Borzi & Graff – Two Different Views on “Choice”

Originally posted on my Meridian Wealth Blog on September 19th, 2011

http://meridianwealth.wordpress.com


http://meridianwealth.wordpress.com/2011/09/19/borzi-graff-two-different-views-on-choice/

Last week I attended NAGDCA (National Association of Government Defined Contribution Administrators) and had the pleasure of listening to the head of the EBSA (Employee Benefit Security Administration), and Assistant Secretary of the Department of Labor, Phyllis Borzi and asking her a few questions. One thing she said (as reported by Pensions & Investments) was:

Ms. Borzi discussed the Labor Department’s work on defined contribution plans. “What I’m all about is giving participants enough tools to make the best choices.”

She added: “I think the smaller the number of investment options, the better for plan participants.”

Contrast this with NTSAA/ASPPA’s head, Brian Graff who states in the 403(b) Advisor Magazine the following:

“The result of this kind of consolidation,” says Graff, “is not better products for teachers. The real consequence is that teachers have fewer choices, including the right to work with the very advisors they’ve grown to trust.”

and,

“NTSAA stands for the proposition that teachers should be able to choose the investment option that best suits their needs, “ Graff asserts in the article, “and the freedom to work with the advisor that they trust. The right advisors can help teachers be informed consumers and help them select from among their array of products the ones best suited to their clients’ unique needs.”

Keep in mind that ASPPA’s own retirement plan is not structured in such a way to provide for “choice” – they have a single vendor plan. The argument that NTSAA/ASPPA is making is that retirement plan participants in non-ERISA 403(b) plans should NOT benefit from the economies of scale that could reduce costs and provide for better retirement outcomes.

In my opinion, Advisors who are true fiduciaries will always find a way to work with their clients – they aren’t limited by the ability to sell one product or another – in fact, what makes them a great Advisor is that they are not selling products, but providing a service (that of financial advice).

Now, here is the odd thing – Mr. Graff is quoted in a Wall Street Journal piece stating “The IRA market is like the Wild West,” said Brian Graff, chief executive of the American Society of Pension Professionals and Actuaries, a trade group. “Things go on that would make people wince.” He is saying this as it relates to the DOL’s proposal to make fiduciaries of those who work with IRA’s. The irony is that the 403(b) is the original Wild, Wild West and operates much like the IRA market (except likely worse) – yet Mr. Graff does not support the same proposals for 403(b) as he does for IRA, curious.

Of course, not everyone is happy with Borzi’s position (which is the DOL position) as a recent WSJ editorial made clear “The Borzi Savings Bomb” and which appears to support the NTSAA/ASPPA “Choice” argument when it states:

“When it comes to new regulation, the Obama Administration has impeccable timing. Just as Americans are worrying about how much is left in their 401(k)s, the Department of Labor has decided it wants to reduce the plethora of options that we have for retirement accounts.”

The industry has been in uproar over Borzi’s “Savings Timebomb” of actually requiring those who purport to deliver advice actually put the best interest of those individuals they serve, first. Seems like an indefensible position to me – I wonder what a Senator or Congressman would say when asked the question “Would you want the financial advisor to your mother to be required to put her best interest first?” It’s hard to believe any would say “No”, and if they did the voters should think twice about re-election. Of course, this is the exact position being taken by most Senators and Congressmen.

It seems to me that the integrity of the US financial system was put in jeopardy by Wall Street banks who didn’t have a fiduciary duty to their clients…yet, we haven’t learned our lesson. I for one support Borzi (though I would make a few modifications to the Fiduciary definition – just minor tweaks).

Whose vision will win out in the 403(b) market? My hope is that the Borzi vision wins. I support her efforts in bringing additional transparency to retirement plans.

It’s been almost two months since I challenged NTSAA/ASPPA/Brian Graff to answer some easy questions publicly (see 5 Questions Brian Graff Should Answer Publicly – July 29th, 2011) and there has been no response, only censorship (see Censorship, False “Choice”).

I’ve spoken to numerous individuals who are members of ASPPA who are bewildered by the position taken – I hope they make their voice heard, I have.

Scott Dauenhauer, CFP, MSFP, AIF

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