St. Vrain 403(b) Example - Freeze It

St. Vrain Valley School District in Longmont, Colorado decided enough was enough when it came to its 403(b) plan, electing to freeze it:

Last November, the District Retirement Committee distributed a survey to all employees regarding its optional retirement plans.  The results of that survey indicated that employees desired an improved plan design, better education and communication, and lower fees.  In addition, the District received negative feedback from employees regarding some of the existing 403(b) and 457 providers, and there had been no official performance or fee review process in place to address these concerns.  Further study revealed large discrepancies among the different providers regarding products offered and fees charged.

St. Vrain instead is offering the state plan, Colorado PERAPlus 401(k) and 457(b) as the sole provider going forward.

They have taken a novel approach to the freeze in order to minimize disruption, they are allowing existing 403(b) participants to continue contributing to their existing providers (five in total).  New participants much choose the PERAPlus plan and if current 403(b) participants stop contributing, they cannot begin contributing again to a 403(b).

This move sets up a long process where eventually the district will have a sole vendor for their 401(k) and 457(b), allowing the 403(b) to die a slow death.

The St. Vrain Retirement committee stated the reasons they chose the PERAPlus program:

The benefits of taking this course of action include the following: 

• PERAPlus is the lowest-cost optional retirement savings plan for Employees 

• Clear, consistent education by a single organization—education meetings are coordinated by the District but provided by PERA at no cost  

• Reduced fiduciary responsibility by SVVSD and the Retirement Committee  

• Removed need to retain portfolio consultant for plan/investment oversight 

• Reduced administrative and compliance burden on the Financial Services Department

• Removed sales culture surrounding District retirement plan offerings 

• Least disruptive option to existing participants; old plan will eventually phase-out through attrition

It's not clear why St. Vrain decided to freeze the 403(b) instead of reforming it, but the politics of reforming the 403(b) may have played a part.  In addition, I believe that the lack of a clear ability to delegate fiduciary duty (no state based 403(b)) played a part.

I believe this move will work out well for St. Vrain and its employees, it should send a message to vendors (as well as the IRS) that the status quo will not stand.

My only concern is for the people currently in a 403(b). These participants have no avenue for gaining access to a low-cost 403(b) option for their existing money (exchange), it's essentially stuck in one (or more) of the five high-cost vendors that were previously approved.  Not providing an outlet for these participants is about the only flaw I see.

The document produced showing the history of the decision is below:

  St. Vrain Plan Transition Summary

I've written about school districts relieving their Fiduciary Responsibility by outsourcing their plan to a state-based Plan Sponsor (Colorado PERA in this case).  This is just the tip of the iceberg for such moves.

Scott Dauenhauer CFP, MSFP, AIF

Teachers Don't Work Hard Enough? Think Again

Explore more infographics like this one on the web's largest information design community - Visually.

403bWise Webinars - Can You Teach and Retire Rich?

My friend and co-author is hosting a webinar for school employees on September 21st, 2013.  If you've never heard Dan present, you won't wont to miss it.  $15 is a steal and the best investment you'll ever make for retirement.  Click the picture below to register.

The American Dream - Selling Annuities & Riding Motorcycles!

I received an e-mail advertising a promotion for a Harley - I just have to sell enough of one particular annuity company - American Equity Investments.  Isn't it strange that a company that only sells fixed annuities has "American" "Equity" and "Investments" in their name?  

When is this nonsense going to stop? A person's savings should not potentially be invested in a particular company's annuity product so that an insurance agent might earn a special perk.

Insurance agents should be the first one's to condem this.  We need good, ethical insurance agents and this kind of blatant bribery is unethical in my opinion.  

Here's the ad, you decide:

Scott Dauenhauer, CFP, MSFP, AIF

The Teacher's Advocate

@403badvocate

@meridianwealth

President

Meridian Wealth Management

www.meridianwealth.com

Buying Service Credit Can Be A Slam Dunk

One of the most consistent requests I receive from new educator clients (as well as other government employees) is to run an analysis to see if it makes sense for them to buy (or repurchase) service credit.

It used to always make sense, but today there are fewer purchase options and in most cases the cost has increased to the point where they would be better off saving in a 403(b).  But not always.  I still come across situations where it not only makes sense to make the purchase, it would be crazy not to.

I use several different models to determine whether the buyback makes sense, but the easiest to understand is the one that tells the client "how long do I have to live to break even?"  Break even being the number of months one would receive income from a pool of money, earning a specific interest rate and that pool becoming exhausted.  There is no right number of months, it really depends on the client, but believe it or not, I've come across some service credit purchases that allow the client to make back every dollar in just over four years of retirement, assuming no interest (longer with different interest assumptions).

Recently, I ran a scenario for a client who had already decided against the buyback.  I won't give away the state where this plan resides and we'll name my client George.  George had less than four years that could be purchased for about $28,000.  He thought this to be too much money.  However, the annual increase in benefit was just over $7,500.  I didn't have to run any numbers to determine this was an incredible deal, but I ran them anyway.

I wanted to see what rate of return George would need if he invested the money on his own and then provided the same income (adjusted for a similar inflation benefit) to himself and lived to about normal life expectancy.  Using 86 as normal life expectancy I calculated that George would have needed a return of almost 21% annually (with no fluctuation in that return) to provide the same benefit the buyback of service credit would provide.  This became the biggest buyback slam dunk I've ever encountered.  Not buying back the service credit would be leaving potentially hundreds of thousands of dollars on the table.  Not only was it worth it, but the client should certainly borrow if they didn't have the funds.

I should state that I rarely run into these "slam dunk" service credit purchases anymore and when I do they are usually of the "repurchase" variety - meaning the client had taken money out of the system many, many years ago and is eligible to re-purchase those years.  Normally, when a person takes a distribution of their defined benefit balance after leaving an employer, it is only their own contributions plus earnings that they receive - not the employer contributions.  So when they ask to repurchase the credit, they have the employer contributions restored, lowering the cost of the buyback.

Buying service credit can be a smart idea, even if the payback period or internal rate of return is not great.  But generally I like to see a payback period under 12 - 15 years (depending on if it's a single life or joint life) and an internal rate of return to average life expectancy over 5%.  Client risk profile is very important in this decision, so my numbers will vary with the client.

If you are eligible to repurchase past service credit, you should look into it.  If you are eligible to purchase years of service credit for which you were eligible, but didn't work - get the data and have someone run the numbers.  While "airtime" is becoming more rare and not usually worth it anyway, you might also look to see if it makes sense for you.

Be careful who you ask to run the calculation, a product salesperson has a vested interest in you NOT doing the buyback.  A buyback can be like found money, don't leave it on the table.

Scott Dauenhauer CFP, MSFP, AIF
@403bAdvocate

Conflicts in Fixed Annuities: Incentives Part II - The Trips, The Amazing Trips!

Do you know what incentives lurk behind the products our nation's educators are sold in their retirement programs?

It doesn't take much time searching the internet to find some of these incentives.  I receive e-mails everyday detailing where I can go if I sell enough of XYZ product.

One major conflict of selling most fixed annuities is insurance agents may be incentivized to sell products of a single company (or several products from a single Insurance Marketing Organization) in order to qualify for special perks.

These perks might be exotic trips, cash or even Apple products. 

There is no law against offering special perks and insurance companies are within their right to offer agents big incentives to sell their products.  However, it's my opinion that this is a major conflict of interest that should be disclosed and potentially even banned.

Fully paid for vacations to exotic locales could certainly persuade an agent to sell one annuity product or another or to sell an annuity when another financial product would be more appropriate. Educators should be aware of the incentives behind products sold to them. In a perfect world there would be no incentives, only the best interest of the client and a fully disclosed compensation scheme separate from the recommendation.

Qualifying for exotic trips is one of the biggest lures for getting insurance agents to sell the products of an insurance company or from an Insurance Marketing Organization (or IMO, an entity that essentially wholesales annuity products).  Sell enough of a certain product or of a collection of products and the agent may end up with a trip to any number of locations.

Many companies offer trips and other perks as incentives to sell their products.

What follows are the destinations for this year and the last few years for those who qualified for one big name insurance company:

2014 Hayman, Great Barrier Reef; Sydney, Australia

2013 Big Apple Bonus - New York City

2013 The Ritz-Carlton, Key Biscayne Florida

2012 Fairmont Orchid Resort, Kohala Coast, Big Island of Hawaii

2011 Riviera Maya, Mexico

2010 Florence, Italy

Another insurance company has a “Leaders’ Club,” which awards a Mediterranean cruise for those who produce enough annuity premium. The cruise is on the Crystal Serenity Ship and cruises to Italy, Greece and Turkey from April 20th to May 7th, 2014!

This company also had a qualifying trip for 2013 to the Four Seasons in Lanai, Hawaii, not bad.

I’ve attached various documents I’ve found from Insurance Marketing Organizations below. It's a cornucopia of great vacation locales:

Ireland

Ritz Carlton in Hawaii

Puerto Rico

Spain

Portugal

Alaskan Cruises

Riviera

Whistler

The list never ends.

Here's a link from an e-mail I just received, check out the headlines:

Silverado Resort and Spa in Napa ValleyExplore all that the Napa Valley has to offer in your limousine wine tasting excursion. Later, you can unwind with a soothing fireside massage or full service spa.
Pebble Beach LodgeEnjoy this world-renowned resort, while indulging in two rounds of golf at the infamous Pebble Beach courses.

All of these trips are achieved by selling annuities to our nation’s educators.  I think it's reasonable to ask if this is appropriate.  The issue has certainly been addressed before in the financial services industry.

Back in 2003 the National Association of Securities Dealers (NASD), now the Financial Industry Regulatory Authority (FINRA) fined Morgan Stanley $2 million dollars for conducting sales contest that “offered or awarded various forms of non-cash compensation to the winners, including tickets to Britney Spears and Rolling Stones concerts, tickets to the NBA finals, tuition for a high-performance automobile racing school, and trips to resorts.”

That was over a decade ago, yet a similar practice in the fixed annuity industry is not only allowed, but seemingly encouraged (Morgan Stanley never admitted or denied the charges). Why is this okay?

Why are our nation’s educators retirement savings being invested by such conflicted sales agents? In my opinion,  this is not acceptable. The industry answer is a disclosure document that is light on disclosure, does not disclose incentives behind the sale and misses the point entirely.  An industry spokesperson from ASPPA/NTSAA was recently quoted:

“We maintain that improving transparency is a far better approach to improving the 403(b) marketplace, than taking away public school employees retirement choices.”

How convenient. Parade around a confusing disclosure document that doesn’t actually disclose pertinent items like exotic trips and whether or not the agent is acting as a fiduciary rather than addressing the actual problem.  Having said that, I think that insurance companies, insurance agents and insurance marketing organizations should be transparent about what incentives are behind the sales of their products.

Since fixed annuities are insurance products, they are regulated at the state level - they are not securities and thus out of the purview of the SEC or FINRA. Perhaps the Consumer Financial Protection Bureau should get involved. For what it’s worth, I’m calling on the fixed annuity industry to make changes to the sales incentives they offer.

I call on all insurance companies that offer products to our nation’s educators to do the following immediately: 

Stop offering additional incentives for the sale of your products

Stop offering your products through IMO’s who offer such incentives

Set commissions on a level basis and disclose them fully

Don't allow agents who sell your products to represent themselves as advisors

Insurance agents, you are not innocent in this - I call on you to do the following:

If possible, stop doing business with companies who offer exotic trips in exchange for recommending their annuities.

If offered a special incentive, kindly decline

Disclose to clients the existence of such incentives

Make your voice known on this topic

I’m willing to bet my e-mail inbox will be silent.

I want to make clear that not all insurance agents are evil, greedy, commission and perk hungry.  I've met many qualified agents whom I respect and even refer my clients to when appropriate.  A good insurance agent can be very valuable (though less so in the fixed arena).  But if you are in education and the person selling you something is licensed to only sell you that product, you might look elsewhere.  As the saying goes, when all you have is a hammer, everything looks like a nail.

I’ve listed links to a bunch of the documents I found on the internet referring to special trips. The links are likely to be dead soon (if they aren’t already)...so, I’ve pdf’d the documents and made them all available to you using my own host. All the documents were obtained on the open internet - no passwords, no firewalls, the information was freely available to anyone.



Scott Dauenhauer CFP, MSFP, AIF
@403bAdvocate
The Teacher's Advocate



 Chairman’s Club 2014

 Champions 2013

 2012

 2011

 Leaders Club

 Miscellaneous Trips

Conference of Champions

AVIVA Leaders by Scott Dauenhauer

Farewell, About Time and WTF?

Farewell, But Not Goodbye

It was announced a few days ago that Julia Durand, Director of Defined Contribution Solutions at the California State Teachers Retirement System (CalSTRS) would be leaving to accept a position as the Deferred Compensation Manager at the San Francisco City and County Employees' Retirement System.

This is a bittersweet announcement for me as I've had the pleasure of working with Julia since 2008 and she has become a real 403(b) Advocate (and friend).  Given that there are so few 403(b) advocates, it's tough to lose one.  But I know she'll continue to be vocal in support of the things that matter to those in government defined contribution programs.

Julia was in charge of all the major defined contribution programs at CalSTRS and they all grew under her tenure.  The 403(b) industry is not the easiest to deal with, but she approached it with a zeal and a poise that disarmed those who would oppose her.

The Pension2 program at CalSTRS has come a long ways and all the staff at CalSTRS should be proud of this accomplishment.  I'm highly biased, but I believe it to be the best 403(b) program available in California and a role model for the country.

CalSTRS will soon be conducting a search to determine who will take Pension2 and the other Defined Contribution programs into the future and I'm confident a new 403(b) Advocate will rise to the occasion, like Julia did.

We will miss you Julia, don't be a stranger!

About Time 

Plansponsor recently ran an article focusing on those who were critical of the PBS Frontline documentary "The Retirement Gamble."  As I was reading through I found an interesting quote from the head of ASPAA/NTSAA (National Tax Sheltered Account Association) that made me do a double take.  The quote in question, as follows (emphasis mine):

“We need to expand coverage to those without a plan at work. We need to make it seamless for workers to save through greater utilization of auto-enrollment. And we need to make sure we focus on outcomes so the system produces the retirement results reasonably expected by both plan sponsors and participants.”

I'm a big advocate of auto-enrollment, in fact I just finished a four-part series titled "Make It Automatic" which you can find here, here, here and here. One of the biggest opponents I've encountered to auto-enrollment is the NTSAA organization, which is part of ASPPA (for a bit of irony, read this).  The NTSAA believes that individual insurance agents and registered representatives should enroll people and that there should be an unlimited number of products available for 403(b) plans - the exact opposite situation needed for auto-enroll.

So when the head of an organization that actively lobbies to defeat any chance of auto-enroll in 403(b) retirement programs says "We need to make it seamless for workers to save through greater utilization of auto-enrollment." I have to wonder whether he was misquoted.  I actually agree with his whole quote, in fact it sounds like something I would say, what gives?

My suspicion is that the current head of ASPPA is no longer in a dual role as head of NTSAA.  This allows him the freedom to push the goals of ASPPA which might differ from the goals of NTSAA.  It seems odd to me and counterproductive to have an organization whose underlying members represent diametrically opposing viewpoints.

The question really becomes this, "Does the NTSAA stand behind the ASPPA director's viewpoint on auto-enrollment as it applies to government employees?"  Furthermore, will the NTSAA work to spend money to stop auto-enroll while ASPAA spends money to push for auto-enroll?  Can these two organizations really stay under the same umbrella given their divergent belief systems?

At this point, I'll take it as a win and say that ASPPA/NTSAA now supports my viewpoint that auto-enroll is critical to the success of helping those in education retire comfortably.

WTF (Why The Face) 

Financial Advisor magazine ran the following headline:

Prudential Says Annuity Fees Would Make Bankers 'Dance'

The relevant quotes are as follows:

“We’re getting more than 2 percentage points of fees from the assets that are part of our annuity business,” Mark Grier, Prudential’s vice chairman, said at a Citigroup Inc. financial-services conference in Boston today. “In your businesses, you probably would dance in the street over 40 or 50 or 60 basis points.”

and

“The quantitative evidence is that that pricing is sustainable in the market,” Grier said today. “People want to pay for the features that these products provide and they’re willing to pay those kinds of prices.”

Now you know what makes insurance companies dance, but are they overcharging?  It seems that if the pricing were enough to cover the risks and a reasonable profit, nobody would be dancing, just reasonably happy.  This guy sounds downright giddy.  Is it possible that the benefits now offered on most annuity products are so benign as to not represent a real cost to the insurance provider and thus the extra fees really are gravy?

Only time will tell.  After the next financial crisis we'll find out whether this guy was just another idiot AIG fellow or a company genius who helped design products that really didn't do anything, except overcharge clients.

Scott Dauenhauer, CFP, MSFP, AIF
@403bAdvocate
The Teacher's Advocate

403(b)izarre: Make It Automatic - Fiduciary Responsibility (Part IV of IV)

In the previous three parts I Introduced the Make It Automatic concept, asked who would oppose it and then addressed a common objection.  In this last part I address the issue of Fiduciary Responsibility.

The Fiduciary Liability Objection

Another objection I hear is that a fiduciary based, auto-everything defined contribution system would cost school districts money and take up staff time as well as opening them up to potential litigation.  

Valid concerns, but easily addressed.

First, by allowing any insurance agent to sell high commission, non-consumer friendly products on your campus - you are already opening yourself to such litigation.  

Of course this line of thinking moves one toward removing the program all together and that is a bad idea.  The truth is there are many things the school employer can do to alleviate the time commitment and litigation threat.

Many states (and many more are starting) now operate defined contribution plans on behalf of public employers.   These defined contribution plans can work as "multiple employer plans" where the state may become the "plan sponsor" and take on most of the responsibility and much of the liability of the defined contribution plan for the school employer.  

The school employer is expected to do their due diligence and to monitor how the program is being run, but everything other aspect (except for the payroll functions) is conducted by the state.  The state negotiates the contracts, does the compliance, monitors the investment options, processes contributions, provides relevant notices and runs the "Make It Automatic" program.  They do this without cost to the school employer (the state is paid by the fees generated by the plans and is non-profit) and more importantly at a very low cost to the school employee.

Where such a plan is not available, many employers could form a consortium and run the program in a similar manner.  Implementing a "Make It Automatic," fiduciary based plan can be extremely simple and not cost the employer much, or anything at all.  One issue is that these plans are not available in every state and some states have laws against such a system.  Whenever these laws are proposed to be changed the insurance industry spends a lot of money to stop their repeal, the status quo drives profit margins.

Why aren't these ideas catching on like wildfire?  They are, but mostly in the private sector.  

Many government plans still remain in the stone age and there is little support from employee associations and dramatic opposition from insurance companies - ironically both of which are funded by school employees.  

Where these programs are being tried, the participation rates skyrocket - it works.

The lives of school employees across American could be dramatically improved by "Make It Automatic."

Isn't it time school employees had access to an "Automatic" option?

This concludes the 4 part series Make It Automatic.

Scott Dauenhauer CFP, MSFP, AIF

The Teacher's Advocate

403(b)izarre: Make It Automatic - What About Personal Responsibility? (Part III of IV)

In Part II of Make It Automatic I explored who might be against this program and why.  In this post I explore a common refrain I hear from smart people who may not have thought very much on the topic. (The intro is to this four part series is here)

What About Personal Responsibility?

Some believe the employer and associations shouldn’t be involved with encouraging school employees to save using “auto-enroll.” 

They feel it’s to paternalistic or none of their business.  

My response:

“Make It Automatic” is NOT a mandate, it has very simple opt-outs that every employee can elect if they choose.  Unlike a defined benefit plan, the participant is always 100% in control.  Should an employee find themselves auto-enrolled in a plan and then later decide they want to stop contributing, 

it’s simple to stop."

American’s have proven they won’t save on their own, they need a nudge.  I challenge anyone to find a retiring teacher upset with their decision to contribute to a defined contribution plan early in their career.

In most non-ERISA k-12 403(b) plans the participation rate is abysmal, hovering around 30%.  In my experience about 60% of those contributing are over age 50, another 25% are between 40 and 50 and less than 15% are under 40.  Those who are under 30 that contribute to a 403(b) are black swans (rare).  

To get the most out of retirement savings it pays to start early and yet almost NOBODY does.  Imagine the wealth that could be built by new school employees who are auto-enrolled.

Enrollment does not have to be at a high percentage.  The private sector often sees auto-enrollment rates at 6% or more with increases of 1% each year until the participant is around a 10% contribution rate.  

Given that most school employees have a defined benefit plan and sometimes Social Security, a smaller percentage or even a flat dollar amount could be used.

Employees who have a better financial outlook are happier, healthier and more productive - this leads to a better quality school program.

Employees who have saved for retirement are likely to retire earlier, allowing employers to replace them sooner with lower salary employees...saving the employer money.

Employees who have saved for retirement are likely to retire earlier and pose a smaller burden on underfunded pension systems.

“Make It Automatic” is a win-win-win - the employee wins, the employer wins and the pensions system wins.  Forget about paternalism, this program makes financial sense for every party involved.

Next week this series will conclude with Part IV of Make It Automatic and will deal with Fiduciary Responsibility.

Scott Dauenhauer CFP, MSFP, AIF

The Teacher's Advocate

403(b)izarre: Make It Automatic - Money and Power (Part II of IV)

In Part I of Make It Automatic I introduce the concept of automating retirement savings and the fact that their is opposition to the idea.

Part II explores the opposition and what drives it.

There is much opposition to the "Make It Automatic" idea and for the only two reasons that matter - money and power.

Last year I witnessed a 403(b) insurance agent ask a high level state employee (who administers the defined contribution programs) to make the following pledge:

"Will you promise not to support any legislation that allows for or requires auto-enrollment?"

While the question may have been worded slightly different, you get the picture.

The 403(b) agent was actively lobbying the state to not implement a program that would improve retirement outcomes for hundreds of thousands of school employees, all so he could continue selling his high-commission, low-quality products.  It never occurred to him that increasing the number of participants in a plan from the sub-30% range to above 90% would produce three times the number of potential clients (or in his case, victims).

A true financial planner who does the right thing for their clients will never be threatened by "automatic enrollment," as their clients will always value them more than as just an "enroller."

Recently, a large school district had a meeting with a gathering of 403(b) agents who were angry that they could not have full access to school district campuses.  They made it clear they would find their way onto campuses regardless of district policies.  This, in the wake of Newtown and other campus shootings is a bizarre behavior.

Putting aside the issue of safety, do we really need more distractions for our school employees during their work hours?  We send our kids to school to learn and our nation's school teachers (and employees) have a lot to fit into their schedule, particularly in the light of furloughs and shortened school years.

Allowing 403(b) salespeople onto a school campus is a further distraction and unwarranted.  What other employer allows salespeople to wander their places of business?

The outcry from these agents is always the same - "without us there would be nobody in these plans."

The 403(b) has been around longer than the 401(k) and yet most public school programs languish with participation rates well under 30% - in that respect there IS almost nobody in these plans.

Auto-enroll, auto-escalate and auto-default helps to solve the problem.  It removes salespeople from the campus, increases participation in the plans to the point where the minority are those NOT in the plan and increases the savings rate each year.  In 50 years of the 403(b), insurance agents have not come close to achieving any such numbers.

This is not to say that a qualified professional shouldn't be involved in a 403(b) program.

Between a Rock and a Hard Place

Power is the other thing keeping 403(b) programs in the stone ages.  There are organizations that purport to support school employees but then actively work against reforms that would serve to create better retirement outcomes.  They are more concerned about controlling or providing 403(b) programs than they are about making those programs work for the benefit of their members.

Misunderstanding the 403(b)

It is thought by many unions and associations that represent school employees that efforts to reform and strengthen 403(b) programs will be the first step in tearing down defined benefit programs.  This line of thinking has sound logic and I am sympathetic to it.

There is no doubt that public sector defined benefit plans are under constant attack.  For some, moving public employees to "defined contribution only" plans is a life mission (it is not mine, I fully support reasonable public defined benefit plans and will fight to protect them).  It only makes sense that the first step in such a conversion would be to first insure that the defined contribution plan that is being proposed is solid.  Thus, many unions see supporting reforms of 403(b) plans as supporting the enemy, looking like they are giving in or moving toward acceptance of such a transition toward eliminating the defined benefit.

I understand this concern, it's valid and it must be addressed head on.

My response to those who feel this way is that there is no reason you can't have both systems strong.

There is every reason to believe that a strong defined contribution system could bolster the defined benefit system - even potentially aiding in increasing the funding levels.

Think about it, a school employee who has saved all their life (through "Make It Automatic") will have a much simpler decision when it comes to retirement.  They will not have to work as long to meet their retirement goals and may retire sooner.  Not only does this take pressure off the defined benefit system (from paying out higher benefits), but it takes pressure off the school employer as they can replace that higher salary with a new teacher with a lower starting salary (not to mention getting new people into the workforce).

A strong defined contribution system has the potential to strengthen school employer budgets and defined benefit plan funding levels.

In Part III of Make It Automatic I will explore a common refrain against implementing "Make It Automatic,"-  that it's to paternalistic.

Scott Dauenhauer CFP, MSFP, AIF

The Teacher's Advocate

403(b)izarre: Make It Automatic Part I of IV

Is your car an automatic or stick shift?

You probably don't have to think about it, unless you're driving a sports car, it's an automatic.  Even many sports cars these days come as automatics.  Less than 7% of cars sold today are "manual."

The reason is simple, driving an automatic is easier.
  
When it comes to the 403(b) retirement program offered to most of the nation's k-12 school employees, they are getting a stick shift (actually they are getting the shaft) when they really need an automatic.

While many school employees think they are buying a sleek, sexy and sporty vehicle, in fact they are being sold a lemon.  The 403(b) program is mired with problems, but it can all be mostly fixed by moving to an "automatic" transmission.

What do I mean?

If I were asked (I often am) how a school employer or union could make an immediate impact on the financial lives of their employees and improve their odds of retiring with significance, I would tell them "Make It Automatic."

What does "Make It Automatic" mean and why is my recommendation often met with scorn, derision and even mockery?

I'll explore both in this first of a new segment on my blog I call 403(b)izarre.

The "Make It Automatic" program I recommend is increasingly in use today in the private sector, backed by very specific laws and regulations.  Not only is it baked into law, it's backed by very prominent behavioral economists with decades of research. Famed, behavioral economist Richard Thaler just penned an editorial for the New York Times list weekend (April 5th, 2013) emphasizing this series main point (the ideas of which came from Thaler, Bernartzi and Tversky/Kahneman). 

Auto-Everything

The Pension Protection Act of 2006 opened the doors to the private sector (ERISA plans) to allow them to automatically enroll participants into 401(k) plans as long as they follow certain "safe harbor" guidelines.  If followed, the employer would be exempted from liability.  The PPA related to automatically:

• enrolling participants into a 401(k) plan
• defaulting participants into an appropriate Qualified Default Investment Alternative
• allowing for increases to the savings rate each year

These three simple automatic ideas (auto-enroll, auto-default and auto-escalate) represent behavioral finance's first big incursion into the retirement planning world and have the potential to change the retirement outcomes of millions of Americans (but remember, millions more are still without a plan - so it doesn't solve everything).  If followed, participation rates can easily hit 90% or more, even without a match.

The PPA does not technically apply to state and local government entities.  Worse, the very entities that could make this happen fight vehemently against its implementation.

If a school employee wants to contribute to a 403(b) currently, it's entirely a "manual" process. In most cases they are forced to go through a salesperson.  If the employee searches hard and finds a low-cost, quality 403(b) option they must fill out an agreement with their employer, fill out an application with the provider and then monitor their paycheck to make sure the right amount comes out and is sent to and deposited by the provider.

While this process doesn't sound difficult, when you consider that the employee may have to choose from dozens or even hundreds of investment options and has little information on any of them - it can be daunting.

Currently this process is alleviated by the use of a 403(b) agent, a sort of used car salesman who will help them navigate the "lot" of products to find the one most suitable.  Instead, they are sold a lemon and the agent makes lemonade...usually turning the sale into a qualification for a trip to somewhere exotic (Monte Carlo here we come!).

It doesn't have to be this way, there is now a path to 403(b) freedom and it starts with "Make It Automatic!" The opposition is fierce though.

Who is opposed to this newly available freedom? 

Find out in Part II of 403(b)izzare: Make It Automatic - Money and Power.

I'll post one part a week for the month of April.

Scott Dauenhauer CFP, MSFP, AIF

The Teacher's Advocate

National 403(b) Day is Here! Sign Up, Save & Savor Retirement

The 401(k) has its day (and ironically it's April Fools, I think we all know who the joke is on), but the 403(b) has never enjoyed its own day.  That changes today.

I declare April 3rd to be National 403(b) Day.

While I have no events other than a blog post later, my goal is to build 403(b) Day each year and use it to promote defined contribution plans for government school employees.

Specifically we will focus on the 403(b), but promoting the 457(b) (which will sadly never have it's own day in the calendar) will also be a tenet.

If you don't have a 403(b) and you are a school employee, I encourage you to sign up today.  If you have a 403(b), use today to increase your contributions and check your asset allocation, if you are retired with a 403(b) encourage someone who is just starting in the profession to start one.

Today is a day to focus on the positive aspects of the 403(b), there will be plenty of time to advocate to make it better.

If you are a school employer, a 403(b) Compliance TPA, an RIA or IAR, a company that offers great 403(b) products....contact me and let's spend the next year making the second Annual National 403(b) Day a success.

If you don't know what a 403(b) is, there is only one place to learn about it - Dan Otter's 403bWise website.

Sign up for a 403(b), Save in a 403(b) and Savor the great Retirement decisions you've just made.

Scott Dauenhauer, CFP, MSFP, AIF

Conflicts In Fixed Annuities: Incentives - Part I

Our nation's school employees are subjected to insurance salespeople everyday touting the newest and greatest fixed annuities.  I decided to start a regular column called Conflicts in Fixed Annuities in order to highlight the problems I see.

One evening while googling 403(b) terms I came across incentives schedules, commission schedules and all sorts of interesting information from annuity companies that service school employees. All of it out on the open internet (not locked behind a firewall) for anyone to see.

This first post deals with "incentives" as they relate to how an agent might be paid for selling different variations of a single product.  There will be several parts to the "incentives" portion of this regular column.

The Incentive to Sell Longer Surrender Period and Higher Surrender Charge Annuities

When trolling around on the internet I came across several documents posted by companies who wholesales fixed annuities (they service insurance agents who service participants).

You can view one of the documents here, until they take it down, which I assume will  be soon (I'll also post at the end of this column a screenshot to prove it was not behind a firewall).

I took the pertinent information from the document and created the following chart:

The information is from a National Life Group/LSW product chart document put out by an insurance marketing organization, but the company is not important for this post, nearly all insurance companies sell annuities in the manner I'm about to describe.

What the above chart shows is the product, its first year commission, the charge for withdrawing funds in the first year of ownership and the surrender period (how long you must wait to be surrender charge free).  Note:  The surrender charge goes down by 1% each year until it hits 0%.

My intention is not to discuss the merits of the products, simply the compensation offered as it relates to the surrender options.

The key takeaway is the insurance agent has a choice to earn a 4.5%, 6.5% or a whopping 10% commission.  The choice is pretty simple, especially if you have a mortgage payment to make.  Selling the "platinum" product pays the agent 122% more commissions than selling the "silver."  

In every day life, if given the choice between silver, gold or platinum, which would you choose? Platinum of course, why settle for silver when you can have the better, rarer metal!

Never mind that the participant ends up being stuck in this product for an additional 8 years (if they are sold platinum over silver) and that the withdrawal charge is 7% more in the first year - they now have platinum status!

It appears the agent is incentivized to sell the product that will make the insurance company the most money.  Why sell a 4.5% commission product when you can sell a 10%?  If an agent only sold a product that had a 10% commission and aimed to earn $150,000 per year, they would only need to place $1.5 million in annuity premium each year (or about $125,000 per month).  To earn the same income selling the 4.5% product the agent would need nearly $3.5 million in annuity premium.

Perhaps now you understand why teachers are a fertile recruitment ground for insurance companies.  A teacher earning $60,000 plus benefits could switch careers to selling annuities and would need to sell less than $1 million in annuity premium annually - a pretty simple task - in order to make more money and have more free time (not to mention less stress).

You might remark that if the agent sells the silver product they would have the opportunity to sell another annuity in 7 years and get another commission.  True, but this assumes the agent still has the client and that rates make sense enough to replace the original product.

Do the math, of these three products the agent makes more money on an annual basis (and all upfront) by selling the platinum over the gold or silver.  If you divide the 10% commission into the 15 year surrender period for the platinum the agent makes on average .67% annually, it falls to about .65% for the other two.  Would you take a guaranteed .67% for 15 years or a non-guaranteed .65%?

Even IF the agents always chose the silver (we'll get into other conflicts in future columns) option, the fact that insurance companies offers incentives to attempt to get agents to sell what are likely more profitable products is a major conflict of interest.  Trusted advisors should NOT be paid more to recommend one product over another.

This has to change, agents should not be able to make additional compensation for selling longer surrender period/higher surrender charge products.  Disclosure is not enough, in fact it is a smokescreen to hide conflicts like the one outlined above, elimination of conflicting sales incentives must happen in order to protect our nation's school employees retirement.

Scott Dauenhauer, CFP, MSFP, AIF
President
Meridian Wealth Management
@403badvocate
www.meridianwealth.com

Screenshot of Firewall Free Document

Simon's "Fleecing" Series Spotlight

Back in 2007 a colleague of mine, W. Scott Simon wrote a seven part series for Morningstar called "Fleecing 403(b) Plan Participants."

Many things have changed in the 403(b) world and while I don't agree with everything Simon says - the articles are certainly worth reading and having in your library.

Some of the articles refer to ERISA plans, my main focus is non-ERISA.

Here are the seven parts:

Update: Morningstar has instituted a "registration" process now to view the articles, there is no cost, but you will have to register to get access, I've let them know this is a bad idea and hopefully they will change...until then...

Fleecing 403(b) Plan Participants Part I

Fleecing 403(b) Plan Participants Part II

Fleecing 403(b) Plan Participants Part III

Fleecing 403(b) Plan Participants Part IV

Fleecing 403(b) Plan Participants Part V

Fleecing 403(b) Plan Participants Part VI

Fleecing 403(b) Plan Participants Part VII


Enjoy.

Scott Dauenhauer CFP, MSFP, AIF
President
Meridian Wealth Management
@403badvocate
www.meridianwealth.com

The 403(b) Advisor of the Future Part I

In this series of short posts, I'll describe the future of 403(b) Advisors.

The days of non-fiduciary based, limited skillset, product toting "advisors" are limited.  Insurance agents who only sell annuities, have limited training and little in the way of a formal education in financial planning and investments will soon be a thing of the past.

The next generation of advisors to school employees will be varied in terms of how they work with school employees, but they will have several things in common:

• Core competency in financial planning and investments

• Act as a Fiduciary and pledge to always place their client's interests first

• They will not be paid from product sales

• They will not be induced to sell lousy products with exotic trips and cash bonuses

• They will support programs that are likely to increase savings for everyone

• They will realize that getting more school employees to save creates future happy clients

• They will not sit in school lunch lounges with donuts and pizza

• They will support vendor consolidation and low-cost investment options

• They will understand all the different school employee retirement programs in depth

• Their mortgage will not be dependent on the "next" annuity sale

There are currently many great advisors serving school employees, but there are far more incompetent and conflicted who are not fit to use the moniker "advisor."  

The transition to higher competency, greater fiduciary responsibility and participant rights is under way - is your advisor on the bus?

Scott Dauenhauer CFP, MSFP, AIF

President

Meridian Wealth Management

www.meridianwealth.com

@403badvocate

Should Teachers Be Wary of Former Truck Drivers?

You may not know it, but Mark Miller, a former truck driver (pictured above) is purported to have "...made more in commissions in a month than he made driving a truck for over 2 years.  Now he only works 20 hours a week."  Or so the advertisement for this annuity sales system would lead you to believe.

Whether Mark is real or not is beside the point, any product that can produce such big commissions in such a short period of time is likely not a great choice for your retirement.

I'm not saying all annuities are bad, in fact some are quite advantageous and I often recommend them to my clients (of course they don't pay commissions, have no surrender periods and no surrender charges...and are low in cost if of the variable type).  The majority of annuities I come across are not very good and in some cases are extremely detrimental to your financial health.

If you see this former truck driver roaming your halls (don't worry, the odds are low as he only works 20 hours a week) it might be wise to close your door and lock it.

Scott Dauenhauer, CFP, MSFP, AIF
@403badvocate
Facebook.com - The Teacher's Advocate

The Rise of State Run 403(b) Programs?

Most states offer some sort of multiple employer deferred compensation plan (457(b)), far fewer offer a similar 403(b) program, but this might be changing.

Some states offer the 403(b) plans through a retirement system, others through an office like the Treasurer.  Most of these plans appear to be low-cost in nature and some are downright cheap!

Are state run 403(b) programs the future for 403(b)?



Perhaps, but they lag far behind in assets and usually lack a salesforce.  With a few tweaks, they could easily rise to prominence - though the opposition to them is quite fierce.  Just the mention of a state assembly wanting to offer such a program and anti-fiduciary forces descend like moths to a flame.

I did a little research and came up with the following states that offer (this doesn't mean it's available to all school employers in that state) a 403(b) program:

Arizona

California

Connecticut

Delaware

Iowa

Maryland

North Carolina (launches this summer)

Vermont

Florida (not actually a state plan)

Wisconsin (this is a union run program, but has the same effect)

These programs are run by mainstream providers - ING, Great-West, Nationwide, TIAA-CREF and VALIC to name a few.

Which state will be next?

Scott Dauenhauer CFP, MSFP, AIF
@403badvocate

NTSAA Resorts to Auto-Enroll to Boost Membership

The National Tax Sheltered Accounts Association (NTSAA) just announced that membership has increased, from 700 to 1500.  What accounts for this growth? 

A new corporate sponsorship program and an auto-enrollment campaign.

The NTSAA now allows “Strategic Partners” to pay a large upfront fee and with it they are granted multiple individual memberships (hundreds potentially) that they are allowed to use to enroll their agents.  

This is no different than auto-enroll and exactly how the huge increase happened in just a short period of time.

It is ironic that an organization dedicated to stopping auto-enrollment would use auto-enrollment to boost its membership in such a successful manner.  Auto-enroll works and NTSAA has proved it, now if they would only apply it where it is needed, with participants.

Scott Dauenhauer, CFP, MSFP, AIF

Reposted from Meridian Blog on 2/20/2013

Trackback: http://meridianwealth.com/2013/02/20/ntsaa-resorts-to-auto-enroll-to-boost-membership/

HR Exec: Reality Check (Make it Simple)

Reality Check

Click on the link above to goto the article.

David Hatter is featured in this Human Resources Executive article with a big focus on removing obstacles to investing in a defined contribution plan.  Hatter says:

“If they have to go online, read a book, fill out a form, sign a form, make a phone call or wait on something, each one of those things is a hurdle,” says Hatter. “If you design the process so the easiest thing for them to do is to save the right amount in the right mix of investments, it will be a huge relief for them.” 

403(b) plans could take a hint from this advice.  Removing barriers to getting school employees into defined contribution plans will increase enrollment much more than unleashing a sea of conflicted insurance agents on them.

Auto-enroll, auto-escalate and auto-default will result in better participant outcomes at retirement and likely financially healthier school districts with higher test scores...and to think, it all starts with a simple idea - make it simple.

Scott Dauenhauer, CFP, MSFP, AIF
Meridian Wealth Management
www.meridianwealth.com

Is CalPERS Raising Long Term Care Rates Again?

The Sacramento Bee is reporting the following:

CalPERS is considering imposing a 75 percent increase in premiums on the vast majority of its long-term care policyholders. They would pay hundreds of dollars a year more – thousands, in some cases – as the California Public Employees' Retirement System tries to fix financial holes in the program.
Customers would be offered a less comprehensive policy as a cheaper alternative. Still, the prospect of a big hike, which would take effect in July 2015, is rattling nerves.

Unfortunately this was not difficult to see coming, I wrote the following back in 2006:

When I first started in the business of working with educators I can across the CalPERS Long Term Care program and generally liked it. I even recommended it because the premiums were so low.
However, as I learned more about long term care insurance and learned more about the CalPERS plan I began to recommend that clients buy a policy from a private insurer. My reasoning was that CalPERS was not charging enough and that they would have to raise premiums at some point, in addition, they are not an insurance company and are required to abide by the same rules that govern insurance companies. I didn't like the lack of safeguards nor the fact that premiums would have to increase. 

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

The fact remains that I am not an actuary, yet I knew several years ago that the premiums would have to rise, sure enough in 2003 CalPERS raised the premiums by an average of 17%.
Even after the premium raise I remained skeptical, and still do. Now CalPERS is proposing to raise the premiums by nearly 34%. This means that for every $100 in premiums, policyholders will be paying $57 more than they were paying in 2002, a 57% increase. Had policyholders known this they may have opted for a private insurance policy that was more expensive at the time, but provided better benefits and a better future in terms of rate increases. 

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

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

Most long-term care insurance companies are coming under pressure to raise premiums or cut benefits, so it's likely that even my solution would not have staved off the increase, but this was easy to see coming.

Scott Dauenhauer CFP, MSFP, AIF

 

Read more here: http://www.sacbee.com/2012/10/04/4880202/calpers-weighs-hugh-premium-hike.html#storylink=cpyU

IRS 403(b) Regs Unintended Consequences

I've got three more stories of ridiculous paperwork issues created by the IRS 403(b) Regulations that went into affect on January 1st, 2009.  While I believe the IRS had good intentions and I supported the overhaul of the regs, the outcome for participants has been a disaster and is leading to higher costs, lots of paperwork headaches and consternation between employers, participants and their vendors (as well as the TPA's that service them).

It has also created a situation where it is extremely difficult for an employee to do something on their own (like move money out of a high-cost vendor), forcing them into the arms of insurance agents who many times have an agenda of selling annuities, rather than the best interest of clients.

The first story is that of a retired Superintendent client of mine who simply wanted to rollover the remaining balance at one of his old 403(b) companies, we'll call it Company V, to his IRA.  There wasn't a lot of money in the account, but he wanted things consolidated - now 14 months later the rollover is still stuck in 403(b) limbo.  So what happened?

After putting together the 8 page document that included the following:

Letter of Instruction to Company Receiving Rollover asking for a Letter of Acceptance and asking them to forward all the included original documents to a Compliance Third Party Administrator (CTPA),

Letter of Instruction to the Compliance Third Party Administrator along with,

Compliance TPA's paperwork

Company V's distribution paperwork

The 8 page document had to travel from Southern California to Kentucky, then from Kentucky to Florida, then from Florida to Texas.  If all went well, once the paperwork hit Texas, the rollover check would be issued and sent to Kentucky.  Things didn't go well.

All of the paperwork made it to Texas, but once their, Company V rejected it stating that the wrong Compliance TPA signed off on the document.  I knew this to be wrong, but they sent the document of another Compliance TPA to be filled out by my client - so we played along and sent it to Company V, who then faxed it to the Compliance TPA.  The Compliance TPA contacted me to tell me that they couldn't read the faxed copy and requested all the documents from me, so I faxed them in.  The next day the Compliance TPA rejected the request stating what I knew from the beginning - they were not the Compliance TPA.  Next, I called Company V without my client - there was no need to involve them and I was not going to require any confidential information from Company V, I needed to inform them that they had the wrong administrator on the account.  The call did not go well.  The Company V representative was very rude and told me that they needed the client on the line to tell them who the right Compliance TPA was.  I remarked that the client wouldn't know (rarely do employees know who the Compliance TPA is, especially one who has been retired for five years), but that I know who it is as I spoke directly with payroll at the school district.  The rep told me he didn't care and wouldn't take the information from me, it had to come from the client...which made no sense.  I told him I wanted a supervisor and he told me no.  Now I was a bit ticked off and started thinking that this was just a tactic to prevent the money from moving.  I demanded a supervisor and eventually the rep relented and transferred me to a nice lady who told me that I was wrong about the administrator...goodness sake.  So, now the supervisor is going to check with another division of Company V and try to get it straightened out...and then she'll call me back.  I'm not confident.

Here we are 14 months after the initial request and I'm stuck - Company V won't distribute without the TPA approving, but they have the wrong TPA listed and won't accept the approval from the correct TPA.  Someone has to budge.  What is most annoying is that the client is over 59 1/2 and thus eligible for the distribution regardless of if he is employed or not.

Thank you IRS for creating this mess.

As if that wasn't enough I have another new client that wants to roll their money out of the same Company, Company V.  While I haven't had any issues so far, when I explained to the client what was needed in order to do the exchange desired, the client's eyes rolled back in her head.  Here is the process and the forms:

I printed 27 pages (don't worry, I did front and back) representing four different forms:

Outgoing Exchange Form for Company V (Distributing vendor)
Account Application for new Company (Receiving Vendor)
Compliance TPA Form
Incoming Transfer form for new Company

Once my client has filled out and signed all these documents I will do the following:

Mail new account application and wait for account to open

Create letter of Instruction to receive a letter of acceptance from the new Company for the exchange

Submit the letter of acceptance and all the other docs above (except new account doc) to the Compliance TPA

Cross my fingers and pray the exchange is approved and then submitted to Company V for them to process the exchange

This whole process will likely take six weeks - if we are lucky and the paperwork will have traveled to Texas, Denver and likely Texas again.

This is an administrative nightmare.  But for people who know the system, like me, it is a competitive advantage.  Annuity sales agents who hated the new regs are probably thanking heaven right now as they're place in-between their client and their client's money is forever solidified due to the crazy bureaucracy created by poorly thought out 403(b) regs which have had disastrous unintended consequences.

There was another way - the IRS could have grandfathered ALL accounts as of a specific date, allowing employers to focus solely on the future.  Instead, employer, Compliance TPA's, vendors, employees, Advisors and insurance agents are stuck in the past fighting to move money around in a manner that leads to higher costs, entrenched & unneeded compliance services and poor products.

Scott Dauenhauer, CFP, AIF, MSFP

P.S.  Yes, I had another story, but I'm just to exhausted to detail the third one.