ASPPA/NTSSA “Study” Rebutted With Own Example – Claims Defamation

ASPPA/NTSAA continues to submit a white paper titled “ “Protecting Participation: The Impact of Reduced Choice on Participation by School District Employees in 403(b) Plans” to school boards and state legislatures across America (including recently in California, where I live), despite it being shown (by me and now others) to be biased, misleading and containing assertions not supported by facts.

I have detailed my issues (opinions) with the study here and you can see all of what followed at my sister blog http://teachersadvocate.blogspot.com.

There have been other refutations since mine came out, but the one I’ve posted below is special because it is written by the consultant to one of the employers mentioned in the ASPPA/NTSAA study – Jefferson County, CO – JeffCo Public Schools.

In my refutation I mentioned many reasons for potential drops in participation that have nothing to do with changing provider structure, they were:

1. Participants retiring – how many of those participants retired? Given that the percentage of participants who are older is usually much higher than the percentage of participants who are younger, people retiring would have a larger affect on participation rates.
2. Layoffs. I’m sure no one who was contributing to a 403(b) was laid off during this time period.
3. Other retirement plans. School employees also have access to a 457(b), how many switched to contributing to a 457(b) instead of a 403(b)? I happen to know of a county in Southern California or two that actively pushes to get participants into their 457(b) plans at the expense of participation in 403(b) plans. How many of these participants stopped contributions to a 403(b), but started to a 457(b)?
4. Greatest financial collapse since the Great Depression happened during this time frame – could that have an effect on participation?
5. Greatest housing collapse since the Great Depression was occurring during this time frame – could that have an effect on participation?

Other reasons for lower participation after a switch could be poor communication during the transition or requiring participants to re-sign up for a 403(b) as opposed to allowing contributions to continue to the new provider without a new salary reduction agreement. A full study that included employers where participation stayed the same or increased after a reduction would be helpful for everyone as it would help create a “best practices” for transitions of this sort – the ASPPA study was not designed to address such questions.

While each of my reasons above could be likely factors for potential drops in participation, it turns out that one in particular accounted for much of the drop, yet was not mentioned in the ASPPA/NTSAA study – the addition of a 457(b) plan.  In the letter below, the consultant states:

“At JeffCo Schools, in point of fact, the number of contributing participants in their retirement plans have been unchanged from 2005 – 2011.  JeffCo Schools rolled out a 457 plan option on January 1, 2006.  Because of more attractive distribution options, many participants chose to switch to a 457 from their previous 403(b).  The ASPPA study ignored this fact.  Even with attrition from the 403(b) to the 457, 403(b) and 457 plan participation in 2011 was 4,243 from 4, 262 in 2005.”

ASPPA/NTSAA chose to illustrate the JeffCo example with the following info graphic:

This graphic clearly demonstrates falling participation – yet it also fails to capture the entire story and turns out to be very misleading when put into full context – at least according to the data provided below from Innovest and JeffCo Schools.

One must ask, what has happened to ASPPA/NTSAA? I’ve spoken to many members who are disappointed with this sad turn of events for what is (was?) a great organization.  The zeal to protect a 403(b) industry stuck in the past has blinded them to the reality of the day.

Regardless of ASPPA/NTSAA’s reasoning to release a study that they knew or should have known to be misleading (this is my opinion), the study should not be taken seriously.  It is time that ASPPA step up and withdraw the study and stop distributing it to unsuspecting school boards and legislators.

Who at ASPPA/NTSAA will step up and finally say what the members are thinking? Perhaps this devastating letter provided below will be the impetus.

ASPPA/NTSSA has responded to the below letter with a bizarre post on their blog, which targets yours truly, titled “Supporters of California Bill Attempt to Defame Study”.  In the post they claim:

Supporters of the bill are attempting to bolster support for the bill by defaming a 2011 study on participation in 403(b) plans. Correspondence was sent to the the Honorable Jose Solorio of the California General Assembly by INNOVEST and Scott Dauenhauer (the “Bill Supporters”) which challenges the validity of the study.

Innovest never sent the letter to me directly and has never communicated to me that they were even sending a letter.  Until the letter became public record I did not know it existed.  Having said that, I do support the right for employers to bid their 403(b) plans (just like they have this right for their 457(b)) and the rights of employees to have fiduciary based retirement options and this bill takes steps toward that end.

As I detailed above and on my sister blog, I thoroughly discredited the ASPPA/NTSAA study with objective facts, no defamation. The Innovest letter goes further by using ASPPA/NTSAA own example and providing the full context (and data) to demonstrate that the ASPPA/NTSAA got it wrong (or at least didn’t provide the full story).  Innovest used data, facts and context to discredit that portion of the “study” – they never attacked the people who wrote it personally or resorted to statements that were knowingly false.

Defamation is a strong word – the proper term here is discredit.  I believe that both Innovest and myself have discredited the “study” using logic, context and facts – no personal attacks.  I honestly believe the study is flawed and could never be accepted by scholars or allowed in a scholarly journal.  I’m fully prepared to withdraw my claim of “discredit” if ASPPA/NTSAA can get their study published in a reputable scholarly journal.

ASPPA/NTSAA states:

The claims made in the Bill Supporters’ letter are baseless and unfounded. The Bill Supporters accuse the authors of the study of omitting data for the Jefferson County School District in Colorado, without providing any evidence substantiating their claims. Furthermore, the Bill Supporters’ letters fail to address that the study found similar reductions in participation in California and Pennsylvania when retirement savings options were eliminated for those participants.

I’ll let you read the letter below and decide who is telling the truth, it becomes rather obvious.

View this document on Scribd

Scott Dauenhauer CFP, MSFP, AIF

Kansas Teachers Upset About Retirement Proposal

Posted on February 11, 2012 

Another legislature attempting to move Teachers to Defined Contribution plans from Defined Benefit plans. I’m willing to bet they have not even looked into the lack of consumer protections in government 403(b) plans, you can understand why these teachers are upset.

Kansas Teachers Upset About Retirement Proposal…, posted with vodpod

Is ASPPA Really Interested in Disclosure? Here is Their Chance To Prove It

Originally posted on my Meridian Wealth Blog on January 23rd, 2012

http://meridianwealth.wordpress.com


http://meridianwealth.wordpress.com/2012/01/23/is-asppa-really-interested-in-disclosure-here-is-their-chance-to-prove-it/

Fiduciary or Not? Participants Deserve to Know

It is no secret that I am a critic of the ASPPA/NTSSA/Graff policies of favoring unlimited vendors and noncompetitive, imprudent individual retail annuity products in 403(b) plans and allowing non-fiduciaries to service school employees.  Non-fiduciary advisors  servicing school employees should also make it clear that they are NOT registered to provide participant advice.  It is my opinion, that a properly run single vendor system is the best way to increase participation rates, contribution amounts and to help school employees retire in dignity.  ASPPA believes that any vendor should be allowed to offer their products – with no fiduciary oversight.

While I think Single Vendor is the best route, I am also a realist and understand that a single vendor environment is not going to happen overnight (actually, it has in many progressive school districts).  It got me thinking about what can be done to protect current participants who are stuck in a non-oversight multi-vendor program or even a program that does have oversight but has multiple vendors.

ASPPA is working on a compensation disclosure document that will be voluntary for agents (presumably the vendors won’t be required to participate, but this is unclear to me).  Why it is taking so long to create such a simple document is beyond me, but what it won’t include is a statement as to the fiduciary status of the agent or broker selling the product.

The inspiration for this blog post came from financial planning thought leader Michael Kitces at Nerds Eye View.

I believe that if ASPPA is truly interested in disclosure – they should follow the guidelines Kitces sets out.

Kitces recently wrote The Public Deserves A Choice, But It’s Not Fiduciary Vs Suitability which echoes my view (but is much more coherent!).  Michael has granted me permission to reprint the post in its entirety below, but first I’ll quote from it:

In the ongoing debate for the fiduciary standard, supporters of fiduciary have suggested that everyone in financial services should be subject to the standard, while those opposing have responded that consumers deserve a choice between fiduciary and suitability; in essence, they simply suggest that we should let consumers choose whatever method of financial services they prefer, and may…the best model win. But to me, the choice presented is a false one (see Dauenhauer’s False Choice post): the real choice is not between fiduciary advice and suitable advice, the difference is between fiduciary advice and suitable product sales (emphasis added). In other words, the real choice we should present to consumers is between advice and product sales, and the real goal of the planning profession should be to focus on who is and is not qualified to deliver advice.

Before I unpack the above statement, I’d like to quote from NTSAA representative Robert  Richter (www.savemy403b.org) who has opposed my views:

We have established a joint task force with the National Education Association and the Association of School Business Officials to create fee disclosure standards for public school 403(b) plans. These national standards will allow public school employees to make apples to apples comparisons of different 403(b) options so they know clearly how much they are paying and what services they are paying for. As we know in the 401(k) industry, it’s not all about fees and public school employees should not be denied the opportunity to work with a personal advisor and product provider they trust.

What we learn from Richter is that ASPPA/NTSAA is quite concerned about allowing “…public school employees to make apples to apples comparisons of different 403(b) options…” and so I propose we allow them to do just that.  Of course I want fees and commissions disclosed, but if participants need apples to apples comparisons to make good decisions on their 403(b) fees, we should also allow them to compare “advisors” on such a basis.

I am calling on ASPPA to practice what they preach and require that those who want to work with public school employees and give “advice” be a fiduciary and those that sell product must disclose they are NOT advice givers and NOT acting as fiduciaries.  ASPPA should adopt this policy for any non-fiduciary who becomes a member of ASPPA or its member organizations.  ASPPA should support the following dictum layed out by Kitces:

If you don’t want to be treated as a fiduciary, that’s fine; just don’t offer advice, and don’t hold yourself out as offering advice. People who offer securities or insurance products for sale eliminate the words “financial advisor” or “financial consultant” from their business cards, and simply hold themselves out for doing what they do: registered representative, stockbroker, or insurance agent. Those who offer advice hold themselves out as advisors, and subject themselves to the appropriate standard.

This compromise allows for non-fiduciaries to still work with 403(b) plans that have chosen to stay multi-vendor, they just can’t give advice.  In a private e-mail with Kitces (which he has granted me permission to share), he made the following analogy:

“I still view it as analogous to the medical industry. You can be a doctor and give advice, or be a drug company and sell your products (albeit also subject to some amount of regulation and oversight). But you can’t be a drug company giving advice about drugs; advice is fiduciary and products are not, but advice is separate from products.”

I’ve always held the position that advice givers should be fiduciaries, it is time that ASPPA endorses this common sense (which happens to be current law (Section 202(a)(11)(C)) position.  This will allow school employees to make a true apples-to-apples comparison among the advisors they choose while also providing the proper disclosure.  It preserves the “choice” position that ASPPA has so desperately clung to, but puts clear parameters around that choice as well as clear disclosures.  Sell product or give advice – but be clear about it.

Kitces goes on to say:

But the real point here is that fiduciary advice vs suitability advice is a false dichotomy; the only kind of advice is fiduciary advice, delivered in the best interests of the person receiving the advice. Merriam-Webster defines the act of advising as “to give (someone) a recommendation about what should be done” (emphasis mine); in other words, telling the person what should be done that’s in their interests is the very essence of what advice is, in the first place! On the other hand, the suitability standard is about offering a product for sale that is suitable – or at least, not unsuitable – given the client’s circumstances. The latter, simply put, is not a standard for advice; it’s not actually about advice at all, but simply determining whether a product being sold is so unsuitable that it’s unconscionable to allow it to be bought at all. Advice, as Merriam-Webster makes clear, it about telling someone what actually should be done, not merely what would be “not unsuitable” to buy. In fact, the existing securities regulations (Section 202(a)(11)(C)) have already stated that any advice delivered in a product sales context should be “solely incidental” to the sale of the product; if the primary focus of the relationship is about the delivery of advice and/or special compensation is received for advice, the fiduciary standard already applies!

I think it’s better if I just re-print Kitces entire post below – his eloquence on the subject is convincing.

In the ongoing debate for the fiduciary standard, supporters of fiduciary have suggested that everyone in financial services should be subject to the standard, while those opposing have responded that consumers deserve a choice between fiduciary and suitability; in essence, they simply suggest that we should let consumers choose whatever method of financial services they prefer, and may be the best model win. But to me, the choice presented is a false one: the real choice is not between fiduciary advice and suitable advice, the difference is between fiduciary advice and suitable product sales. In other words, the real choice we should present to consumers is between advice and product sales, and the real goal of the planning profession should be to focus on who is and is not qualified to deliver advice.

The inspiration for today’s blog post comes from several recent Twitter debates that I’ve had about the fact that I believe the focus on fiduciary is the wrong message to send to the public. As I’ve noted previously on this blog, consumers already believe that advisors have their best interests at heart, so promoting fiduciary isn’t really about saying “you can trust me” – it’s just about bashing your competition and saying THEY can’t be trusted. And a negative advertising campaign that bashes the competition is a terrible way to advance the profession, and your own financial planning practice.

But the real point here is that fiduciary advice vs suitability advice is a false dichotomy; the only kind of advice is fiduciary advice, delivered in the best interests of the person receiving the advice. Merriam-Webster defines the act of advising as “to give (someone) a recommendation about what should be done” (emphasis mine); in other words, telling the person what should be done that’s in their interests is the very essence of what advice is, in the first place! On the other hand, the suitability standard is about offering a product for sale that is suitable – or at least, not unsuitable – given the client’s circumstances. The latter, simply put, is not a standard for advice; it’s not actually about advice at all, but simply determining whether a product being sold is so unsuitable that it’s unconscionable to allow it to be bought at all. Advice, as Merriam-Webster makes clear, it about telling someone what actually should be done, not merely what would be “not unsuitable” to buy. In fact, the existing securities regulations (Section 202(a)(11)(C)) have already stated that any advice delivered in a product sales context should be “solely incidental” to the sale of the product; if the primary focus of the relationship is about the delivery of advice and/or special compensation is received for advice, the fiduciary standard already applies!

Accordingly, the real debate is not about whether consumers should have a choice between fiduciary or suitability; the real choice is between working with an advisor who delivers advice and working with asalesperson who sells a product. Notably, the latter is not intended in a derogatory or pejorative manner; it is simply to make the distinction between someone who offers bona fide advice – which, by definition, is in the interests of the person receiving the advice to get a recommendation about what should be done – versus someone who offers a product for sale, which is implicitly in the interests of the person or company offering the product for sale but should only be offered when it is not unsuitable to do so.

Why is this distinction of advice versus sales more important than fiduciary versus suitability? Because, cast in the context of advice versus sales, the solutions quickly become more readily apparently. The goal of fiduciary advisors should not be to subject everyone to the fiduciary standard; it should be to subject everyone offering advice to the fiduciary standard. If you don’t want to be treated as a fiduciary, that’s fine; just don’t offer advice, and don’t hold yourself out as offering advice. People who offer securities or insurance products for sale eliminate the words “financial advisor” or “financial consultant” from their business cards, and simply hold themselves out for doing what they do: registered representative, stockbroker, or insurance agent. Those who offer advice hold themselves out as advisors, and subject themselves to the appropriate standard.

In this framework, then, it’s not about whether consumers deserve a choice between fiduciary and suitability standards; it’s a choice about whether they want to buy their products from a salesperson, or receive advice from an advisor. It’s a much clearer choice. Eventually, we might even see a world where a prospective buyer of an insurance policy, after being told about the policy’s benefits and features, asks the question “But is this policy right for me?” to which the insurance agent responds “Oh, I’m sorry, I can’t give you advice on that; you’d have to ask your financial planner.” The agent responds this way because he/she doesn’t want to be held to a fiduciary advice standard if he/she isn’t giving advice. And the consumer receives a genuinely clear distinction about what role the insurance agent does, and does not, serve.

In fact, arguably consumer clarity itself is a major benefit of shifting the dialogue in this manner. While consumers have made it clear they don’t understand the different between a fiduciary and suitability standards very clearly, the difference between “is this person giving me advice, or not” is much clearer. In fact, it highlights the problem, as noted in the RAND study itself: “most investors believe that the financial intermediary is acting in the investor’s best interest [regardless of whether delivered from a broker-dealer or investment adviser].” Perhaps the best target for advocacy is not to expand the fiduciary standard to all, but instead to remove the “solely incidental” exception for advice delivered by registered representatives, and simply make all advice subject to fiduciary.

But the bottom line is this: debating about the fiduciary versus suitability standards is a lost cause. The public doesn’t understand the distinction, in no small part because they simply cannot conceive of anyadvice that isn’t in their best interests, since that contravenes the very definition of advice. The real issue to the consumer is whether they are receiving advice at all, or whether they are simply being pitched a product for sale. By creating a distinction between product sales and advice, consumers can have a clear choice about which they want, and each can be regulated in its own appropriate framework. And if a product salesperson doesn’t want to be held to the standards of advice – client-centric fiduciary, with the necessary competence including education, training, experience, and ethics – that’s fine; just make it crystal clear to the buyer that no advice is being delivered. Just as so many advisors are already quick to emphasize that they are not tax advisors and cannot/do not give tax advice, so too would they make it clear they are not financial planners and cannot/do not give financial advice, unless they truly wish to deliver such advice and be held to the associated standard. (emphasis mine)

So what do you think? Is “advice vs product sales” a better distinction than “fiduciary vs suitability”? Does it make a clearer distinction for the public? How could we shift our advocacy, lobbying, and discussions with the public if we focused the debate on separating advice from product sales, instead of fiduciary from suitability?

I think Michael’s point is clear and I would challenge ASPPA to take a serious look at such a framework.

I’ve tried to find a compromise on the “Vendor Choice” issue, but I cannot logically make the leap that offering an unlimited number of investment options with no oversight and no fiduciary responsibility makes for better retirement outcomes – there is simply no evidence for it, none.  Given that ASPPA has failed to meet a single challenge so far (Brian – the debate option is still on the table) I am convinced they will continue to ignore me (while getting enormous pressure from their membership).

Scott Dauenhauer CFP, MSFP, AIF