScottyD

Teachers, did you forget to do your homework on 403(b) plans? | The San Diego Union-Tribune

Teachers, did you forget to do your homework on 403(b) plans? | The San Diego Union-Tribune

Lynn O'Shaughnessy keeps poor 403(b) options in the spotlight with this timely article on why teachers need to do their homework on 403(b) plans if they want to maximize their retirement plans.

Great Job Lynn.

Scott Dauenhauer, CFP, MSFP

On Stuff: William Bernstein

On Stuff

My favorite author, Dr. William Bernstein gives us the low down on Commodities and their place (or mis-placement) in a portfolio.

Scott Dauenhauer, CFP, MSFP

Firm to disclose savings plan fees - Los Angeles Times

Firm to disclose savings plan fees - Los Angeles Times

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A union has finally stood up and protected its teachers. The United Teachers of Los Angeles, led by an outspoken teacher has forced AIGVALIC's hand in disclosing fees that they did not want disclosed.

While this plan is not perfect, it is good to know that a union and its members are standing up for what is right, perhaps this watershed moment will lead to even more in this long fight for participant rights and transparency.

Scott Dauenhauer, CFP, MSFP

ING to Give Teachers Refunds

Kathy Kristoff updates us on the problems with the New York State Union 403(b) problems, it looks like their provider, ING will pony up $30 mill to settle claims it misled participants and didn't disclose backroom deals. Of course, ING will not be admitting any wrongdoing. NYSUT settled for about $3 million early this year. Another story on the topic can be found here.

Its amazing that the NEA Valuebuilder product has never been investigated, it is much worse (or at a minimum the same!).

ScottyD

Workers Get a Double Jolt on Pension Benefits

Another good primer on the Windfall Elimination Provision and the Government Pension Offset. If you are a teacher you MUST know about this in order to effectively plan for retirement.

Scott Dauenhauer, CFP, MSFP

New Jersey Teacher Wins Fight on Retirement Fees

John Wasik is 100% right on in this column, if you are in education (regardless of your position) you need to read this article.

ScottyD

AB 2462 Signed By Schwarzeneggar Today

The Governator signed Assembly Bill 2462 today. This bill will allow CalSTRS to offer Third Party Administrative services to school districts as well as adding safeguards to TPA's doing business in California. CalSTRS is expected to be offering their TPA services by mid 2007.

Scott Dauenhauer, CFP, MSFP

Official IRS Announcement of 403b Reg Delays

Delay in Effective Date for Regulations Under Section 403(b)
The Internal Revenue Service announced today that the general effective date for the regulations regarding section 403(b) arrangements that were proposed in 2004 (including the related controlled group regulations under section 414(c)) will be extended.

In order to provide employers, employees, insurance carriers, and mutual funds involved in section 403(b) arrangements a reasonable advance period before the regulations go into effect, the final regulations generally will not be effective earlier than January 1, 2008.

Scott Dauenhauer, CFP, MSFP

I reported this several months ago...

CTA Retirement Piece

A pretty darn good piece on 403bcompare.com and what CTA members should be doing now to save for retirement.

A chart created by me was also included.

Scott Dauenhauer, CFP, MSFP

403(b) Regs Will Be Delayed

I have it on good authority (Source at the IRS) that the 403(b) proposed regs that were supposed to be released and finalized tomorrow (June 30th) will be delayed till the fall. In addition, the effective date of the regs will be delayed by at least a year as well. When the proposed regulations become finalized they won't be effective until January 1st, 2008 (they were due to become effective January 1st, 2007).

It appears the hold up is an issue between the IRS and Department of Labor that might subject non-government non-profit voluntary only plans to ERISA. The IRS apparently doesn't want this to happen and is working with DOL to ensure this doesn't happen. Governmental plans will still not be subject to ERISA.

In addition, it seems that there will not be any significant changes (from the proposed regs) in the final regulations as they relate to governmental 403(b) plans.

I'll keep you posted as to further developments, but it looks like the proposed regs won't become final until either before or shortly after the elections.

Scott Dauenhauer, CFP, MSFP
Co-Author of The 403(b)Wise Guide

Can Pricey Target-Date Funds Be Competitive?

Great article by Morningstar that rips into high cost Target Date funds. If you don't know what a target date mutual fund is you are not alone, they are relatively new.

A "Target Date" mutual fund is supposed to be a one-stop fund that a person can utilize for retirement. You pick a retirement date (or one that is close to the funds Year) and the fund does the rest, including the asset allocation and becoming more conservative as you get closer to your retirement date.

For example, if you plan to retire in 2035 (my planned phase out date) you might choose the Vanguard Target Retirement 2035 fund (VTTHX, expense ratio .21%). This fund currently has an asset allocation that is 87.5% Stocks and 12.5% Bonds and will slowly adjust as the years pass by so that by the time I am retired (or phasing into retirement) the allocation will have adjusted to 42% stocks and 58% bonds.

I am a fan of the Target Date concept, but not of the implementation. Currently most target date funds are too expensive (the point of the Morningstar article). The ones that are priced well (Vanguard) aren't diversified enough. At this point I haven't found a target date fund that I like. Other problems with Target Date funds are that you can't customize a persons portfolio to fit them or to adjust to different economic environments.

I believe that as this concept evolves the expenses will come down and they will be better diversified. I also believe that these funds are best used in retirement plans like 403(b), 457(b), or 401(k) . They are also best used for smaller account levels, as your asset grow so should your asset allocation strategy.

Scott Dauenhauer, CFP, MSFP

New York Teachers Union Settles Retirement Probe

The 403(b) world is changing and for the better. Unions are finally getting the message that endorsing high cost product in order to boost revenues for their Member Benefits units is a bad idea. ING just got slapped with a fine and it seems to me that the NEA is about to find itself in similar travails. Both have announced that they will bid out their programs and offer low cost products and just this week the United Teachers of Los Angeles worked to ensure that the new 457 plan that will be offered to employees is in the employees best interest.

The CTA and CFT recently endorsed legislation (AB 2462) that would allow the California State Teachers Retirement System to offer a compliance program to school districts along with a low cost 403(b) and 457(b). I think unions might finally be getting the message - supplemental retirement plans matter and they can have a big hand in making these products the best that they can be.

Many people have worked hard to get to this point, but the work is not over. We need to build on this momentum and keep pushing for better options, more disclosure, and education.

Scott Dauenhauer, CFP, MSFP

NYSUT agrees to retirement plan reforms to end probe

NYSUT - New York State United Teachers got away with a mere $100,000 penalty for intentionally taking "steps to conceal it." "It" being the fees and conflicts of interest that are so vary prominent in their ING Opportunity Plus program. ING pays NYSUT Member Benefits over $3 million annually to get the NYSUT endorsement.

The settlement also has some additional stipulations, as follows:

• conduct open bidding for future retirement plan endorsements,
• provide full disclosure of all payments from insurance companies,
• provide free and impartial investment advice to members and allow them to roll over current savings to a new endorsed plan at no cost.
• It will also hire an independent consultant to oversee reforms and report to the attorney general's office.

This is actually a decent settlement, but I am doubtful anything will actually change. Sptizer commented "A simple rule that my office has enforced time and time again is that fiduciaries must place the interests of their clients first." ING is clearly running the show and making the investment decisions, not anybody at NYSUT and ING is conflicted. NYSUT should hire an outside investment advisor to help them make investment decisions in the plan and bar ING from making those suggestions.

I will tell you this - if this was a public firm (like a fund company) the fines would be in the millions, people would be indicted, and ING would be in the hotseat, but Spitzer needs the NYSUT endorsement as he is running for Governor......talk about going soft on your buddies.

We'll keep on top of this and continue to hold NYSUT to a higher standard - though we are doubtful they will live up to it.

Press Release from NYSUT regarding announcement

ScottyD

NH Accuses ING of Fraud

ING apparently failed to disclose revenue sharing agreements and the state is ticked. They should be, however they should have known not to deal with a company like ING in the first place unless they could dictate the structure of the deal. I find it hard to believe that New Hampshire couldn't find out about these revenue sharing deals - I could have done it in about 15 minutes of work. Simply look at what funds are being utilized - this tells you everything. It appears the fiduciaries where asleep at the wheel allowing ING to dictate what funds to use - as if ING was going to work in New Hampshires best interest....that is laughable.

Scott Dauenhauer, CFP, MSFP

AIG VALIC Successfully Completes Major Re-Structuring of Its Fund Options; Fund Substitutions Result in Reduced Fund Expenses

Yes, it is true, fund expenses have dropped. But through a nifty maneuver they have apparently increased their revenues by 26%. I'll explain how they did this in a later post.

ScottyD

Illegals granted Social Security

Interesting. Someone from another country can come to the United States illegally and recieve Social Security benefits, but the Educators who teach our children (and the children of those here illegally) will be denied Social Security benefits they legally earned. I feel as if I am in the twilight zone.

Scott Dauenhauer, CFP, MSFP

Results expected soon in attorney general examination

Dick Iannuzzi - NYSUT President "There is no intermingling of NYSUT and Member Benefits funds. Any fees NYSUT’s Member Benefits Trust receives are used to fund the nearly 40 programs and services offered by the Trust. No money from the Trust or vendors is used to fund daily union operations." This quote is from www.edwize.org

The linked to article also quotes Iannuzzi as saying "Member Benefits uses approximately half the fees from ING to directly enhance the benefits received by 403(b) participants, including providing term life insurance and a survivor financial counseling program to inservice participants; and a legal services plan and financial counseling program. The remainder of the fees are used to help cover the costs of administering the 403(b) offering and the more than 40 Member Benefits programs and services, Trust managers said. There is no mingling of Member Benefits funds and NYSUT funds, union leaders noted."

NYSUT admits to using the assets of a trust (the 403(b) plan) to fund other Member Benefits programs and services, this is egregious. In Iannuzzi's defense on the NYSUT website it does disclose the following:

"The ING Opportunity Plus Program is a NYSUT Member Benefits-endorsed program. Member Benefits receives an expense reimbursement/endorsement arrangement of $6.50 per NYSUT member for the year 2006 with a member cap of 515,000 for this program. All such reimbursements are used solely to defray the costs of administering Member Benefits programs and, where appropriate, to enhance them. Member Benefits acts as your advocate; please contact Member Benefits at 800-626-8101, if you experience a problem with any endorsed program."

I do not know if the prospectus specifically states this or if materials given to potential and current participants disclose what is going on.

I do know that using the assets of one trust to pay for benefits for another trust (with different beneficiaries) could easily be seen as a breach of fiduciary responsibility. Imagine if a school district started a 457(b) plan and required the investment provider to overcharge the participants so that it could use the funds to pay health benefit costs for the employees of the district - I am pretty sure NYSUT would be outreached at such a breach - yet they are doing the same thing.

As a fiduciary of the 403(b) program it is shocking that they would use plan assets to subsidize other programs. I believe this to be a breach of fiduciary responsibility and an abuse of trust - even if fully disclosed.

ScottyD

School System Sues Over Teachers' Retirement Planning

Not again.......

Scott Dauenhauer, CFP, MSFP

Spitzer vs. NYSUT

Elliot Spitzer is finally investigating the New York State United Teachers and their relationship with an endorsed product provider ING. I raised concerns about this relationship several years ago and send an e-mail to Sptizers office encouraging him to look at if a Fiduciary breach of responsibility is occuring. Nothing ever happened. Finally, thanks to a series of articles that have appeared in Forbes magazine, the LA Times, and other publications Spitzer is looking into this cozy relationship. What follows are links to a few of the articles - most require either a free subscription, some you must pay for the article (yea right, like we're going to pay for it)....

New York Times: Spitzer Studying ING's Tie to Teachers' Union

New York Post: Where's Elliot?

Reuters: New York AG probing teachers' union ties with ING

LA Times: New York Is Probing 401(k) Plans

New York Post: ELIOT TAKES A 'PASS'

I'll continue to follow this story and pass along all pertinent articles.

Scott Dauenhauer, CFP, MSFP

NEA Rebuttal

What follows is the NEA’s rebuttal to the LA Times article that came out a few weeks ago. I am still of the opinion that this program is not in the best interest of the members and that the NEA should discontinue it. I’ll follow up with my comments in a few days.

Scott Dauenhauer, CFP, MSFP

Some facts about NEA's Valuebuilder plan

On April 25, 2006 the Los Angeles Times published an article titled "Unions' Advice is Failing Teachers." The article suggests that teacher unions, including the National Education Association, sponsor 403(b) annuity products for their members to generate revenue for the sponsoring union. The article's conclusions are flawed and rooted in a misunderstanding of the K-12 403(b) marketplace and a misapplication of traditional 401(k) principles.

NEA Member Benefits is a wholly owned subsidiary of the National Education Association. Its mission is to provide the 2.8 million members of National Education Association, as a benefit of membership, the highest quality products and services at the lowest possible price. Although it is a for-profit company, it operates as close to a break-even margin as it can and any surpluses it may have are poured back into the services and products that NEA Member Benefits provides. It has made agreements with many of NEA's state affiliates to offer products and services to NEA members working in those states. Those states receive some compensation to facilitate the delivery of products and services.

No dues dollars are used to support NEA Member Benefits.

The following factual information is helpful in understanding NEA Member Benefits' Valuebuilder Program, along with background information to clarify and correct the misleading information in the article.

The facts about fees and expenses

NEA receives no money as a result of the sponsorship. NEA Member Benefits receives a relatively small payment from Security Benefit Group, the underwriter of the NEA Valuebuilder Program, to help market the program and ensure that the investments, relative to the marketplace, represent a good value for members. If NEA Member Benefits received no money from Security Benefit Group, there would be no material impact on the pricing of the product. The only impact would be lower quality, less visibility for the program, and fewer opportunities for members to participate in a great program.

While everyone prefers lower fees, research clearly indicates that NEA members want investment advice. Agents and brokers have been the best vehicle to provide that advice at a reasonable and disclosed price. For the segment of members who may want to do it on their own and enjoy the benefits of lower fees, we will be developing (assuming we can find a company willing to develop the product for us) a high-quality, low-cost product. NEA Member Benefits hopes to have this available by year's end.

403(b) and 401(k) plans are different

It is important to note that school district based 403(b) plans are not distributed in the same manner as employer-based 401(k) plans. In fact, there are significant differences between an employer with a centralized workforce, supported by a centralized HR department that provides a narrowly focused and often employer-matched 401(k) plan, and a school district with no employer plan or involvement, undifferentiated product offerings. One of the major differences is these decentralized plans often have substantial barriers to acquire the mechanism for making payroll deduction which enables tax-deferred contributions to an employee's investment of choice.

In a 401(k) environment, there are few barriers to participation so distribution costs in the form of brokers, financial planners and salespeople are not incurred. In a school district environment where work sites are spread across a city, county or municipality, there are huge barriers to participation. If it weren't for the information, service and support that brokers, financial planners and sales people provide, a large percentage of our members would not be participating in any investment plan at all, thereby losing the critical tax-deferred benefits and supplemental retirement savings opportunities that 403(b) annuities and mutual funds provide.

All things being equal - lower is better; but all things are NOT equal

All things being equal, lower fees are better, but everyone knows that things are usually not equal. In the late 1980s, NEA Member Benefits, in partnership with Mutual of America, created a very low-fee annuity program for members. The program was based on member activism, telephone support and no sales agents in the field to consult with members and obtain a mechanism for members to make contributions directly from their paychecks. After years of nurturing the program, it failed to appeal to members. In a retrospective evaluation of the program, members were asked in focus group sessions and surveys why they did not participate. Members indicated clearly that they preferred representatives, agents, brokers, and/or financial planners to help them understand investing and their investment choices. In addition, NEA members preferred to have representatives navigate the school district's administrative maze, to acquire the administrative mechanisms to make payroll deductions and participate in the program.

Programs to meet the unique needs of NEA members

Based on responses shared in multiple focus group sessions, individual interviews, and surveys, NEA Member Benefits reached the conclusion that it had an obligation to develop a program that would meet this specific need of the membership. Subsequently, the NEA Valuebuilder Program, a 403(b) program that provides members with face-to-face investment advice with quality, trained professional investment experts was developed and offered to members. The NEA Valuebuilder Program has a cost associated with it that members have explicitly expressed a willingness to pay. It is also worth noting that since its inception in 1991, the NEA Valuebuilder Program has become one of the best-received programs that NEA Member Benefits has developed for NEA members.

You can't compare apples to oranges

When compared to similar programs distributed by financial planners and brokers, the NEA Valuebuilder Program is very competitive. But you can't compare the NEAValuebuilder Program to programs that do not provide a similar level of service; this would clearly be comparing apples to oranges. Many people who have time and consider themselves to be savvy on investment matters want to make their own investment decisions, but research indicates that a large percentage of NEA members prefer to have assistance in making important investment decisions.

NEA Member Benefits understands that a segment of members are comfortable making these types of investment decisions without face-to-face consultations. NEA Member Benefits is developing a high-quality, low-cost, phone and Internet-driven product to meet the needs of these members. Unfortunately, there are not many companies interested in providing this type of program. It is not because of fees "the union" would demand for sponsorship; it is because those companies understand the barriers and the difficulty in providing high-quality, low-cost products, in the decentralized school district environment. Companies like TIAA-CREF and Vanguard have indicated that they can't reach critical mass in a program that has to acquire payroll slots and communicate a complex investment message, without an on-site expert.

NEA Member Benefits is very proud of the NEA Valuebuilder Program. If you have any questions, please email them to Gary Phoebus, president, NEA Member Benefits Corporation gary.phoebus@neamb.com or John Wendland at jwendland@neamb.com. For more information you may also visit http://www.neamb.com/.

Special Problems Areas for Pensions

Special Problems Areas for Pensions

Not sure of the agenda of this organization - but they are correct in there assessment.

ScottyD

Teachers union criticized for pushing retirement plan -- Newsday.com

Teachers union criticized for pushing retirement plan -- Newsday.com

This isn't news, but perhaps it will have some positive effect. I've sent e-mails to Spitzers office, the SEC, and the NASD about the ING plan offered by NYSUT over the past several years and have never gotten a response (perhaps because Spitzer needs NYSUT to get elected Governor). I am doubtful anything will happen, but am glad to see this finally getting publicity. I believe a national revolution is forming and that the 403(b) will look very different 10 years from now.

ScottyD

Unions' Advice Is Failing Teachers - Los Angeles Times

Unions' Advice Is Failing Teachers - Los Angeles Times

Kathy Kristof's article on how unions are failing our teachers when it comes to the 403(b) and 457(b). I believe our unions (of which my wife is a dues paying member) can make a huge positive difference in the 403(b) world if they really wanted to, the question remains whether they want to. The only way they will change is if the membership lets them know that they want help. Send this article to your local, state, and national union leadership.

ScottyD

403(b)wise : Features : One Educator's Take on the NEA and the 403(b)

403(b)wise : Features : One Educator's Take on the NEA and the 403(b)

I started the assault on the NEA Valuebuilder product several years ago with an article entitled "Does the NEA Practice What It Preaches," since then several other people have come to the same conclusion. Kathy Kristof (article to follow) of the LA Times wrote about it recently and now a member and former product owner of the Valuebuilder has written an article. The article is posted on 403bwise.com.

ScottyD

New retirement savings plan is portable for school workers

The Bristol Press - New retirement savings plan is portable for school workers

Ok, the Connecticut Association of School Business Officials has created a 457 plan - great. They say it is low in cost, however they have partnered with ING, a company that is not known for low cost plans. Furthermore, they fail to mention that the funding mechanism for the 457 plan is a Group Annuity Contract. Why would they adopt a variable annuity for their funding vehicle? If they were truly looking to offer a great product at a great price they would not have settled for a Group Annuity Contract. There was no disclosure of expenses and in fact I did not see any mention of fees in the motion passed by the CASBO board in November.

I am doubtful that is plan is what it is says it is - though I am willing to review it if CASBO would like to put out a press release disclosing all the costs and how to get a copy of the prospectus and state publicly that they don't recieve any money from ING.

The article cites the Ohio 457 plan, they are right, it is a good plan, and it has $6 billion in assets and low costs. It utlizes mutual funds, not an annuity contract (though the recordkeeper is an insurance company).

I'm not optimistic at this point as I have seen other endorsements by ASBO states of 457 plans that turned out to be turkeys.

ScottyD

Court Blocks W.Va. Pension Merger

News Articles [PLANSPONSOR.com] - Court Blocks W.Va. Pension Merger

The closing of West Virgina's DC plan and the folding of it back into the DB plan (pension) is hitting some snags. This is something to watch if only because it will be used to show that switching to a DC plan or giving a DC plan as an alternative doesn't work in the public sector. Whether true or not, this will be a landmark event.

ScottyD

Exit Strategy - Dan Otter Profil

Exit Strategy

You'll need to create a login to edweek to view this, but the login is free and the article is worth it. This is another profile of Dan Otter, the creator of www.403bwise.com. It is a great article.

Scott

AIGVALIC Goes Single Vendor In Richmond, VA

Several years ago a bill was introduced in the California legislature to allow California Public Schools the ability to choose a single vendor for their 403(b) plans (they can actually do this already if the platform is mutual fund based). There were several companies against the Single Vendor option (which lowers costs and increases services, and should allow economies of scale to benefit the employer and employees) and VALIC was one of them. The bill was basically watered down and turned into a disclosure database which became www.403bcompare.com, a landmark in and of itself.

It appears that VALIC has had a change of heart and now fully endorses the Single Vendor concept. The attached Press Release announces that AIGVALIC will be taking over the 403(b) and 457(b) programs in Richmond, VA Public Schools. I'll be following this development to see how AIGVALIC responds in California.

Scott Dauenhauer, CFP, MSFP

10 Year Treasury Breaks 5%

Bloomberg.com: Top Worldwide

The ten year treasury finally moved above 5% yesterday for the first time since 2002. Many have wondered how long the long term Treasuries could keep from rising along with short term rates. At the beginning of 2005 the 10 year stood at 4.23% and began 2006 at only 4.37%, yesterday it ended at 5.05%. The ten year treasury is commonly used to set mortgage rates and Real Estate is typically inversely correlated with interest rates - in other words - higher rates lead to lower real estate prices (all things being equal). The 10 year has risen by 68 basis points (.68%) in just three and a half months, that is a 15.5% increase, quite a jump. The yield curve is no longer inverted, though it is quite flat from 6 months to ten years. Interest rates are impossible to predict, though some believe that this rise in long term rates was inevitable. It will be interesting to see how this affects real estate.

The link I provided is to an article from Bloomberg which also has links to several video files that talk about this latest move.

WV Teachers Vote to Return to DB Plan

Publish2

I think this will stop the current actions of many states who are trying to freeze DB plans and move to DC plans. I still believe the trend of moving toward DC plans is one that cannot be stopped, but I think it will take a lot longer in the state pension world.

Scott

Merrill Lives Up To Brokerage Firms Rep

NASD - Press Room - News Release - 3/15/06

Another nail in the coffin on why you cannot trust brokerage firms - they will always find a way to separate you from your money and work in their own best interest. Merrill was fined a measly $5 million for improperly selling and servicing clients who had less than $100,000 in assets. These "undesirables" clients where switched to a Call Center program in order to be "serviced better." I was at Merrill when this initially started and knew that this would be a joke - I turned out to be right. Merrill serviced these people like Bonnie and Clyde serviced banks. Those who could least afford the bad advice where given bad advice and sold products that were in Merrill's interest. Of course the most surprising thing is that someone is surprised.

ScottyD

Fiduciary Rules Applicable to "(b)" Plans (January 2005)

Fiduciary Rules Applicable to "(b)" Plans (January 2005)

School districts - it is time to start learning about this stuff. You have a fiduciary responsibility in your 403(b) plan whether you like it or not, the attached article gives a good overview of some of your responsibilities.

Scott Dauenhauer, CFP, MSFP

Investor's home sale tops $1 million

ContraCostaTimes.com 02/22/2006 Investor's home sale tops $1 million

Just another update in the ongoing Plan Compliance Group/Bill Reimers Scandal.

Scott

District suffers in investment collapse

ContraCostaTimes.com 01/20/2006 District suffers in investment collapse

This will be an interesting case as I am pretty sure the employees and their union will end up in a court battle with the district. The issue will be what responsibilities the school district has to the employees regarding their payroll deductions to retirement plans.

What is unclear is what actually transpired. It appears Plan Compliance Group was on the "approved vendor list" (hint: employees need to request a copy of this list to see how it is titled....approved indicates some level of responsibility) of the district and if this is true it means they signed a hold harmless agreement with the district, this agreement holds the district harmless should fraud happen and makes the company responsible. However, the district also has the responsibility to ensure that the money is actually going to an account that is allowed by the IRS. The question is what agreements did the district have with PCG and when was the last time those agreements were updated. The employees need to find their statements and figure out whether their money was ever really invested in a 403(b). The district liability in this is not clear, but the questions will be 1) Is the district responsible for verifying if a plan is actually a 403(b) approved plan, 2) If so, what steps, if any were taken by the district to verify this, 3) was Plan Compliance Group the actual investment provider or were they simply a common remitter, i.e. a firm that forwards money on to another vendor - if so, the district may actually have some liability if it can be proved that PCG was an agent (via the hold harmless agmt) of the district. This will be a very interesting case to watch, though ultimately the new 403(b) regulations require the district to take responsibility and in the future the district will likely be on the hook for occurences such as this. This is why districts are going to have to find a good system for handling their 403(b) plans.

Scott Dauenhauer, CFP, MSFP

West Contra Costa USD employees invested with Reimers

ContraCostaTimes.com 01/19/2006 West Contra Costa USD employees invested with Reimers

FYI. The new regulations for 403(b) hopefully will prevent at least some of this stuff.....if districts actually pay a little attention.

Scott

Danville investment manager in East Bay hospital

ContraCostaTimes.com 01/17/2006 Danville investment manager in East Bay hospital

Just an update on PCG and the owner Bill Reimers. I was happy to hear that Bill is recovering from his suicide attempt. While I am extremely displeased and upset about what Bill did I also am glad that he survived and hope that he makes a full recovery. The road will be tough for him as he will be forced to account for all that he has done, but this road is better than the alternative.

My heart goes out to him and his family and I keep them in my prayers. However, the people who lost their life savings via this mess are the real victims, let's not forget them in our prayers either.

Scott Dauenhauer, CFP, MSFP

Once at the top, businessman now faces probe

Yet another story about Plan Compliance Group and Bill Reimers. It seems Bill was running a ponzie scheme with individual investors in order to finance his high lifestyle. None of the people involved ever bothered to check into Reimers, whether he was registered or had any licenses. A simple check would have saved their lifes savings. Apparently one woman did do some checking and decided she didn't want Reimers managing her money, it looks like she was the straw the broke the camel's back. It looks like it was just a matter of time before everything crashed in on him. It's sad, but should serve as a lesson to investors....As Ronald Reagan used to say about the Soviets - "Trust, but Verify."

The school districts could have done a better job as well, they could have verified everything that Reimers told them as opposed to just trusting him.

Scott Dauenhauer, CFP, MSFP

High-flier's sudden fall leaves lives in ruin / Good life apparently was propped up by Ponzi scheme

High-flier's sudden fall leaves lives in ruin / Good life apparently was propped up by Ponzi scheme

A story about the damage Reimers and PCG did on the personal investor side. Trust is not enough, you must verify. You must verify your money is where you send it and not in the hands of an advisor directly. You must verify registrations, nobody did this and everybody lost.

Scott

Plan Compliance Group Update

Plan Compliance Group Update: "The president of Plan Compliance Group, the California company responsible for the disappearance last year of more than $2.6 million intended for retirement investments on behalf of island teachers and university professors, attempted suicide last month as the company crumbled under the weight of spreading accusations of fraud."

Turns out money was also stolen from individual investors, not just school districts.

This continues to be a sad story for all involved.

Scott

PCG Update

StarBulletin.com News /2006/01/11/

Update on PCG Bankruptcy and its effects.

Scott

Company accused of mishandling funds files for bankruptcy

KPUA.net - KPUA Hawaii News - Company accused of mishandling funds files for bankruptcy

It's official, Plan Compliance Group is now defunct. It will be interesting to hear the whole story, though I don't believe it will come out for quite awhile. I think it is sad for both school district employees, employers, TPA's, and Plan Compliance Group. I don't actually think PCG was a bad apple, they did a good job; it takes more than good intentions and a good job to run a business.

As always, I'll keep a watch on this an report on it from all sides.

Scott

Follow Up to Long Live the 20% Surrender Charge & Equity Indexed Annuities Debate

I've recieved quite a few comments from people on my recent article "Long Live the 20% Surrender Charge." Most of the comments were complimentary, but evidently I ruffled a few feathers in the insurance agent community (which is of course the point). I received e-mails from a few reps who called themselves Independent but then claimed to be senior reps with one of the companies mentioned. I don't see how you can be a "senior" rep with a company and still be independent, but that's another story.

I was accused of not presenting the whole story or just not being fair. One agent told me the product had been discontinued, another told me that he had placed 200 clients in that product (a truly scary thought and not something I'd readily admit too). None of these agents actually disputed that these products exist or existed, which is of course the point.

I recieved one e-mail that told me AVIVA now offers a product with only a 12% surrender charge.....only. If this doesn't tell you what is wrong with the 403(b) market, I don't know what will. I can't imagine a 401(k) plan with a 12% surrender penalty and a lousy interest rate, it may happen, but it isn't bragged about as in the 403(b) world.

Companies that are offering products with 10 year surrender periods and excessive surrender penalties shouldn't be allowed to offer products and their agents should be banned from school districts.

Equity Indexed Annuity

Recently I came across an industry publication that is supposed to be for "insurance agent use only" and it listed fixed annuity products along with their corresponding surrender periods, beginning surrender charges, and commission rates. What interested me the most was the commission differential between a traditional fixed rate annuity and the equity indexed annuities that seem to be so hot right now. I'll use Great American as an example since they sell 403(b) products, though keep in mind that I don't know if the products listed are available in the 403(b). What I want to demonstrate are the incentives agents have to sell one type of fixed annuity versus another.

Company Product Sur Period Sur Charge Commission
Great American American Freedom 10-ST 10 Years 9% 8%
Great American American Legend EIA 10 Years 10% 9%

Now, this is actually a pretty good differntial, there isn't that much incentive to sell an Equity Indexed Annuity over the straight fixed product, but there is still an incentive, one must ask why? Some companies have differentials of 7% or more which means an agent would get paid up to 7% more to sell an equity indexed annuity over a traditional fixed annuity, this is just wrong. I'm not picking on Great American, I'm picking on the insurance companies, agents, and marketing companies that continue to lie about the equity indexed annuity and pay higher commissions to promote them. The concept of an Equity Indexed Annuity could actually work (though not like presented by most agents) if it was done on an honest, simple, and commission reduced basis. The industry won't listen, they make way to much money on these products.

I'd love to continue to hear your thoughts and opinions on Equity Indexed Annuities and excessively high surrender charges on fixed products.

Scott Dauenhauer, CFP, MSFP

The Perfect Storm - School Districts Beware

School Retirement Plan Editorial

It’s Time To Get Serious About 403(b)/457(b) Retirement Plans

The perfect storm is developing in the 403(b) world, only this storm has the potential to wreck serious harm on the 403(b) industry, not the employees the industry portends to serve.  The outcome of this perfect storm could very well spell the beginning of the end for the current inefficient distribution method of the 403(b) retirement plan.  It is time the school districts and county office of educations around the country began taking these back burner retirement plans seriously.  The education community has the opportunity to take back a retirement plan that was started as an employee benefit, but has largely become a subsidy for the financial services industry.

What are the events that are precipitating this Perfect Storm?

A Movement Begins

The first event isn’t really an event, it is a movement that began in 2000 when a teacher by the name of Dan Otter started a website called www.403bwise.com that allowed a community of like minded educators to congregate in one place and speak out against 403(b) abuses in the industry and simultaneously provide unbiased education about retirement plans available to school employees.  Dan eventually teamed up with myself to write “The 403(b) Wise Guide,” a manual on how to effectively utilize the 403(b) retirement plan.  The book has sold over 10,000 copies and led to a second book solely authored by Dan called “Teach and Retire Rich.”  These two books have had the effect of educating the educators and have started a “Great Awakening” among them about how best to save for retirement.

The IRS Issues New Regulations

The second event is the Proposed IRS regulations for the 403(b) which are scheduled to become final January 1st, 2007.  These regulations are far reaching and require the employer to take control of the 403(b), whether the employer wants to or not.  The new regulations require the employer to monitor all transfers, distributions, loans, and to create a plan document that governs how the plan will be run.  While the employer is currently obligated to do many of these things already most don’t, but they won’t be able to get away with not complying anymore.  

The new regulations are serious and will create a compliance nightmare if school districts continue to offer a long list of providers.  The 403(b) industry is scared of these regulations and is fighting them.  The spokes group for the 403(b) financial services industry is the National Tax Sheltered Accounts Association and they have attempted to hire a lobbyist to fight these regulations, though they couldn’t come up with the money from their members, mainly insurance agents.  However, insurance companies themselves are taking the battle to congress and they are a powerful lobby.  My hope is that they don’t get their way.  The new regulations will be tough to comply with under the current way of operating, however they will be simple if a new way is adopted.

Intermediaries Fail

The third and most disturbing event is the series of third party administrator (TPA’s) failures over the past 18 months.  These TPA’s were responsible for accepting money from school districts and forwarding it to the 403(b) vendors the educators want to invest in.  The TPA’s were also responsible for keeping the plan in compliance.  Horizon Benefits Administration, NEBSonline, and Plan Compliance Group have not only failed over the past 18 months but are all facing criminal investigations, lawsuits, and worst of all they (allegedly) stole money from school district employees.  The latest, Plan Compliance Group has taken school districts across the country for over $3 million.  School districts across the nation are sending money to TPA’s with very few checks and balances in place to prevent this theft and they are paying for this mistake out of their own pocket.  

Not only are districts sending money to TPA’s who may not be financially viable they are sending money to financial services companies that don’t actually have their own products (I dub them “403(b) Intermediaries”).  There are many “payroll slots” in school districts where money is sent to a financial services firm and that firm deposits the money to their own corporate accounts before sending the money onto another 403(b) vendor.  These companies either don’t have a 403(b) product or their own or they offer their product alongside of others.  Though this is common practice in the industry it is dangerous for three reasons.  

First, the IRS clearly states in publication 571 that “Generally only your employer may make contributions to your 403(b) account” through a salary reduction agreement and “this agreement allows your employer to withhold money from your paycheck to be contributed directly into a 403(b) account for your benefit” (emphasis added).  Thus the IRS requires school districts to make contributions directly to your 403(b) account; they cannot be made through an intermediary that is not a direct agent of the district.  What this means is that money withheld from an employee’s paycheck should not be going to a company that simply re-forwards the money to another entity (presumably a 403(b) vendor).  This appears to be a violation of IRS rules and regulations.

Second, even if it isn’t a violation of IRS rules and regulations to send money to an entity that is not the product vendor it should be a practice that is frowned upon as the district has absolutely no control of the entity it is forwarding the money too.  If the entity a district forwards money too goes bankrupt or just steals the money before sending it to the actual provider the employee has lost money.  Presumably the school district should have exercised better fiscal control and will in the end reimburse the employee for the losses incurred by the intermediary.  School employees and school districts are financially exposed to these “403(b) intermediaries” and should not forward money to them.  In fact, a district should research vendors before allowing them on an approved vendor list to ensure that the vendor actually offers a product and that school employee money will go directly to that product (as required by the IRS).  Districts are not currently doing this and are left exposed.  Districts should be actively policing and auditing their vendors.

The third reason these “403(b) intermediaries” are dangerous is because they act as a middleman in the process and drive up the cost of products and make compliance nearly impossible for a school district.  How is a school district supposed to monitor loans, hardships, and other distributions when it doesn’t even know who has their employee’s money?  

If you take the above three events and combine them with the fact that 403(b) products on the whole benefit the financial services industry more than the employees they are suppose to serve you have a situation of The Perfect Storm.

This Perfect Storm will combine to force the pendulum to swing from an industry in favor of financial services companies (and agents) to an industry that favors the end user, the participant.  There are many ways this can happen, but I believe the best way is for school districts to combine with other school districts (combine buying power) and to move toward a fiduciary based Single Vendor System.

A Single Vendor System would solve all the above mentioned problems and if done right could save hundreds of millions of dollars annually while improving the 403(b).  This system I envision is one that has been rejected outright by the leaders of the NTSAA (the trade organization that represents the 403(b) industry) because they believe it will hurt the agents who are their members.  School districts, their unions, and their employees must come together for once on this issue and stand up to the financial services industry that controls the 403(b) and find a better way.  

There is a better way; the winds of change are beginning to blow.  

Scott Dauenhauer, CFP, MSFP

iLind.net - Plan Compliance Group Follow Up

iLind.net

A Hawaii Blogger is following the events of Plan Compliance Group and has some additional thoughts.

Scott

No Losses For Orange County School Districts

After speaking with the President of Envoy Plan Services I have been assured that no Orange County School Districts (or any Envoy school districts) have been harmed or lossed money due to Envoy's sub-contractors legal problems and allegations of theft. Envoy stopped using Plan Compliance Group in October after running the September payroll.

Plan Compliance Group allegedly stole or misappropriated nearly $3 million from school districts as it acted as a conduit from the districts to 403(b) vendors. The alleged theft took place in September. I will be providing a full report soon on what has taken place.

It is clear that school districts going forward are going to need to put better safe guards in place to ensure the employee's money is not lost due to bad Third Party Administrators. Plan Compliance Group is the third TPA to be accused of theft in the last year.

To be clear - Envoy Plan Services no longer uses Plan Compliance Group for Common Remitting though will continue to use Plan Compliance Group for compliance functions and number crunching through the end of this month. PCG will not have any control of Envoy School Districts money and Envoy is not cited or alleged to have done anything wrong.

More on this too come.

Scott Dauenhauer, CFP, MSFP

25 Schools District Sold A Ridiculosly High Cost Retirement Plan

Press Release - RSG Elite Choice

Perhpas the most scary observation was the following from this press release:

"Denise Smith, Director of Human Resources for the Imperial County Office of Education says, "We found that Elite Choice offered the most comprehensive and competitively priced program. Elite Choice is a total solution for the district and employers. Elite Choice quite simply fits our needs, and so far has exceeded our expectations."

I've reviewed this Elite Choice plan and found it to be among the most expensive retirement options ever offered. The claim that this plan meets a districts fiduciary responsibility is laughable as the fees are absolutely outrageous.

If you've adopted this plan as a district you can expect to pay about 3% in fees annually.

Scott Dauenhauer, CFP, MSFP

The Fall of the TPA - School Districts Stuck With Losses

In September of 2003 I wrote a short story titled "The Rise of The TPA." At that time we were beginning to see school districts hire Third Party Administrators to help with compliance issues relating to their 403(b) & 457(b) plans. I devoted a lot of my attention in 2003 and 2004 to one TPA, Envoy Plan Services. I didn't like Envoy or how it conducted business and I wrote to several school districts expressing my concerns. Envoy is at this point still in business, however the company it uses (or used to use) to outsource its compliance and common remitting has apparently gone to the dark. Plan Compliance Group is being accused by three states of mishandling or stealing school employees retirement funds. There is no evidence that Envoy is involved, nor have they been mentioned in any reprots, investigations, or lawsuits. I am at this point unclear of the relationship with Envoy and Plan Compliance Group, though I have call into Robert Hornaday to find out.

Plan Compliance Group is being charged with stealing money from school employees and I have been unable to reach Bill Reimers, the President for over a month to find out if he has a side to his story. The Department of Education in Hawaii and the Attorney General of Hawaii are the first to sue Plan Compliance Group for money that has disappeared.

This is not an isolated event, Plan Compliance Group is just the latest in a series of TPA failures in the U.S. that has literally cost educators millions of dollars (actually it cost the school districts millions). Last year both Horizon/Flagship Benefits Administrators and NEBSOnline both failed after stealing money from school employees before sending their retirement contributions on to the intended retirement vendor.


I have compiled links to several articles regarding the failures of these companies and will continue to update you on the Plan Compliance Group situation.

Horizon/Flagship

Unions sue districts over missing retirement funds
REVOCATION of ohio salesperson license
HAROLD HOPKINS INDICTED ON 56 COUNTS OF SECURITIES LAW VIOLATIONS
Missing investment funds scandal spreads beyond islands
Local couple named in securities/pension lawsuit

NEBSOnline

Financial officer's death adds twist to probe at retirement administrator
Ontario-Montclair fights teachers' lawsuit

Plan Compliance Group

DOE sues California firm over lapse in pension fund
Department of Attorney General - Hawaii News Release
School District Deals with Missing Money - includes video
State of Hawaii DOE Files Legal Action Against Plan Compliance Group, Ltd.
California company accused of mishandling Hawaii funds
Missing investment funds scandal spreads beyond islands
Statement by Superintendent Patricia Hamamoto regarding Employee Tax Sheltered Annuity Funds
Schools share pension woes
State Investigates Company Managing DOE Retirement Annuity Includes Video

I will continue to track this developing story. I have put in several phone calls to Mr. Reimers without a response. I have also called Envoy Plan Services to get their response. At this point it is unclear whether a relationship still exists with Plan Compliance Group and Envoy or whether any funds are missing. As soon as I find out more information, good or bad, I'll update this blog.

Scott Dauenhauer, CFP, MSFP

Smart Stops on the Web

Smart Stops on the Web

The Journal of Accountancy has named my site one of the Smart Stops On The Web!

Thanks!

Scott Dauenhauer, CFP, MSFp

DOE loses $2.28M in pension deposits - The Honolulu Advertiser

DOE loses $2.28M in pension deposits - The Honolulu Advertiser

Districts, please read, this is of upmost importance. More on this to come....

ScottyD

Equity Indexed Annuity Debate

Last week I got into a rather heated debate with another advisor on the topic of Equity Indexed Annuities. I don't like them and feel they are misrepresented, he apparently likes them (and likes to misrepresent them - in my opinion). I get called a few names, but I can take it. It's a long post, but has a lot of good information on both sides. I believe I debunk quite a few of his myths.

Have fun.

Scott Dauenhauer, CFP, MSFP

10 Rules for Saving For Retirement

What follows are the 10 rules you need to know to effectively save for retirement. I will expand on each one as time goes by.

1. Start now
2. Make it automatic (either from your paycheck or checking account)
3. Diversify, Diversify, Diversify
4. Don't be overly conservative in your allocation
5. Don't be overly aggressive in your allocation
6. Consistently increase contributions
7. Tax Diversification - use both pre-tax & post tax accounts (Roth)
8. Don't borrow from your retirement savings
9. Keep overall expense low
10. Avoid products with long surrender periods and high surrender charges

If you follow these ten rules you will have a successful retirement savings plan.

Scott Dauenhauer, CFP, MSFP

Kiplingers: I Teach Teachers How To Invest Better

403bwise creator and author of two books on financial planning for educators (including the latest, Teach and Retire Rich) Dan Otter is featured in December's publication of Kiplingers magazine. For those of you who have never met Dan Otter the above link will take you to his ugly mug (Ok, he's not that ugly, but you didn't hear it from me)!

The article is about how Dan got into educating teachers on how better to invest. Recently Dan gave a presentation based on his book Teach and Retire Rich in San Diego to a crowd of over 100 educators and it was clear that they were Wowed. The crowd had never before heard the things Dan was saying and they came away with a sense of determination to improve their financial situation. They also bought a lot of Dan's latest book which is the most excellent piece of literature ever written for educators on the topic of finance, you can pick it up at www.teachandretirerich.com or his other website www.403bwise.com. I do not get any kickbacks from the sale of his books.

Dan and I collobarated on the first book, The 403(b) Wise Guide which has become THE book on 403(b) plans - though it is now out of print (though it may make a comeback once the final 403(b) regulations are published).

It's been five years since the 403(b) Wise revolution got started and a lot has changed, but as they say, you ain't seen nothing yet!

By the way, the "financial planner" mentioned in the article is me! Thanks Dan.

Educators and School Employees - if you want to learn how better to plan for your financial future you need to read Teach and Retire Rich.

Scott Dauenhauer, CFP, MSFP

Long Live The 20% Surrender Charge....

These days you'd think that excessive surrender periods and surrender charges would be gone, after all, didn't Eliot Spitzer clean up the financial services industry?

Unfortunately there are still many unscrupulous individuals and companies who sell fixed annuities that have low returns, high surrender charges, and long surrender periods. Much of the time the products are not fully disclosed. Not only that, but the products are sold by Certified Financial Planners (of which I am one). It seems that these days you can't even trust "the most trusted designation in the industry."

Recently I met a school employee who had worked in the past with a company by the name of Zuk & Associates. I have come across Zuk many times in the past and so far have never seen anything from them that impresses me. Zuk's idea of diversification during the tech bubble was to own five different Janus funds (if you don't believe me I can show you the statements). Zuk was also against AB 2506, the legislation that created a full disclosure databank online at www.403bcompare.com (I have copies of the letters they sent to client lying about the bill).

Zuk sells a lot of products from Great American, but also products from companies like AVIVA and even occasionally mutual funds. In this instance the school employee was sold several fixed annuities. Each had 10-12 year surrender periods and one (from AVIVA) had a surrender charge that started at 20%. Another of the products had a "bonus" that was supposed to make up for surrender charges in another product that the employee was told was possibly having financial problems (a whole other story). The bonus however doesn't show up until the 5th year and even then the employee doesn't actually get to keep the bonus until the 12th year. In addition, the bonus is reduced if withdrawals are made, considering the client was at retirement age when the product was sold it is unlikely the employee will ever see the bonus.

What is wrong with the 403(b) industry? I would say that these product sales were isolated instances, however when I look up who is behind the National Tax Sheltered Accounts Association (the trade organization for 403(b) agents) I find AVIVA and Great American as two of the major sponsors. The other sponsors aren't exactly pillars of wonderful products either. This indicates to me that poor products are not the exception, but the rule.

What is clear is that something needs to be done to clean this up. Selling a fixed annuity with a 20% surrender charge isn't illegal, however it is unethical, especially if it isn't properly disclosed. It is time that a new system is put in place, a system that takes the best of the 403(b) world and the best of the 401(k) world and combines it, who will do this?

School employees - it is up to you to take better care of your retirement, you are being taken advantage of every day and don't even know it. It's not all your fault, but now there are resources to help you like www.403bwise.com and www.403bcompare.com and hourly based financial planners. It is up to you to approach your union and districts and demand that they take responsibility for their retirement plans.

Scott Dauenhauer, CFP, MSFP

MSN Money - Teachers' investment plans flunk

MSN Money - Teachers' investment plans flunk

Tim doesn't get an A for accuracy oro balance, but the overall message is pretty good - School Employee Retirement Plans are for the most part BAD and they deserve better.

I continue to see simply eggregious behaviour on behalf of the industry serving school employees and I am sick of it. The self serving behaviour and flat out fraudulent behaviour has got to stop, it risks ruining educator retirements because they lack trust in the institutions delivering the services.

If you knew the things that I knew that went on behind your back you'd be ready to sue everyone in sight. It is high time that somebody stepped up to the plate and cleaned up this mess we call the 403(b). I have a vision for what that clean up would look like, but it will take a lot of hard work and faith for this vision to come true. Over the next 12 months I will slowly reveal my vision. I'd do it sooner, but I don't want to give ammunition to those who want to derail my efforts.

Scott Dauenhauer, CFP, MSFP

K Plan Features Offer Little Incentive to Participate (free login required)

I find this quite interesting considering every time I bring up the topic of 403b plans having much lower participation rates than 401k plans I get attacked about the lack of a match in the 403b. Turns out that the match doesn't account for the huge gap.

Now, of course the industry will always have the pension arguement to fall back on (since there is a pension there is less participation), but I don't wholly buy that arguement either (though I do believe the pension provides a false sense of security leading some to not participate or participate as much as they should). If 403b participation is in the 40% range and 401k's are in the 70% range the difference cannot just be the pension plan (of which there are still private sector employees who offer both), perhaps the difference can be explained by something else........structure.

The 403b is structured terribly, it is fragmented and has an ugly retail distribution model. The 403b needs reform and I believe the new regs just be provide that impetus. It's time that a new model was given a chance.

ScottyD

Some fear decline of 403(b) plans under new law - InvestmentNews

Interesting article, but I think it misses the point. Those fearing the decline of the 403b are sales agents, not educators and the decline they are referring to is commissions, not the actual demise of the 403(b). I think the new regs will have some dissapointing effects at first, but then I think the market will adjust and 403b's will become stronger than ever. There is always opportunity in chaos.

ScottyD

Public Sector (403b/457) Plan Sponsors Confront Participation Challenges

It's a tough world in the 403b/457 arena, but a few changes could make it easy - unfortunately they aren't addressed in this article.

Scott Dauenhauer, CFP, MSFP

Magazine Articles [PLANSPONSOR.com]

www.GovExec.com - Cost of managing TSP continues to shrink (9/19/05)

This plan is a good example of how a retirement plan can be run at a low cost, however this plan is not all it is cracked up to be. It can be vastly improved without much of an increase in costs. I think State Teachers Retirement Systems should take a cue from the TSP - basically using the vast economies of scale of millions of workers with commonality to build a large asset base and lower costs. However, I believe this plan can be vastly improved upon. The education, website, and recordkeeping are horrible. If the TSP gave me one hour I could give them enough suggestions to make this plan the darling of all investment plans.

Scott Dauenhauer, CFP, MSFP

www.GovExec.com - Cost of managing TSP continues to shrink (9/19/05)

Pay For Long Term Care Insurance via 401k or 403b?

This is a good idea and one that we should all support. We need to find a way to make long term care insurance affordable and the ability to use pre-tax dollars saved in 401k or 403b plans is one way we can do that.

CAHI

403(b) Proposed Regs Delayed - NTSAA Press Release

The following Press Release came from the NTSAA today.  The NTSAA is the leading organization against the implementation of the proposed regulations from the IRS.  
The new regs are needed and I believe will lead most 403(b)’s to actually become 403(b) PLANS – as opposed to arrangements.  I think this will lead to a system where districts will adopt a single vendor for their 403(b).  At this point 403(b)’s will begin operating very similar to 401(k) plans.
I am happy however with the following release because it gives districts more time to comply with the proposed regs.

Scott Dauenhauer, CFP®, MSFP
Congress has returned to Washington from summer recess. We would like to acknowledge and thank members who contacted Senators and Representatives while they were in their respective “home” districts. If you had success contacting your own representative or senator (or a member of staff) during recess, please be sure to report that information to the NTSAA as it is important to keep a record of interested members of Congress for possible future actions.
New: Treasury & IRS Remarks:
We wanted to report comments made by Tom Reeder of Treasury and Robert Architect of the IRS at a Washington D. C. conference held last week as reported in the September 9, 2005 edition of Tax Notes Today:
Tom Reeder of Treasury and Bob Architect of the IRS “devoted most of their time to discussion of proposed regulations on section 403(b) plans” and noted that the “regs will not be effective before January 1, 2007”. He also expressed optimism that the regs will be finalized in the first or second quarter of 2006. Architect also said, "that it is likely the effective dates of some entities, such as church plans will be pushed back even further.”
In terms of the controversial written plan requirement, Reeder said, “No where in the code does it say a 403(b) plan does not have to be written. In fact, the fact that the statute refers to the word 'plan' implies that there ought to be a written plan.” To further explain that requirement, he said, “We’re not talking about a plan document in a 401(a) sense. We’re talking about a plan document that someone can use to reference what the terms of the plan are.”
In referring to the repeal of Revenue Ruling 90- 24, Architect said, "that the Service wants to get beyond Rev. Rul. 90-24 because it has complicated efforts at compliance by employers and has made enforcement more difficult for IRS agents.” However, Tom Reeder did say that “the final regs might permit some transfers that would not be allowed under the proposed regs”.
What Do We Think?
We believe that your efforts should continue, but focus almost entirely on contacts with members of Congress. Sample letters and other information to assist with these efforts can be found at www.ntsaa.org, under the “Advocacy" link.
It is important to note that Tom Reeder’s reference to the fact that the statute refers to the word “plan” is evidently based on IRC 403(b)(12) (which covers nondiscrimination rules added in the Tax Reform Act of 1986) where in (A) it says “a plan meets the nondiscrimination requirements of this paragraph if”, and in (C) there is the title “State and Local Governmental Plans”, and Plan is also used in the body of that section.
The key question for members of Congress is whether the intent was to apply the rules of plans to 403(b) arrangements, when in fact, all previous legislative history took the opposite approach. Despite many opportunities to do so, Congress has never mandated a written plan requirement for 403 (b). Even so, discussions with Treasury indicate that both Treasury and the Service hold the belief that Congress intends this result (when, in fact, Congress may well not be aware of the ramifications of the proposed changes).
Finally, as we review the Examination Guidelines, it is made clear in the detailed explanations of 403(b), that “403(b) plans take a wide variety of forms. Even where a 403(b) plan takes the form of an arrangement rather than a plan, it is nevertheless subject to all of the requirements of 403(b)”. Note that unlike qualified plans, the requirements in the 403(b) statutes do not include a written plan. In the plan document section of the Guidelines, the statement is made, “Unlike qualified plans, 403(b) plans are not subject to the requirements of a definite written program (although Title I requires a written plan document for certain 403(b) plans).”
We will continue to keep you informed, and ask that you continue your efforts to get employers, unions, and participants to contact Members of Congress.
NTSAA http://www.ntsaa.org/advocacy1.php

Ellie Lowder
Technical Advisor
email: info@ntsaa.org

FOXNews.com - U.S. & World - California Facing Teacher Shortage

Perhaps teacher salaries will rise faster than inflation over the next decade. When California faced a nursing shortage (which it still does) wages rose (as supply and demand would indicate). With home prices where they are right now it is no wonder a person in college would choose a different career than teaching. Teacher wages are going to have to rise in order to attract and retain quality (heck even unqualified) educators.

ScottyD

Teachers have few defenses when investing in 403(b)s

The Wall Street Journal lays out a great case for better 403b plans and oversight, read this article carefully.

Scott

Teach and Retire Rich is now available.

Teacher Dan Otter has released his newest book, Teach and Retire Rich. I've had the opportunity to preview the book and it is a must read for anybody in education. Every single educator in the US should be required to read this book as it will give them the insights they need to retire.

The title may sound a bit outrageous, but believe me it is worthy of its title. Pick up this book now at http://teachandretirerich.com

Scott

Great article on 403bcompare.com

ScottyD

Tired of Those High Paid Teachers!

I, for one, am sick and tired of those high paid teachers. Their hefty salaries are driving up taxes, and they only work 9 or 10 months a year!

Its time we put things in perspective and pay them for what they do, baby sit! We can get that for less than minimum wage. That's right?

I would give them $3.00 an hour and only the hours they worked, not any silly planning time. That would be $15.00 a day. Each parent should pay $15.00 a day for these teachers to baby-sit their children. Now, how many do they teach in a day?.... maybe 25. Then that's 15 x 25 =
$375.00 a day.

But remember they only work 180 days a year! I'm not going to pay them for any vacations. Let's see? That's 375 x 180 $67,500.00. (Hold on, my calculator must need batteries!)

What about those special teachers or the ones with Masters Degrees?

Well, we could pay them minimum wage just to be that fair. Let's round it off to $6.00 an hour. That would be $6.00 times five hours times 25 children times 180 days = $135,000.00 per year. Wait a minutes, there is something wrong here!!!!

There sure is, huh ??????!!!!

Send this to any teachers YOU may know. I'm sure they'd gladly accept baby-sitting rates!

ScottyD (this was not written by me, I have no idea who wrote it!)