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

Originally posted on my Meridian Wealth Blog on August 26th, 2011

http://meridianwealth.wordpress.com 


http://meridianwealth.wordpress.com/2011/08/26/ntsaaasppa-false-“choice”-censorship-graff-radio-silence/

False “Choice”
ASPPA through their NTSAA branch has decided to side with old school 403(b) providers and are trying to keep the gospel of “choice” alive. The surface argument is that participants should be able to work with whatever advisor they choose. What is really behind this argument however is a set of high-cost providers trying to protect their turf and product lines. When ASPPA/NTSSA speaks of “choice” they are simply protecting their members, not participants – it’s code.

I think we can all agree that a participant should have the ability to work with whatever advisor they choose, however where I disagree with NTSAA is the qualifications and legal duties to those participants. I believe that an advisor should be required to always put the best interest of the participant first and find it tough to believe anyone could disagree with such a position. Where ASPPA/NTSAA fails in their position is where they promote products over people.

There is no reason a plan can’t have a single vendor, but offer multiple fiduciary advisors. This gives the participants a fiduciary plan with the benefits of competitive bidding along with their choice of advisors. They can continue to use their current advisors so long as that advisor adheres to a fiduciary standard.

ASPPA/NTSAA must answer the question why they don’t support a fiduciary standard for all advisors who work with participants.

The current argument over choice is a red herring, it’s really an argument over whether the participants should have an advisor who is a Fiduciary.

Brian Graff Update
Mr. Graff has been radio silent since I posed five questions to him in my blog post Five Questions Brian Graff…. Why the silence Mr. Graff? The questions are easy to answer, what are you hiding from?

Here is a link to Mr. Graff’s LAUSD escapades.

Keep in mind I am not attacking Mr. Graff on a personal level – I’m posing questions to him as the leader of an organization which has taken a position that is in my opinion anti-participant.

ASPPA Censorship?
Mr. Graff has been silent on questions posed to him, but obviously feeling the pressure. My post of questions experienced a lot of traffic and generated a lot of buzz. Instead of answering the questions ASPPA sent out Robert Richter to try to reframe the debate, but then decided they didn’t actually want a debate and refused to approve comments that were contrary to their position. So, I decided to post Robert’s response and MY response to him which ASPAA has refused to approve. What are you so afraid of ASPPA? Why the censorship? Shouldn’t the industry be debating this and how can ASPPA be against fiduciary advice in retirement plans? Richter’s post and my response is below:

From Robert Richter on LinkedIN:

403(b) Consolidation

Some of you may be a aware of an ongoing debate over some positions taken by ASPPA & NTSAA regarding 403(b) plans for K-12 public schools. ASPPA & NTSAA, along with a coalition of interested parties, will be rolling out a website and a campaign to clarify our positions and why the positions being taken are in the best interests of teachers and staff at our public schools. In the interim, a few comments are warranted. 

We know that due to regulatory changes, 403(b) plans have a greater resemblance to 401(k) plans. Aside from the substantive legal differences, however, one must understand that the delivery and implementation of 403(b) plans in K – 12 public schools is considerably different than 401(k) plans. There are no on-site human resource functions at each school to provide investment education and enrollment functions. Rather, schools have taken a passive approach to 403(b) plans – they allow a payroll slot for those teachers who want to participate in a 403(b) plan. It has been up to advisors to reach out to teachers to encourage them to participate in the plan and in how to invest those contributions. A soon be to be published study will demonstrate that the elimination of options in 403(b) plans (and the corresponding elimination of the existing relationship teachers have with advisors) results in significantly decreased participation rates by teachers. 

Another important distinction between 403(b) plans and 401(k) plans is that under ERISA, employers who sponsor 401(k) plans have a fiduciary responsibility to ensure that fees are reasonable compared to the services being provided. It’s not simply a matter of who has the lowest fees. The new fee disclosure regulations will also help ensure that conflicts of interest are more readily apparent. This fiduciary obligation, along with nondiscrimination requirements, requires sponsors of 401(k) plans to have an active role both with respect to the plan and to encourage employee participation. These factors do not exist in the public school environment. 

Notwithstanding this, some large bundled insurance providers are trying to push legislation that will effectively push smaller providers and advisors out of the market. They are lobbing state capitols to convince lawmakers that the state should take over 403(b) plans and significantly limit the number of providers, and sometimes pushing for a single provider. We don’t believe using legislation so that large insurers can gain a market advantage is in the best interest of public school employees. 

We are certainly not taking the position that the 403(b) market is perfect. As an organization, we continue to be concerned about issues relating to hidden fees. As you know, DOL’s fee disclosure rules do not apply to K-12 403(b) plans. So we are doing something about it. We have established a joint task force with the National Education Association and the Association of School Business Officials to create fee disclosure standards for public school 403(b) plans. These national standards will allow public school employees to make apples to apples comparisons of different 403(b) options so they know clearly how much they are paying and what services they are paying for. As we know in the 401(k) industry, it’s not all about fees and public school employees should not be denied the opportunity to work with a personal advisor and product provider they trust. 

I hope this will alleviates any concerns that ASPPA & NTSAA members have. More detailed (and more eloquent) explanations will be provided in the very near future.

My Response to Rober Richter which has yet to be approved by ASPPA, despite two comments in favor of Robert being approved after my comments were submitted.

Robert,

I see that you have decided against answering any of the questions that are actually on peoples minds. Here are the five questions you need to answer:

1. Do you believe School Employees should always have their best interest put first by any advisor they work with, in other words, a conflict-free fiduciary standard?

2. Why shouldn’t all advisors who want to work with School Employees be held to a fiduciary standard?

3. Would ASPPA be open to allowing multiple 401(k) providers for their organization with no process for “screening costs, fees or other terms or conditions” and would they support such a structure for private sector 401(k)’s? If not, why and do you believe this would violate ERISA?

4. You have stated several times that competitive bidding and/or single vendor options will not lower costs and fees and that participation rates suffer under such regimes, disregarding the fact that this is standard practice in the 401(k) world which you represent. Where is your evidence to support such conclusions?

5. In your recent NTSSA article you claimed victory over the Los Angeles Unified School District (LAUSD), please explain how, by hiring a lobbyist law firm and sending threatening letters, you were not acting as a bully for the financial services industry?

Your defense of the status quo and of brokers/agents over participants is disturbing on so many levels.

Your national standards for disclosure do NOTHING to require that the brokers/agents working with educators place those educators interest ahead of their own.

You fail to mention that it is NTSSA/ASPPA actively lobbying against Multiple Employer Plans that seek to provider lower cost, fiduciary based services to participants as well as advisory services. You are the one working to protect a dying industry (retail based fixed annuities sold by non-fiduciary agents and brokers).

You have ignored 403bCompare.com and you know that “comparing fees” simply ignores the fact that the people you represent sell products that are free of fees (spread products).

You have attacked consultants who pledge a fiduciary duty as essentially conflicted and yet you don’t point out the huge conflicts of the firms you represent.

Will you be the one to answer the questions I pose or will you hide behind Project Albatross? ”

LAUSD Responds To Brian Graff & NTSSA/ASPPA

Originally posted on my Meridian Wealth Blog on August 3rd, 2011

http://meridianwealth.wordpress.com

http://meridianwealth.wordpress.com/2011/08/03/lausd-responds-to-brian-graff-ntssaasppa/

The head of ASPPA/NTSSA has a lot of explaining to do. I’ve challenged his recent op-ed in a related post, please see: Five Questions Brian Graff & NTSSA/ASPPA Need To Answer Publicly

Even before his Op-Ed, Graff had been advocating for broker/agents rights over the rights of participants and he took his fight to the Los Angeles Unified School District (of whom he claimed victory over in his op-ed). His presentation to the committee was filmed and is available on YouTube, but I’ve also embedded for your viewing pleasure below.

The Committee that Graff made the presentation to at LAUSD has issued a statement of their own, and it takes Graff/ASPPA/NTSSA to task for supporting brokers over participants. I’ve included the response below.

Also see, A Tale of Two Cities…er, Retirement Plans.

5 Questions Brian Graff & ASPPA/NTSAA Should Answer Publicly

Originally posted on my Meridian Wealth Blog on July 29th, 2011

http://meridianwealth.wordpress.com

http://meridianwealth.wordpress.com/2011/07/29/5-questions-brian-graff-asppantsaa-should-answer-publicly/

Recently Brian Graff penned an op-ed for The 403(b) Advisor (see below), the official magazine of the National Tax Sheltered Account Association titled “Eliminating Choice Will Hurt Public Employees.”

The op-ed was an effort to show support by NTSSA/ASPPA of brokers and agents who act in a non-fiduciary capacity when advising school employees. Nowhere did the article talk about participant’s rights to conflict-free fiduciary advice; instead it focused on restraining competition by allowing any vendor that wants to offer a product (in a school district) to offer such product without obstruction. Mr. Graff certainly doesn’t support such a vision for the 401(k) industry, so why for the 403(b)?

As Mr. Graff begins his Project Albatross lobbying group (any chance the details on this will be made public Mr. Graff?) I believe it is time he answers some hard questions.

Here are five questions that I challenge Brian Graff to answer publicly and in writing. His response is welcomed to be posted unedited on the 403bWise.com website.

1. Do you believe School Employees should always have their best interest put first by any advisor they work with, in other words, a conflict-free fiduciary standard?

2. Why shouldn’t all advisors who want to work with School Employees be held to a fiduciary standard?

3. Would ASPPA be open to allowing multiple 401(k) providers for their organization with no process for “screening costs, fees or other terms or conditions” and would they support such a structure for private sector 401(k)’s? If not, why and do you believe this would violate ERISA?

4. You have stated several times that competitive bidding and/or single vendor options will not lower costs and fees and that participation rates suffer under such regimes, disregarding the fact that this is standard practice in the 401(k) world which you represent. Where is your evidence to support such conclusions?

5. In your recent NTSSA article you claimed victory over the Los Angeles Unified School District (LAUSD), please explain how, by hiring a lobbyist law firm and sending threatening letters, you were not acting as a bully for the financial services industry?

Mr. Graff – the fiduciary community is awaiting your response.

Scott Dauenhauer CFP, MSFP, AIF

A Tale of Two Cities…er, Retirement Plans

Originally posted on my Meridian Wealth Blog on July 18th, 2011

http://meridianwealth.wordpress.com

http://meridianwealth.wordpress.com/2011/07/18/a-tale-of-two-cities-er-retirement-plans/

I started working with Government Defined Contribution Plans in 1998, its been quite a ride and a lot has been accomplished, but there is much more work to do.


The link above will take you to my paper hosted by Scribd.


Scott Dauenhauer, CFP, MSFP, AIF

403(b) Paperwork is Out of Control - Thank You IRS

Last week I helped a client rollover a 401(k) to an IRA. The IRA was already opened and all we had to do was get online and make the distribution, a few clicks and we were done. Conversely, it could have been done over the phone in just a few minutes. For most 401(k) plans it is a simple thing now to get a rollover processed - not so for non-ERISA Government 403(b). I just finished the paperwork for a client and have my fingers crossed it will make it to all its destinations and not be rejected along the way - my estimate for time of receipt of rollover funds is anywhere from 60 - 120 days. Here is the process:

Open the IRA if it isn't already.
Contact provider of where 403(b) account is held and receive their paperwork.
Contact the TPA of employer where the client worked and find out if they require paperwork...they do. Send all the paperwork to the client to sign (this takes a few weeks to get the forms back and may or may not require a phone call to walk through it with them)
Receive paperwork back and fill it out, check for errors.
Create cover page and send both sets of paperwork (Current Vendor and TPA) to the IRA holder so that the IRA can sign that they are accepting the rollover.
Pray that the IRA provider reads the coverage and keeps the originals, signs where required and then forwards the originals to the TPA.
Pray that the TPA approves the request and doesn't require more paperwork and that the TPA actually forwards the originals to the current 403(b) vendor.
Pray that 403(b) Vendor receives back their account paperwork in good working order and an approval from the TPA to process.

As long as all those steps happen, the rollover should happen...should! Gotta love the 403(b) market.

BTW - the paperwork is having fun traveling, here is a list of its destinations:
Murrieta to Hemet
Hemet to Murrieta
Murrieta to Cincinnati
Cincinnati to Florida
Florida to North Carolina
Check goes from North Carolina to Cincinnati...


Scott Dauenhauer CFP, MSFP, AIF

Lincoln Financial Group - "...extremely profitable business....403(b)"

Lincoln Financial Group has an interesting press release today about how profitable they are, stating:

With $164 billion in assets under management as of July 1st, 2011, Lincoln Financial Group hopes to further increase their already extremely profitable businesses: annuities, disability, life, and group life insurance, as well as 401(k) and 403(b) and savings plans.

I always want the companies doing business in the 403(b) market to be profitable, this leads to better and more innovative services - however it is disturbing to hear a company describing their 403(b) business as "extremely profitable." There is only one way for 403(b) business to be "extremely profitable" and that is on the backs of those participants in their 403(b). Scott Dauenhauer, CFP, MSFP, AIF

403(b) Regs Waste Enormous Amounts of Money

I'm trying to help a client rollover an account at an old employer in another state. It is a 403(b) and she stopped working for the district back in 1993. It has taken me nearly four months and two paperwork submissions for me to be told that the district can't verify my client ever worked for them - so the plan administrator will not process the rollover. Keep in mind my client has an account that is in the name of that district's plan - thus proof she was employed there. The administrator has had to waste time on this, I've spent several hours on it and now the school district will be forced to go through employment records all the way back to 1993 (which likely means ordering boxes from storage) all so a $5,000 account can be rolled over.

Are you happy IRS? Your regulations could have served to ease the burden on employers and make the 403(b) a better, easier plan -instead it has become an endless drain. Its time to reform the reform.

Scott Dauenhauer, CFP, MSFP, AIF

A Tale of Two Cities...er, Retirement Plans

A call for revolution in the Government Defined Contribution Retirement plan arena. Click on the link above.

Brian Graff at LAUSD Oversight Part 1 (of 4)

Brian Graff at LAUSD Oversight Part 2 (of 4)

Brian Graff at LAUSD Oversight Part 3 (of 4)

Brian Graff at LAUSD Oversight Part 4 (of 4)

TSA Consulting Group Buys Great American Plan Administrators

The good folks over at TSA Consulting Group have dug deep and entered into an agreement to buy Great American Plan Administrators, or GAPA. GAPA was an arm of the commission fixed and equity indexed annuity company Great American. Great American essentially used GAPA as a loss leader to maintain payroll slots or obtain payroll slots. This allowed them to continue to sell their retail fixed and equity indexed annuity products via commission based sales agents.

There is no disclosure as to what, if any agreement was reached as to keeping those payroll slots open when the administration transfers over to TSA Consulting Group. Though it is unlikely they would sell to a company that planned to shut them out.

TSA CG has a big job ahead of them. Traditionally, GAPA offered free administration services to districts, now those districts will have to pay (though I'm pretty sure the structure will be a vendor pay model). All in all, TSA CG is vastly superior to GAPA and this should expand TSA's reach into parts of the country they don't have a presence.

Scott Dauenhauer CFP, MSPF, AIF

LSW, Veritrust & Equita Under Investigation

A California insurance investigator, Mark Colbert is investigating Life Insurance of the Southwest, Veritrust Financial and Equita Financial.

From Mark's website:

In California, Arizona, Texas, Florida and Nevada, agents who've sold life insurance policies, annuities and/or 403(b) products for The Life Insurance Company of the Southwest (LSW), Equita Financial Group, and/or Veritrust Financial Services (VFS) are currently being investigated.

Insurance victims have claimed agents promised that life insurance policies (also referred to as Life Solutions will be "paid-up" in as few as five to seven years and work just like a ROTH IRA.

If you, or someone you know, owns a Life Solutions plan, you/they are encouraged to have an insurance or financial professional (other than someone at one of the companies named above) review it. I have already seen nearly a hundred of these cases in California and Texas and would be happy to speak with anyone who currently owns one of these policies.

You can contact Mark at www.markcolbert.com

Scott Dauenhauer

P & I: 403(b) participants hurt by unfair rules

I've been saying this for years, its nice to see others echo it.

The link above may not work, so some of the story is reprinted below, it begins:

While there has been significant convergence between 401(k) and 403(b) plans, 403(b) participants are still treated as second-class citizens when it comes to getting the best pricing on their savings for retirement.

401(k) plans are free to have the most appropriate and cost-effective investment structure — including mutual funds, annuities, commingled trusts and separate accounts. But not 403(b) plans.

Instead, because of anachronistic laws, 403(b) participants are limited to mutual funds and annuities — regardless of the size of the plan. This is unfair and counter to our social policy that seeks to encourage working individuals to contribute toward their retirement security.

Essentially arcane 403(b) rules limit participants ability to buy into cheaper investment options. In some plans I work with we can use Collective Investment Trusts to dramatically lower expenses or provide investment flexibility to participants - this cannot be done in 403(b)'s and leads to higher costs.

Of course, this is not the only issue with 403(b) plans, but its a start that Congress should get to work on now.

Scott Dauenhauer CFP, MSFP, AIF

Ronald Reagan: Collective Bargaining = Freedom

Does this sound like the Republican party of today? For all the talk of how Reagan is the role model for the Republican party one wonders if they actually know what Reagan stood for. I rarely get political in this blog, however, the title is The Teachers Advocate and what has happened in Wisconsin is not only a blow for freedom, but an attack on people who are not the ones who have caused this economic depression (that would be government and Wall Street).

Reagan once said that he didn't leave the Democratic party, it left him. I wonder if he would say the same about the Republican party of today.

Scott Dauenhauer CFP, MSFP, AIF

Two New TIAA White Papers

I have NOT had a chance to evaluate either of these papers. They are for your review only. When I do read, I will be sure to post my comments and thoughts.

Scott Dauenhauer CFP, MSFP, AIF

Reforming K-12 Educator Pensions: A Labor Perspective


Pensions and Public School Teacher Retirement

Jon Stewart: Crisis In Dairyland Part III of III - Those Darn Teachers!

The Daily Show - Crisis in Dairyland - For Richer and Poorer - Teachers and Wall Street
Tags: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

Jon Stewart: Crisis In Dairyland Part II of III - Those Darn Teachers!

The Daily Show - Crisis in Dairyland - For Richer and Poorer
Tags: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

Crisis In DairyLand: Jon Stewart's take on Wall Street vs. Teachers

Who is more important Wall Street or Teachers?

I might have a unique perspective because I worked on Wall Street and am married to a teacher (full disclosure, I do consulting work for Teacher Retirement Plans). I'm here to tell you, it isn't Wall Street - but you'd never know it by the current discourse. Jon Stewart skewers some people who still cling to the notion that the average teacher is a part-time worker. My wife is a teacher and I can tell you - there is nothing part-time about her work.




Scott Dauenhauer, CFP, MSFP, AIF

The "Benefit Counselors" Provision in 403(b) TPA Contract

Recently I came across a contract between a 403(b) Compliance TPA and a school district in California that had an interesting provision:

"The "XXX XXXXX" (name of TPA), through its licensed financial professionals ("Benefit Counselors"), will assist Plan Participants regarding their rights, benefits or elections under the 403(b) annuity arrangement upon reasonable request of the Employer. The "XXX XXXXX" may, as part of its Administrator duties, limit access to Plan Participants to those Benefits Counselors who meet its qualifications including professional licensing and adherence to a Professional Code of Conduct."

I cannot be sure that this contract is still in-force, so I'll limit my comments to what I believe is wrong with such provisions in general.

To provide a bit of background, this particular TPA charges a premium fee over most other TPA's in California (80% more compared to a few of the larger players) AND this TPA employs sales agents to sell 403(b) and 457(b) plans. The sales agent part is what is concerning as this TPA is now referring to them as "Benefit Counselors" and is attempting to exclude any other individual from working with the employees of this school district, essentially attempting to establish a monopoly. What is interesting to note is that the Employer via this arrangement has now made a Fiduciary delegation to this TPA to vet potential Benefit Counselors. I have been unable to find anything that talks about what qualifies these individuals to act as "Benefit Counselors" (BC's) and I do not see anything in this agreement that requires these BC's to act in the best interest of the participants, i.e. act as Fiduciaries. The fact that these people are licensed and adhere to a professional code of conduct is meaningless - are they held to a Fiduciary standard? The answer is that they will not be.

So you have an Employer who likely doesn't understand what they are doing making a Fiduciary delegation to a conflicted entity who ONLY allows Benefit Counselors that are loyal to the TPA and owe no fiduciary duty to the participant.

I'm not harping on the monopoly aspect of this, I could support that if the environment was one that contained a duty of loyalty and was based on Fiduciary principles - I am deeply concerned that plan participants may be exposed to sales agents masquerading as qualified "Benefit Counselors" who will NOT act in the best interest of plan participants.

Captive Benefit Counselors of a TPA with full delegated powers who owe no fiduciary duty is dangerous combination.

Scott Dauenhauer CFP, MSFP, AIF

Bloomberg: Indexed Annuities Cap Gains, Obscure Fees as Sellers Earn Trip to Disney

Another great article regarding the pitfalls of Equity Index Annuities.

Scott Dauenhauer

Money Mag: Index annuities are a safety trap

I am not a fan of Indexed Annuities. Equity Indexed Annuities (EIA) are the reason I started working with educators, so I guess they've done some good! Back in 1997 I came across my first teacher with an Equity Indexed Annuity, one sold by Americo - it was toxic. Sure, you could never lose money (unless you surrendered in the first ten years...), but the index formula was so stacked against the client and so easily manipulated by the insurance company that I believed the client would be lucky to earn 2% annually. I found that this was not only common, but rampant and the last decade has seen nothing but huge growth in these products.

When people ask me if Equity Indexed Annuities are good for retirement, I tell them yes, as long as you are talking about the retirement of the agent selling them. Commissions are huge, incentives are amazing (trips to every exotic locale you can imagine) and most of the agents have never read the contract or can even do the actual crediting method calculation.

Great job to Money Magazine for exposing these scams (something I've been doing now for 13 years).

Scott Dauenhauer CFP, MSFP, AIF

9th Circuit says regulatory safe harbor for employee pension benefit plans is limited

It looks like the NEA suit is dead:


"The “Valuebuilder Plan” could be construed as referring to the individual Valuebuilder annuities offered by Nationwide and Security Benefit. However, these annuities were not established or maintained by either the employees' school district employers or by the NEA. These annuity contracts could not, therefore, be “employee pension benefit plans” covered by ERISA. Insofar as the employees used the term “Valuebuilder Plan” to refer to these individual § 403(b) annuities, they failed to state an ERISA claim. The judgment of the district court had to be affirmed."

In America there are two defined contributions systems - one that is governed by ERISA and one that is not. Those who are in non-ERISA plans are apparently able to get away with just about anything. This needs to change.

Scott Dauenhauer

Can Retirement Plan Fiduciaries Accept Gifts/Perks?

There are some fiduciaries out there who don't have an issue accepting gifts from vendors they do business with or may do business with. The following two articles provide some perspective from a legal basis:

https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0B_j6Iy8Ev55_ZWVkNWNlMWUtYzJhNS00ZTVmLWJlM2UtY2I4MWQ0Y2NmYWNk&hl=en

https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0B_j6Iy8Ev55_NjhkODQ4OTItZWYxMC00ZTM2LWE5Y2ItNDBmN2ExMWVkNjY2&hl=en

You decide, I think the answer is clear.

Scott Dauenhauer CFP, MSFP, AIF

Marcia Wagner: Plan Sponsor's Duty To Avoid Conflicts of Interest

You'll need to click the above title to be taken to the article by attorney Marcia Wagner (who has a number of great articles). This article speaks mainly to ERISA plans, but all Plan Sponsors should take heed of its contents and follow them.

There are many in this 403(b)/457(b) industry (on the government) side who ignore the existence of ERISA because it doesn't technically apply to them. They don't feel a tinge of guilt when they break nearly every prohibited transaction rule and even find foolish reasons to defend their actions.

There are those in the public arena that take great care to run their plans on a fiduciary basis, unfortunately they are currently in the minority.

My advice if you are reading this article is to keep a copy if you are a plan sponsor or administrator, read it every quarter and distribute it to all that work with you. If you are a participant, print it out and send it to your plan sponsor or administrator - hold them accountable.

We need accountability in this 403(b) world, without it bad things happen to good people. There are some in this industry that profess to be Fiduciaries and then do the exact opposite in private, hoping not to be found out or believing that if they are found out that no one will care. YOU KNOW WHO YOU ARE.

Scott Dauenhauer, CFP, MSFP, AIF

TIAA Issues New IRA Contracts With Lower Guarantee

That free lunch that TIAA was offering...gone, for the most part. Up until October 10th you could open an IRA with TIAA-CREF and if you qualified you could get a 3% minimum crediting rate and guarantee - with full liquidity. Those days are gone (thank you Ben Bernanke). The new minimum rate is somewhere between 1 and 3% - my experience is that it is now 1.25%. It still has full liquidity, so its still a reasonable option, its just not an amazing option (like it was before).

You can bet this move is based upon TIAA belief that interests rates will likely remain low for an extended period of time. I don't like the move, but I understand it. For those of you who have TIAA products with a 3% guarantee, you should be careful when moving money so as not to mess that up.

Below is the press release (which I missed):

The effective date of this change has been updated from October 13 to October 11, 2010.

Beginning October 11, new Investment Solutions IRA contracts which contain TIAA Traditional Annuity will have an adjustable guaranteed crediting rate of 1% to 3%.

The TIAA Traditional Annuity in IRAs pays a guaranteed crediting rate while offering the opportunity for additional interest amounts, as declared by the TIAA Board of Trustees. Additional amounts, when declared, remain in effect for the “declaration year” which begins each March 1.

This change does not affect the minimum crediting rate for other TIAA Traditional retirement products, including Retirement Annuities (RAs), Supplemental Retirement Annuities (SRAs), Group Retirement Annuities (GRAs), or Group Supplemental Retirement Annuities (GSRAs).

This change only affects the TIAA Traditional Annuity in Investment Solutions IRA accounts opened after October 11, 2010. TIAA-CREF IRAs that do not offer the TIAA Traditional Annuity product are unaffected by this change.

The prospective change to the Investment Solutions IRA TIAA Traditional Annuity crediting rate reflects the prevailing low interest rate environment and conforms with state insurance laws, which allow insurers to adapt more quickly to the interest rate environment than in years past. TIAA holds the highest insurer financial strength ratings from all leading independent rating agencies.

Questions & Answers

Will my Investment Solutions IRA contracts be subject to a change in the guaranteed minimum crediting rate?
This change only affects Investment Solutions IRA accounts opened after October 11, 2010. TIAA-CREF IRAs that do not include the TIAA Traditional Annuity are unaffected by this change.

Who is eligible to open a TIAA-CREF Investment Solutions IRA?
The TIAA-CREF Investment Solutions IRA is available to participants and their spouses or partners who work for institutions that are eligible to use TIAA-CREF products for their retirement plans. Please note that TIAA-CREF offers other types of IRAs to the investing public.

How is the minimum crediting rate on the TIAA Traditional Annuity account in the TIAA-CREF Investment Solutions IRA changing?
The minimum crediting rate for the TIAA Traditional Annuity in the TIAA Investment Solutions IRA contracts issued on or after October 11, 2010 will change to a minimum guarantee of between 1 percent and 3 percent, compared with a guarantee of 3 percent for Investment Solutions IRAs opened before that date. These changes, which are in conformance with state insurance laws, reflect the current low interest rate environment. Minimum crediting rates for the TIAA Traditional Annuity in existing IRAs and the TIAA Traditional in other TIAA contracts such as the RA, SRA, GSRA and GRAs are unaffected by this change.

Where can I get more information on IRA products?
TIAA-CREF offers several IRA solutions to meet investors’ needs. For more information, please visit www.tiaa-cref.org/ira or speak with an advisor at 800 842-2776.

What is TIAA’s insurance financial strength rating? What does this mean?
TIAA holds the highest insurer financial strength ratings from:

A.M. Best Company as of 12/2009 — A++
Moody’s as of 7/2010 — Aaa
Fitch Ratings as of 4/2010 — AAA
Standard & Poor (S&P) as of 5/2010 — AAA
These ratings are for TIAA as an insurance company and do not apply to variable annuities, mutual funds or any other product or service not fully backed by the claims-paying ability of TIAA. Ratings are subject to change. There is no guarantee that current ratings will be maintained.

The insurance financial strength ratings are one means of assessing the financial strength of an insurance organization, including the ability of the insurer to meet its obligations. TIAA’s capital and contingency reserves – which determine its claims-paying ability – are among the highest in the company’s history, ending the first quarter of 2010 at $24.1 billion, an increase of $1.3 billion over year-end 2009.

This message is informational only and not intended to solicit any TIAA-CREF product or promote any contract transaction.

Guarantees are based on the claims-paying ability of TIAA.

Annuity products are issued by TIAA (Teachers Insurance and Annuity Association), New York, NY. Brokerage Services are provided by TIAA-CREF Brokerage Services, a division of TIAA-CREF Individual & Institutional Services, LLC, members FINRA and SIPC.

Government DC Plan Disparity

In my last piece I talked about the problems in Government DC plans - see Thrown To The Wolves. This is just a quick update.

In the past few months the Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) has been busy. They have done some excellent work in updating fee disclosures, transparency and fiduciary obligations, specifically they have released the following regulations or proposed rules:

408(b)2 Interim Final Regulations
404(a) Participant Fee Rules
Definition of Fiduciary Proposed Rule

There are substantial changes including increased disclosures, greater transparency and more participant protections and yet, none of these rules apply to Government Defined Contributions plans such as 403(b) and 457(b). Sure, many government employers will adopt some or all of these rules/regs but the majority will not. Why is that one set of employees in America is treated so differently than another set just because their income comes from the Government. Is it ironic that these government plans are not subject to government rules/regulations?

Its time that Government employees receive the same rights and protections that private-sector employees receive in relation to their Defined Contributions plans.

Scott Dauenhauer CFP, MSFP, AIF

Labor Dept. eyes reports of advisers exploiting retirees

If only the Department of Labor had state jurisdiction - you'd see a different Government DC marketplace.

This article details some of the abuses taking place in 401(k) - you can bet if they are taking place in 401(k), its much worse in 403(b) and 457(b).

Scott Dauenhauer CFP, MSFP, AIF

Government Employees: Thrown To The Wolves

Why California Is Wrong To Believe That Our Pension Problems Will Be Solved By A Move To Defined Contribution Plans



If you listen closely to the politics of the day you might hear that many of our budget problems would be solved by a simple switch from Defined Benefit (DB) plans to Defined Contribution (DC) plans. Not true.

The problem isn't with our pension plans, it is with our politicians promising what cannot be delivered. But aside from that it would be irresponsible to move our public employees (even "just" future employees) to DC only plans. Why? Because we would be throwing them to the wolves.

You see, in California and many states around the country public employees do not enjoy the same protections that private employees receive when it comes to Defined Contribution plans (403(b) and 457(b)). Government defined contribution plans are not governed by the same laws, namely ERISA that private plans are. There is no Department of Labor that protects our public employees from the wolves in sheep's clothing that stalk our public employees. EBSA might as well mean Employees Being Sold Adrift (EBSA is a division of the Department of Labor and really stands for Employee Benefit Security Administration).

Yes, there are some fiduciary laws on the books in California and other states across the U.S., but they are rarely enforced. The term Fiduciary is bantered about and there are some revolutionaries who take up its banner, but by and large our public employees are bait when it comes to their DC plan.

The new 408(b)2 rules are great rules; except they don't apply to Government DC plans.

It is so bad that in some places criminal behavior has become the norm. What would ordinarily be punished in the private sector as criminal is rewarded in the public sector, even encouraged. Transparency is the exception, rather than the rule (at least the public sector has one thing in common with the private sector!).

The term Fiduciary is truly the "F" word when it comes to public schools - not because employers don't care, but because it isn't a priority - and why should it be? I'd much rather have my local school district spend their time focusing on education - not figuring out the Alpha, Beta and Sharpe of a certain mutual fund. The issue is not that people don't care, its that it isn't even on the radar. In addition, even if it was on the radar there is no enforcement.

Politicians across the U.S. are campaigning on the issue of over-abundant pensions. Maybe they are right, maybe they are not (full disclosure: my wife if one of those people who works her....uh, well she works really hard every day as a school teacher and thus is a beneficiary of a government pension, so I may be a bit biased)...its up to the voters to decide. What is wrong with the pitch that is being made is that these politicians have absolutely no clue that they are throwing these public employees to the wolves. What is worse is that these public employees have been the prey of the wolves for decades and nobody has done anything about it (save a few good souls at CalSTRS...full disclosure: I have done and hope to continue to do consulting work for them).

Two Americas


For some reason we have divided DC plans into Two Americas - those in the public sector and those in the private sector. Those in the private sector enjoy the protections of ERISA (but please don't get me started on 404(c)); those in the public sector are subject to whatever the state legislature MIGHT have put into place for the state's DB plans (with few exception). Why should public employees not be entitled to the same disclosure rules under 408(b)2 (essentially full transparency of service providers) that the private sector will be entitled to come July of 2011?

Why do we have two systems of regulation for DC plans in the US (forgive me, one system of regulation, another system that is essentially unregulated).

Good people are getting hurt and suffering because of this. Moreover, when corruption occurs (and trust me, it occurs) it is not punished - in fact it is rewarded. It is an injustice that has no protector. When a government employee is sold an investment because the individual selling that investment earns a trip to some exotic locale - that employee should at a minimum be disclosed such facts and in reality the person selling the investment should be punished (It shouldn't be allowed in the first place).

Government employees DESERVE to have their DC plans run by competent Fiduciaries, not people who put their own interest ahead of participants.

Conclusion


I've seen too much to sit back and let the prisoners run the asylum, its time that all Government DC plans were held to a higher standard - a Fiduciary standard. Its time that those who seek to undermine public employees Income Security (hmm..perhaps we should create PERISA - the Public Employees Retirement Income Security Act) are held accountable for their actions and are duly punished, not rewarded. It is time that the Duty of Loyalty that should be owed to our public employees DC plans actually means something.

Many public employers currently do the right thing (I know because I work with them on a daily basis), but too many public employees are in plans that are not in their best interest.

I challenge all that believe in a Fiduciary Standard to join me as I work to create a Fiduciary Standard for all government employees that is actually enforced....in other words, Stay Tuned.

Scott Dauenhauer, CFP, MSFP, AIF

"I Have Not Yet Begun To Fight"

According to Wikipedia:

During his engagement with Serapis, Jones uttered, according to the later recollection of his First Lieutenant, the legendary reply to a quip about surrender from the British captain: "I have not yet begun to fight!"

Spotting a Fake Fiduciary

Recently I've come across numerous situations that really tick me off. When I set out to help change the School Employees 403(b)/457(b) world I knew it would take a long time, real change doesn't happen overnight. Don't get me wrong, we've made a lot of progress, but sometimes it feels like employers are taking one step forward and two steps back. What has recently set me off are insurance agents that masquerade as "Consultants" for 403(b) and 457(b) programs. In most cases the insurance agent has convinced the employer that they are knowledgable and will act as a fiduciary - but in the end they are usually looking for a payday. This is of course my experience and my opinion (If you didn't already know, my first amendment right to criticize has been severely curtailed).

These fake "Consultants" even appear to conduct Request for Proposals processes and many times even invite good providers to compete. However the invitation to the good providers is usually just a farce used to gain credibility - the fix is in from the beginning - the consultant already knows who they are going to choose. The chosen providers typically have a revenue agreement with the Consultant. So - how do you spot one of these Wolves in Sheep's Clothing? Look for the following and ask the questions:

Questions for the Consultant?

Do you have a financial relationship with any of the proposed vendors?

Are you licensed to sell the specific product the vendor is offering and do you plan on receiving commissions or fees or trips for selling that product?

Please disclose all compensation you could potentially receive from each of the potential winning vendors?

Do you require a vendor to "Pay to Play" in order to make the finalist list? In other words, will the winning vendor(s) be required to pay money to the "Consultant" if they win? (Note: This is different than a bidder paying agreed administrative payment to the Plan, which the Plan Sponsor may pay out to compensate a Consultant)

Has the vendor paid for any trips you have taken in the past seven years? This is a no-no.

I could list dozens more questions to ask, but I think you get my drift - a True Fiduciary is someone who always acts in the best interest of the participants - ALWAYS.

A True Fiduciary will not take trips paid for by vendors or potential vendors, those trips will be paid for by the Fiduciary him/herself as a cost of doing business. A True Fiduciary will not enter into undisclosed agreements with vendors to receive commissions (or even disclosed agreements). A True Fiduciary will receive income only from their client, not from a vendor. A True Fiduciary will not utilize his/her position of power to benefit him/herself.

Fake Fiduciaries abound, in fact they are the majority. True Fiduciaries are Independent and will put in writing that they are Fiduciaries. True Fiduciaries will always act in your best interest and will not receive income from any source other than their client. They will disclose their conflicts of interest and try to avoid them whenever possible.

The state of the School Employees 403(b) and 457(b) world has trended toward the Fake Fiduciary, in fact it is dominated by Fake Fiduciaries. I come across them everyday. They are scared to death to have any light shed on them and their practices as they will be exposed for what they are - Self-Interested Fakes. This country is in desperate need of True Fiduciaries...School Employees are in desperate need of True Fiduciaries.

School Employees need to demand accountability and employers should work only with True Fiduciaries.

I am a True Fiduciary, are you?


Scott Dauenhauer CFP, MSFP, AIF

Free Speech Non-Existent in San Diego

More to come, but be careful if you criticize a public figure in San Diego - the First Amendment no longer protects you.

ScottyD

Quoted in Forbes: Teachers Facing New Financial Pains

Quotes:

"They have no faith in the stock market and feel they've been misled that stocks produce a higher return [than bonds] or that they'll be rewarded for stock market risk if they just hold on long enough," he says.

Many school districts are also barred from giving financial advice or restricting vendors selling high-cost annuities from campuses, Dauenhauer said. That makes some teachers easy pickings.

"The insurance agents prey on the teachers fears," he said.

What's to be done? For starters, expect that your 403(b) will be as large a part of your retirement as your pension plan, and invest it accordingly. While some teachers may think that their non-pension retirement savings can be invested more aggressively because there is a backstop, Danhauer argues that teachers may find themselves on the hook for more of their health care costs down the line because of the shaky state of government finances.

"The 403(b) has been thought of as supplemental," he said. "My mission is to convince teachers that it is essential to a healthy retirement."

Scott Dauenhauer CFP, MSFP, AIF

SASH - Bad Choice

Douglas Holt of TDS & The Lotter Group Finds New Broker/Dealer

Looks like Mr. Holt found a home, Lighthouse Capital Corporation.

I don't know much about this company other than they are small, though I did come across some weird connections on google, you can review and decide.

Securities and Exchange Commission v. Diversified Lending Group, Inc., et al., United States District Court for the Central District of California, Civil Action No. 2:09-cv-01533-R-JTL

Lighthouse was mentioned in this Dow Jones article as having some connections to Diversified Lending Group, though it is unclear if there are any regulatory issues stemming from this apparent scam.

This seems to me an interesting place for the Lotter Group and Holt to land (assuming the group went with him). The question becomes whether all that 457 money was bulk transferred from his previous broker/dealer to this new one.

Were the school districts affected notified of this? Seems like pertinent information to me.

Security Benefit - Operator of NEA Valuebuilder - Sold to Guggenheim

Not sure of the implications, but we'll follow.

Scott Dauenhauer CFP, MSFP, AIF

Architect to VALIC

Former IRS official and 403(b) expert Bob Architect has joined VALIC.

In an unrelated story, VALIC is sued in California, click here.

Developing....Architect to VALIC

Press Release to follow.

Former IRS official famous for his leadership and knowledge in 403(b) has joined VALIC.

Scott Dauenhauer

Remember This Story - Puplava and FBC

I am reposting the link to this story mainly because the FBC has decided that two days of deposing me is not enough. They are pissed at my involvement in the story behind the scenes and have chosen to subpoena all sorts of stuff. They even made what could only be taken as a threat to sue me in the last deposition (they meaning Dan Shinoff, the FBC attorney). The FBC is suing the former advisors and those advisors are countersuing the FBC. I am not being sued, just deposed....yet! The price you pay for standing up for the little guy I guess. I wonder how much taxpayer money is being spent on this lawsuit?

Scott Dauenhauer CFP, MSFP, AIF

What Happened to TDS's Doug Holt?

I heard a rumor that Doug Holt of TDS is no longer with TDS, as of yesterday. I don't usually report rumors, only things that I can substantiate. I decided to check out his FINRA status on BrokerCheck and sure enough, he is no longer registered and it shows "Termination", though it doesn't state why. I should note that this termination is from Questar, his broker-dealer, so I can't say for sure that he is not with TDS. I'm awaiting an e-mail reply from TDS.

Update: Latest sources tell me Doug hasn't been terminated from TDS, only Questar (his Broker/Dealer). I wonder who the new broker will be on all those 457(b) accounts.

By the way, this is a tad strange as usually you can transfer to a new broker/dealer, there must have been some reason he didn't, we should find out soon.

10/30/2009 Update:

According to FINRA Holt was discharged by Questar on September 14, 2009 for the following reason:

"Registrant was terminated after internal review evidenced failure to provide prompt written notice and obtain written approval to participate in a private securities transaction and used unapproved marketing material."

I have given TDS a chance to respond to this, they have thus far refused.

Scott Dauenhauer

SchoolsFirst to Begin Charging Vendors for Compliance

SchoolsFirst has now joined the ranks of those charging vendors for compliance, citing the high costs of keeping districts in compliance. It makes one wonder how those who claim to do it for free are able to do so (the answer is they are losing money and hoping to make it up on product sales volume of their TPA partners).

For those districts utilizing SchoolsFirst, since the service is no longer free, perhaps it is time to look at the other available TPA's.

Scott Dauenhauer CFP, MSFP, AIF

Schools First Letter 10-14-09

TIAA Cracks Down On Switchers

Evidently enough people caught on to a secret trick that allowed one to reset their interest rate at TIAA (TIAA Traditional). Basically, you would sell into the money market (out of Traditional) on one day and then buy back in the next. This would effectively increase your rate to the new rate. So if you are earning 3% now and TIAA changes the rates to 3.5% you simply sell today into the money market and then repurchase back in a few days later and voila, you are now earning 3.5%. Well it turns out that this little trick caught on last year or TIAA knows that its going to have to raise rates in the future and doesn't want people resetting their rates (at least very often), so they are instituting the following new policy:

When you transfer out of TIAA Traditional and transfer back within 120 days, the amount, up to your original transfer, will be credited with the same interest rates that would have applied if the transfer out had not taken place. Such interest will be credited from the date the transfer in was made. Interest will not be paid for the period from the date of transfer out to the date of transfer in. Do you wish to continue with this transfer?

This will help, though lets say rates jump to 5% on the Traditional and I'm earning only 3%, you think I care if I lose out on 120 days of interest? I'll take that trade any day.

In reality this is a smart move, a daily liquid account like this is dangerous when you have volatile rates.

Scott Dauenhauer CFP, MSFP, AIF

Ed Siedle Speech: "Perspectives on the Future"

Click above to goto a great speech by Ed Siedle.

Since the 1980s the financial services industry has experienced explosive growth. Over the decades dealing with brokers, money managers and other financial advisers ceased to be limited to the wealthy few. As a result of shifting responsibility for retirement planning onto workers and financial product innovation, virtually all Americans (and foreign investors for that matter) that had accumulated any degree of wealth turned to financial services firms for expert, independent investment advice and investment products.

Scott Dauenhauer CFP, MSFP, AIF

Former TDS Representative Sues TDS Group and Robert Lotter

Below is the copy of the lawsuit that Emily Wang has filed against Robert Lotter's TDS Group (Tax Deferred Services). This lawsuit gives considerable insight into what happened during the transition to Lotter. I'm going to decipher some of it for you in commentary to come.

Scott Dauenhauer CFP, MSFP, AIF



TDS Group Sued By Former Rep

Calling a Spade a Spade - Brokers Giving Investment Advice

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20091004/REG/310049996&ht=spade

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The "Free Education" Fallacy

Why most financial education programs in the Public School 403(b) and 457(b) world are really just covers for commission-based product sales.

A question that I continue to hear from Public School employers these days is “how do we best educate our participants?” Several companies that work in the 403(b) and 457(b) world have begun to develop and market “education programs” that purport to “raise financial literacy across the entire workforce.” I am all for financial literacy, in fact I think it is imperative that financial literacy is incorporated into our public school curriculum, however it is clear that financial education in relation to defined contribution participants (401(k), 403(b) and 457(b)) has failed.

There is plenty of evidence to support the failure of participant education:

Many participants are eligible for a match (free money) and fail to take advantage

The average participant account balance underperforms

The average participant couldn’t tell you the difference between a stock and a bond

More than 60% of participants don’t participate (about a third in 401(k)’s)


If you look at the dispersion of who is contributing to their 403(b) or 457(b) by age group those who are closer to retirement make up the overwhelming majority. These facts do not support the notion that participant education is working.

Participant education in Public School 403(b) and 457(b) retirement plans is very different than in 401(k) plans. In 401(k) plans there typically is a single plan and signing up is relatively easy, an advisor holds a plan meeting, provides some “education” and then helps people enroll or directs them to a website. This is not the case in 403(b) and 457(b) government retirement plans.

Most 403(b)/457(b) Public School retirement plans are “multi-vendor,” which means that the employer doesn’t have a single provider for their plans, they may have five or ten or in California, up to 76. Not only do these employers have multiple vendors, but many of these vendors also offer multiple products. In many districts in California its possible to have nearly 300 different products available to a participant. Each of these products may be sold by multiple agents, meaning that the number of choices between vendor, product and sales agent are almost too numerous to figure.

Imagine being an employee in one of these plans, you would be completely overwhelmed.

California has a website, www.403bcompare.com in which each of the 403(b) products are disclosed in terms of fees and returns, yet it is unreasonable to expect the average employee to actually analyze all the available options. Its tough enough for the average 401(k) participant to analyze the twenty-to-forty investment options available to them, imagine the school teacher who has to manage nearly eighty vendors, nearly three-hundred products and potentially thousands of investment options within those products and then finally choose from whom she wants to purchase that 403(b). No amount of “participant education” or “increased financial literacy” will enable the average participant to fully understand what is being offered to them.

It is the “multi-vendor” environment that feeds the perceived need for more “participant education.” The sheer number of options overwhelms people and pushes them either into paralysis or into the arms of a commission-based salesperson, who shows up on campus under the guise of “education.” If the education was truly unbiased and not related to commission-based products, there might be an increase in participants making the right choices, however there is no evidence there would be an increase in the number of participants overall.

The true reason behind the push for “participant education” in the 403(b)/457(b) School District retirement plan world is commissions.

While many firms represent that they only want to provide “unbiased” financial education, they are lying. Think about it for a second, can you think of any non-profit financial education companies that are not tied to product manufacturers in some form or fashion? You can’t, its because they don’t exist. When someone comes to your workplace to provide “education” on a 403(b) plan (in a multi-vendor environment) it is for one reason and one reason only, they want to sell you a product in order to earn a fee or commission. They are not interested in protecting your best interest, they have no duty of loyalty to you and they are not providing the “education” in order to increase your financial literacy. Financial education is a front for product sales. There is a reason that the Department of Labor is making changes to the highly conflicted regulations under ERISA that allowed for salespeople to give investment advice.

A few Third Party Administrators (TPA) for Compliance in California sell their “free” services and wrap them in the blanket of “free financial education.” Even worse, some charge for their compliance services and then offer to provide “free financial education.” This is dangerous for both the employer and the employee. Free financial education, if offered without commission-based product sales is fine, but that is not what is offered. The TPA essentially is acting as an agent for the employer - to the employee the TPA appears to be “endorsed” by their employer (either implicitly or explicitly) and this leads to the assumption (right or wrong) that the representatives of that TPA are selling products that have been approved by the employer.

Essentially the employees are trusting the employer made the right decision and they transfer that trust to the TPA representatives, this is exactly what the TPA Representatives want. Once the TPA and its reps have the confidence of the employees (based on the implicit employer endorsement) they need only to get in front of them to sell commission-based products. The means to get in front of them is “participant education.” The TPA is simply a front for the sale of high-cost, commission-based financial products that are rarely in the best interest of participants.

These education conflicts can be avoided by not hiring a TPA or provider of 457(b) plans that earns a commission or a hidden fee for selling financial products. They can also be avoided by not allowing sales agents on campus to “provide education.” There is no evidence this education works and it only facilitates an employee providing a commission to a sales person who has no duty of loyalty to that employee.

If you doubt me, simply ask the TPA sales organization to put in writing that all of their sales representatives will act as a Fiduciary (under ERISA) at all times when working with your employees, none of them will do this.

So what is the solution to the education problem? That’s a story for another time.

Full Disclosure: I am a consultant to the CalSTRS 403bComply and Pension2 service offerings. CalSTRS provides financial education and does NOT receive commissions or fees in exchange for the sale of financial products.

Is There Really “Appropriate Separation” Between ZUK and Great American Plan Administrators?

UPDATE: SEE BELOW AFTER YOU READ THIS SECTION, IMPORTANT NEW INFORMATION PROVING THE QUID PRO QUO.

In a recent letter to School Business Officials (SBO’s) regarding 403(b) Compliance, a ZUK representative claimed it “has appropriate separation between the TPA, product manufactures and education providers thus eliminating conflicts,” but is this statement true? My opinion is that it is not.

One of the “free” Third Party Administrators (TPA) that ZUK uses or at least recommends to some of the districts they service is GAPA, or Great American Plan Administrators. I decided to test this “separation.”

I guess one can measure “appropriate” however one desires, for my purposes “appropriate separation” will mean that the TPA does not benefit financially in the form of commissions from the sale of 403(b) and other financial products. This seems like a reasonable way of defining “appropriate.”

Let’s exam the relationship between ZUK, product manufactures, education providers and GAPA.

GAPA or Great American Plan Administrators is a subsidiary of the Great American Life Insurance Company (GALIC) and is also affiliated with Annuity Investors Life Insurance Company (AILIC).

Great American is a product manufacturer and markets '14' 403(b) products in California according to 403bCompare.com (vendor numbers 1167 and 1092). Each of these products pay a commission to selling agents and Great American earns revenue from the sale and ongoing servicing of these products. My research shows that Great American and Annuity Investors Life Insurance Company are both on all “Approved Vendor” lists that Great American Plan Administrators does the “compliance” for (in California). Does this sound like “appropriate separation” when the administrator who supposedly does the work for “free” benefits financially when certain products are pushed over others? Utilizing my definition of “appropriate,” this relationship doesn’t pass the test and I think we’ve discovered how Great American Plan Administrators can offer “free” compliance.

Of course, it doesn’t end there. We’ve established that there is NO separation between the TPA and the product manufacturer, let alone “appropriate separation,” but what about the appropriate separation between the TPA and the “education providers”.

Who are the “education providers” in this case? ZUK financial advisors. Are conflicts eliminated by allowing ZUK advisors to provide “education” and are the ZUK advisors really separate from Great American?

I’ll let you decide. I went to the public ZUK website and clicked on “The Advisors” link and looked up each advisor that works for ZUK on the state of California Insurance website to see who these advisors were registered to do business with, it is publicly available information.

Of the 19 advisors listed on the site, 16 were licensed and appointed with GALIC and 18 with ALIAC. Only one representative is not appointed with a company affiliated with Great American Plan Administrators. This doesn’t mean that every ZUK representative sells Great American annuities and life insurance or that any of them are required to sell Great American annuities and life insurance. However, it is interesting that ZUK recommends GAPA and states they are “eliminating conflicts” when in fact the conflicts that exist are quite large. Not only does GAPA offer products for sale, almost the entire ZUK advisor team is licensed to sell them. I can tell you from experience in working with clients that were former ZUK clients that nearly every client I took over from ZUK had at least one product sold to them from GALIC or ALIAC. So, is this how GAPA offers capital intensive “compliance” services for free? I think the mystery is solved as to why ZUK offers the GAPA TPA service and how it is offered for free.

Its one thing to advertise yourself as “unbiased and objective” its another thing to be unbiased and objective and I don’t think the evidence presents a case that ZUK “has appropriate separation between the TPA, product manufactures and education providers thus eliminating conflicts.”

Free is an enticing word, however the IRS wasn’t joking when they created the new 403(b) regulations and they expect employers to comply. Using a free service that does not generate revenue from compliance is an open door to problems in my opinion. Entities that perform free services to subsidize product sales will inevitably end up cutting corners (at least in my experience), something employers cannot afford. Employers need a partner whose primary business is 403(b) compliance, not 403(b) product sales.

Full Disclosure: I am a consultant to the California State Teachers Retirement System 403(b) Comply and Pension2 service offerings.

IMPORTANT NEW INFORMATION UNCOVERED PROVING THE QUID PRO QUO

A client of mine is now contributing to a new 3121 plan (commonly referred to as a Social Security Alternative Plan) and that plan is now with Great American. Why is this important? The employer that this plan is with hired the gentleman from ZUK whom I refer to above to take their 403(b), 457(b) and 3121 plan out to bid. Whether the employer knew or understood that this individual worked for ZUK and was a product peddler is unclear at the moment, but an RFP (request for proposal) was conducted and guess who won the bid - ZUK. ZUK brought in their own 457(b) that pays their reps a commission and brought in Great American Plan Administrators as the TPA (the "free" TPA). It was a foregone conclusion who would be hired, imagine ZUK being hired to "consult" and then choosing someone else. So who did ZUK choose to offer the 3121 plan? None other than Great American Financial Resources's insurance subsidiary Annuity Investors Life Insurance Company and guess who is the agent on the policy? The ZUK consultant....sound like appropriate separation to you? This is the Quid Pro Quo, the free administrator is awarded with annuity product sales made by ZUK. Only in the land of non-ERISA 403(b) could this occur.