NAGDCA 403(b) Pre-Conference Session

A good 403(b) session that I missed at the Louisville conference this year at NAGDCA.

Ben Taylor did a great job moderating a panel topic that can sometimes get bogged down in the weeds. 

Scott Dauenhauer, CFP, MSFP, AIF

Otter on Chatzky Blog: A 403(b) Crash Course

Jean Chatzky runs a great personal finance website and blog over at www.jeanchatzky.com, she also runs an online "Money School" that you would be wise to check out.  Speaking of "be wise"...our very own WiseGuy Dan Otter of 403bWise.com has a guest post up today on Jean's blog, A 403(b) Crash Course.









A 403(b) Crash Course, By Dan Otter

Imagine you are at a retirement plan party. Not a retirement party — there are no gold watches being given out here. But a party attended by the various retirement plans. There’s the famous 401(k) and it’s quirky but increasingly popular sibling the Roth 401(k). There’s the modest IRA, with some of its cousins: the Roth IRA, the SEP IRA, and the Rollover IRA. Even the granddaddy of them all, Social Security, is in attendance. Then there’s this other plan. It’s kind of off by itself. You can’t quite place its name. Is it called the 401b? Or, wait, isn’t it called a tax sheltered something?

Close. The plan is actually called the 403(b). But it is commonly, and erroneously, referred to as a TSA or Tax Sheltered Annuity. Created in 1958, it predates the more famous 401(k) by twenty years, yet it remains a bit of a mystery. Why? Probably because the 403(b) covers a smaller subset of employees working in generally less glamorous positions: K-12 employees, college and university employees, pubic health care workers, and not-for-profit workers. Plus, public school teachers and administrators typically have pension plans, so for them the 403(b) is a supplemental plan.

Here’s what you need to know to make small talk with and about the 403(b):

For the rest, you'll have to jet over to Jean's blog.

Scott Dauenhauer

Annual Notice Requirement BullSh*t - A Marketing Gimmick

The following is an opinion piece, but based on actual events.

"The IRS requires that we verify that every employee has attended a meeting to learn about their 403(b) plan, so you must fill out this form.  We won't contact you unless you check the box that you want financial planning help"

This was the paraphrased message a teacher heard yesterday somewhere in Southern California and likely somewhere everyday in America after being forced into a meeting where someone with the title "Financial Consultant" tells them they can have a "free" financial plan (worth $500) just by meeting with this altruistic individual.

I call Bullsh*t!

Actually, that someone was my wife, at her school during a meeting she was required to attend where someone from the district's 403(b) "Compliance Administrator" was presenting.  I'll keep the name of the company a secret so as to avoid being sued for telling the truth.

What is the truth?

The truth is that the IRS DOES require a "meaningful notice" be communicated to each employee on an annual basis stating that they can participant in the 403(b) plan.  But not even the insurance agent based NTSAA believes that this "notice" must be in-person, there manual states:

"The notice must be provided in a manner designed to ensure delivery to each employee individually. For example, posting a notice in the employee lounge by itself is not an acceptable delivery method. However, a sum- mary provided at a benefits fair followed up by quarterly payroll stuffers would probably suffice. There is no requirement for a written receipt from each employee that they have received the annual notice." (emphasis added)

So why does it appear that "Advisors" from the "Compliance Administrator" are telling school districts that this is a requirement?  Why did my wife have to sit in on a presentation from the "Compliance Administrator" who was selling their services as if they were qualified Financial Planners and not salespeople and then fill out a form stating that she attended?  The reason given: If the IRS audited the school district they would use it as proof of compliance.

The idea here is that the same thing couldn't have been accomplished by a simple letter, an e-mail or a payroll stuffer - it had to be in person, which is clearly not what the IRS demands.  This is a clever marketing ploy to get in front of employees to sell the financial products of the "Compliance Administrator."  It's not like letter don't exist to send to employees, I found one pretty quickly using, here.

The irony is that I just wrote a whole piece on deceitful CTPA practices.

Why does this annoy me so much? It's deceitful.  It's one thing to offer in-person meetings as a service to a school district, it's quite another to make the employees sign what are in fact lead cards to verify they've been to a presentation under the guise of compliance.  I wonder, do they go through the cards and track down every single employee who didn't sign one or didn't attend a meeting? Doubtful.  

The school district meets their requirement of meaningful notice by providing just that, a meaningful notice - a letter in a teacher's box, a payroll stuffer, whatever else they might think of.  If they choose to add meetings to provide additional notice - great!  But don't make the meetings mandatory, don't hold them during hours where teachers are supposed to be working and don't do it under the guise that they are required for compliance.

These meetings are sales meetings disguised as compliance.  Whether the "Compliance Administrator's" corporate office knows this is going on is unknown to me, but they couldn't be the only company doing this, I hear it all the time - everywhere.

The last thing the financial services industry needs right now is more dishonesty, using IRS compliance sell financial products is just that.

Scott Dauenhauer, CFP, MSFP, AIF

Wild West in Government 403(b) Continues

When the IRS issued new regulations for the 403(b) several years ago there was hope that the "wild west environment" that existed for k-12 Government plan participants would change for the better.  Nearly five years after those regulations went into affect (and seven since issued) there have been some positive changes, but the "wild west environment" remains.

In some aspects things have changed for the worse, specifically the category of Compliance Third Party Administrators (CTPA).

(For questions you should be asking your CTPA, scroll to the bottom)

CTPA's act as the gatekeeper and policeman of a multi-vendor 403(b) plan.  They maintain the plan document(s), determine which vendors are allowed, collect vital information from the various parties and are tasked with keeping a plan in compliance.  The CTPA's role is critical to staying on the right side of the Internal Revenue Service in a multi-vendor plan environment.

One particularly concerning aspect of CTPA's is how they are compensated.

There are many compensation schemes for CTPA's, but one in particular has emerged as the winner, "vendor pay". The "vendor pay" model works exactly like it sounds, the vendor of a product pays a fee (tied to some participant metric) to the school employer's chosen compliance company.  In my opinion, this arrangement is problematic in certain circumstances.

A Bit of History

When the new IRS regulations were being implemented, the financial crisis of 2008 was either on the horizon or in full swing as districts rushed to comply by January 1, 2009.  School Employers didn't want to pay compliance fees for a retirement program that they saw as being "supplemental."  When what appeared to be a "free" compliance service was offered, most School Employers jumped at the opportunity.  At first, these "free" services took the form of 403(b) product-selling firms, a huge conflict of interest.

As it became clear that providing compliance was an expensive proposition, most product-selling "free" CTPAs began to charge fees.  But "who" paid the fee became the next question.  Should the school district (no money)? Participants (they might complain)? 403(b) product vendors?

The vendors ended up with the bill.

The pitch went something like the following:

"It's the vendors who benefit financially from the 403(b) plan offered by the employer, so it should be the vendors who pay for it."

This makes sense to an extent, but you must remember that most Government 403(b) plans are not subject to a fiduciary standard, meaning there is no single individual or entity charged with protecting the plan participants.  This line of thinking also ignores the obvious - it's the participants who benefit the most from a well run plan.  In the 401(k) world the participant does usually pay for the services of a vendor, but there is only a single vendor, which can drive down costs considerably.

Most 403(b) plans have multiple vendors and typically those vendors are not chosen via a competitive process.  Instead vendors are chosen by state law (which might allow any and all vendors), the CTPA, internal politics or pay-to-play schemes.  In most cases the CTPA has enormous influence in determining which vendors make an "approved" list.  This represents a conflict of interest because the influential CTPA may also be receiving an income stream from the vendors they are selecting.

Once a vendor makes it on an "approved" list, they must pay the CTPA a fee, usually per participant. The vendor who is most successful in getting new participants into the plan will pay the most in fees to the CTPA.  The CTPA has an incentive to add vendors to the program who have a history of adding participants - not because it's good for enrollment, but because it makes the CTPA more money.  The issue is that the enrollment happens regardless of if the product that vendor is selling is appropriate.

The worst vendors have a higher likelihood of adding participants in a multi-vendor system since they pay the highest commissions (and are willing to sit in school teacher lunch rooms).  This situation leads to the counterintuitive outcome that competition leads to higher costs and worse overall outcomes.  While the participants suffer, the CTPA is collecting its fee.

Many CTPA's advertise themselves as "Independent" and "Fee-based" which sounds objective and unbiased.  However, one must question the objectivity of a company whose revenue may come directly from the 403(b) vendors they are charged with choosing and overseeing.

Before I go further, I'd like to point out that some Independent CTPA's have adopted a "vendor pay" program reluctantly, solely in a bid to survive.  I'd also point out that if an employer engaged in a competitive bidding process using an unbiased and objective proposal process (not one ran by a conflicted consultant or CTPA) then a negotiated fee paid by each vendor to an unbiased CTPA (one who had no influence or input into the proposal process) could, in my opinion, still be appropriate.

The switch to "vendor pay" happened very fast, CTPA's who didn't adapt faced going out of business in certain regions.

School Employers with free 403(b) compliance options available to them and a fiscal crisis on their hands had little choice but to work with CTPA's who wouldn't add a line item to their budget.  Those CTPA's who had spent years charging their compliance fees directly to the employer to avoid conflicts of interest concerns where suddenly looking at a tough choice - charge the vendor or go out of business.

In many regions of the country, independent CTPA's were hamstrung and chose to start taking money directly from 403(b) vendors in order to stay in business.  This is not to say that some CTPA's didn't continue to charge employers, a few continue to do so where the School Employers are less pressured or more forward thinking.

I can state from experience (in California), there was no other option, either find a way to offer the service for free...or shut down.

The CalSTRS Comply (full disclosure: I provide consulting services to CalSTRS) product began offering a form of vendor pay by 2010, reluctantly as an alternative payment solution.  The thinking being that it's better to have a trusted product, administered by a competent organization in the marketplace rather than just let the market be overtaken by conflicted, expensive, incompetent and product selling CTPA's (which did and continue to dominate in the marketplace).

Of course, the Comply product has its flaw - in order to be maintained it receives some revenue from the vendors it polices.  There is a difference in the Comply model though - in California if a company is on 403bCompare.com (an online disclosure databank) and meets simple administrative requirements, it must be offered. Thus, Comply doesn't act as a gatekeeper or in a consultative capacity in terms of what vendors should be offered, they simply offer all eligible vendors, removing the main conflict.  But the conflict of removing a vendor (for non-compliance) and risking the loss of revenue remains.

Many CTPA's are increasingly offering consulting type services. I've even ran into a CTPA who acts as a consultant for school employers and runs request for proposals for CTPA services, I'll give you one guess who wins the bid (imagine your health care provider being in charge of the bid for health care services).

Increasingly, conflicted CTPA's are providing fiduciary based consulting services to school districts, but without taking on any fiduciary responsibility.  These CTPA's are making or heavily influencing vendor decisions, yet, the CTPA is at the same time receiving revenue from those vendors.  In some cases the revenue is significant.

An analogy that comes to mind is that of a regulatory body funded and ran by the very entities it is charged to regulate.

This symbiotic relationship with the vendors is creating a system that is designed to protect the vendors and the CTPA's business models, not the participant.  No one has the best interest of the participant in mind, no one is looking out for the little guy.  All business decisions are run through a filter of "is it good for the CTPA and vendor business?" 

The vendor inmates are running the CTPA asylum.

While I don't believe the only solution is a single-vendor structure, it certainly could go a long ways to solving the problem.  The core issue in the the 403(b) world is a lack of fiduciary responsibility on behalf of the participants.  This lack of oversight and consumer protection allows a wild west environment to prosper.  CTPA's are not, for the most part regulated and government 403(b) plans are not, for the most part, subject to a fiduciary duty.

Cleaning up the wild west is not easy, it begins with a sheriff.   Strong leadership and good stewardship is essential.

In order to strengthen the 403(b) and make it a consumer friendly plan we need to do the following:

• School business officials and particularly the Chief Financial Officers must get educated in defined contribution plans and how to be good stewards of them.

• Low cost fiduciary and stewardship training should be made available to all school business officials on a continuous basis.

• CTPA's must disclose more information about where their income is derived.

• School Employers should have a Fiduciary Duty to their employees when it comes to their defined contribution plans.

• School Employers should have a simple way to discharge their Fiduciary Duty, such as a state-based plan Multiple Employer Plan (or a private MEP with a good reputation).  This would allow for participants to be protected, while ensuring School Employer budgets are not impacted.

• School districts should move to a single-vendor solution.  If implemented correctly, "single-vendor" can be a far superior solution to a multi-vendor system.  For smaller school districts (and large ones as well), a Multiple Employer Plan ran by the state can be a great option.

• School employee unions should focus on protecting their members defined contribution rights in addition to their defined benefits and realize the importance of doing so.

• CTPA's should NOT be paid by vendors (with the exceptions I outlined above), should be subject to 408(b)2 and should publicly disclose their funding structure (who they owe money to and who owns the equity).  Put the conflicts of interest cards on the table and let the consumer make an informed decision.

• Like the DB plan, the 403(b) plans should be automatic.  Employees should be automatically enrolled into the DC plan and their contributions automatically increased periodically.  

• The 403(b) should be subjected to a competitive bidding process that is not run by a conflicted party (for example, a CTPA who receives revenue from the bidders) or who has a financial interest in the outcome.

• The IRS should admit defeat and allow for a structure that could eliminate the need for a CTPA by making it simple for a School Employer to take their plan to a single vendor environment.

While the task at hand seems daunting, there has been some progress.  This progress will build on itself and begin to spread exponentially and there will be no stopping it.  But it starts with good people.

Progress starts with people who are willing to take a stand and pledge to work in the best interest of participants, it starts with Fiduciaries.

Is Your CTPA Really "Independent"?
(Questions Every CTPA Should Answer)

If you are a school employer and are looking to hire a CTPA you need to ask them the following questions in order to understand the potential conflicts involved:

1.a.  Does your firm, any of its affiliates or any employees receive revenue in any form from 403(b)/457(b) vendors that you currently monitor or oversee or could potentially monitor or oversee in the future?  In other words, do you receive income from vendors that appear on school employer approved provider lists that you are the compliance administrator for?

1.b. If the answer to 1.a is yes, please list each vendor and the revenue received in the past twelve months.

2.a.  What percentage of your company revenue is derived from fees paid:
     
                  Directly by employers,
                  Directly by participants (payroll deduction or a line item on their statement)
                  403(b)/457(b) vendors

2.b.  What percentage of your company revenue is derived from commissions from financial product sales?

3.  List any trips paid for by any vendor you oversee or could potentially oversee (whether as compliance or in an RFP), even if you only have influence over a process and not direct decision making authority.

4.  List each insurance company you are appointed with to sell financial products.

5.  Is your firm affiliated with a Broker/Dealer? Are any employees or affiliates registered as Registered Representatives?

Update: Additional questions submitted by readers

Does the CTPA or any of its affiliates perform any services of any kind for vendors for which they are paid? If yes, please explain,

Does the CTPA remove (or recommend removal) of vendors from the plan who do not pay them TPA or other fees? If yes, please explain.

Any other questions you think should be here? E-mail me and I'll add them.

Scott Dauenhauer, CFP, MSFP, AIF

Breaking 403(b)ad: The Real Reason Walter White Went Heisenberg

403(b)ad: The real reason Walter White broke bad http://t.co/hTv9cQ5iR6
— Dan Otter (@403bwise) September 23, 2013

AARP Survey: 403(b) Participants Want Fiduciary Advice

While some organizations continue to promote "disclosure" over an actual requirement to be a fiduciary - 403(b) (and 401(k)) participants have made it clear - they want investment advice to be in their best interest.

A recent AARP survey, titled "Fiduciary Duty & Investment Advice: Attitudes of 401(k) and 403(b) Participants" could not have been more clear in its results.  According to AARP, "The survey was administered online from May 24, 2013, to May 31, 2013, by GfK Custom Research to its national KnowledgePanel, a probability-based web panel designed to be representative of the U.S. population.  The findings are based on 1,425 adults ages 25+ who currently have money saved in a 401(k) or 403(b) plan."



A few key findings (taken directly from the AARP site linked to above):

• More than nine in ten (93%) respondents indicate that they would favor requiring plan providers to give advice that is in the best interest of plan participants.  Nearly as many (89%) favor requiring plan providers to explain, prior to giving advice, if the advice is not required to be in the best interest of plan participants.

• More than three in four (77%) respondents indicate that they are concerned by the fact that investment advice from plan providers is not required to be in the best interest of individual plan participants. Fewer—yet still a majority (62%)—describe themselves as concerned by the fact that their plan provider can give advice to plan participants while making money from their investment selections.

• Before reading a statement explaining that investment advice from plan providers is not required to be in the best interest of individual plan participants, just over nine in ten (93%) plan participants indicated that they either “completely” or “somewhat” trust their plan provider to manage their 401(k) or 403(b) investments in their best interest, while nearly as many (87%) respondents said that they trust their plan provider to give them investment advice that is in their best interest.

• After reading that advice from plan providers is not required to be in the best interest of plan participants, half (50%) of respondents indicate that this information makes them “less likely” to trust their 401(k) or 403(b) provider for advice while just over one in three (37%) indicated that it has “no impact” on their level of trust.

• When asked to indicate whether they would prefer to receive advice about their 401(k) or 403(b) plan from someone that may make money from their investments or no investment advice at all, reactions are mixed.  Almost four in ten (39%) said that they would choose “advice from someone that may make money from the investments I choose,” but nearly as many (31%) indicated that they would choose “no investment advice at all.”  Another three in ten (29%) indicated that they “don’t know” which they would choose.

• Approximately eight in ten (81%) respondents agree that it is important to get investment advice about their retirement from an independent advisor who does not earn money based on their investments.

• Fewer than four in ten (36%) respondents would trust the advice from an advisor who is not required by law to provide advice that is in their best interest.

While this is no surprise to me, it provides further support that associations working to undermine fiduciary based advice in 403(b) plans are pursuing a goal that is clearly divergent from the participant base they seek as clients.

Below is the Executive Summary of the Survey:

  Fiduciary Duty and Investment Advice Attitudes of 401k and 403b Participants Executive Summary

Below is the Full Survey:

  Fiduciary Duty and Investment Advice Attitudes of 401k and 403b Participants AARP

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