Exit Strategy - Dan Otter Profil

Exit Strategy

You'll need to create a login to edweek to view this, but the login is free and the article is worth it. This is another profile of Dan Otter, the creator of www.403bwise.com. It is a great article.

Scott

AIGVALIC Goes Single Vendor In Richmond, VA

Several years ago a bill was introduced in the California legislature to allow California Public Schools the ability to choose a single vendor for their 403(b) plans (they can actually do this already if the platform is mutual fund based). There were several companies against the Single Vendor option (which lowers costs and increases services, and should allow economies of scale to benefit the employer and employees) and VALIC was one of them. The bill was basically watered down and turned into a disclosure database which became www.403bcompare.com, a landmark in and of itself.

It appears that VALIC has had a change of heart and now fully endorses the Single Vendor concept. The attached Press Release announces that AIGVALIC will be taking over the 403(b) and 457(b) programs in Richmond, VA Public Schools. I'll be following this development to see how AIGVALIC responds in California.

Scott Dauenhauer, CFP, MSFP

10 Year Treasury Breaks 5%

Bloomberg.com: Top Worldwide

The ten year treasury finally moved above 5% yesterday for the first time since 2002. Many have wondered how long the long term Treasuries could keep from rising along with short term rates. At the beginning of 2005 the 10 year stood at 4.23% and began 2006 at only 4.37%, yesterday it ended at 5.05%. The ten year treasury is commonly used to set mortgage rates and Real Estate is typically inversely correlated with interest rates - in other words - higher rates lead to lower real estate prices (all things being equal). The 10 year has risen by 68 basis points (.68%) in just three and a half months, that is a 15.5% increase, quite a jump. The yield curve is no longer inverted, though it is quite flat from 6 months to ten years. Interest rates are impossible to predict, though some believe that this rise in long term rates was inevitable. It will be interesting to see how this affects real estate.

The link I provided is to an article from Bloomberg which also has links to several video files that talk about this latest move.

WV Teachers Vote to Return to DB Plan

Publish2

I think this will stop the current actions of many states who are trying to freeze DB plans and move to DC plans. I still believe the trend of moving toward DC plans is one that cannot be stopped, but I think it will take a lot longer in the state pension world.

Scott

Merrill Lives Up To Brokerage Firms Rep

NASD - Press Room - News Release - 3/15/06

Another nail in the coffin on why you cannot trust brokerage firms - they will always find a way to separate you from your money and work in their own best interest. Merrill was fined a measly $5 million for improperly selling and servicing clients who had less than $100,000 in assets. These "undesirables" clients where switched to a Call Center program in order to be "serviced better." I was at Merrill when this initially started and knew that this would be a joke - I turned out to be right. Merrill serviced these people like Bonnie and Clyde serviced banks. Those who could least afford the bad advice where given bad advice and sold products that were in Merrill's interest. Of course the most surprising thing is that someone is surprised.

ScottyD

Fiduciary Rules Applicable to "(b)" Plans (January 2005)

Fiduciary Rules Applicable to "(b)" Plans (January 2005)

School districts - it is time to start learning about this stuff. You have a fiduciary responsibility in your 403(b) plan whether you like it or not, the attached article gives a good overview of some of your responsibilities.

Scott Dauenhauer, CFP, MSFP

Investor's home sale tops $1 million

ContraCostaTimes.com 02/22/2006 Investor's home sale tops $1 million

Just another update in the ongoing Plan Compliance Group/Bill Reimers Scandal.

Scott

District suffers in investment collapse

ContraCostaTimes.com 01/20/2006 District suffers in investment collapse

This will be an interesting case as I am pretty sure the employees and their union will end up in a court battle with the district. The issue will be what responsibilities the school district has to the employees regarding their payroll deductions to retirement plans.

What is unclear is what actually transpired. It appears Plan Compliance Group was on the "approved vendor list" (hint: employees need to request a copy of this list to see how it is titled....approved indicates some level of responsibility) of the district and if this is true it means they signed a hold harmless agreement with the district, this agreement holds the district harmless should fraud happen and makes the company responsible. However, the district also has the responsibility to ensure that the money is actually going to an account that is allowed by the IRS. The question is what agreements did the district have with PCG and when was the last time those agreements were updated. The employees need to find their statements and figure out whether their money was ever really invested in a 403(b). The district liability in this is not clear, but the questions will be 1) Is the district responsible for verifying if a plan is actually a 403(b) approved plan, 2) If so, what steps, if any were taken by the district to verify this, 3) was Plan Compliance Group the actual investment provider or were they simply a common remitter, i.e. a firm that forwards money on to another vendor - if so, the district may actually have some liability if it can be proved that PCG was an agent (via the hold harmless agmt) of the district. This will be a very interesting case to watch, though ultimately the new 403(b) regulations require the district to take responsibility and in the future the district will likely be on the hook for occurences such as this. This is why districts are going to have to find a good system for handling their 403(b) plans.

Scott Dauenhauer, CFP, MSFP

West Contra Costa USD employees invested with Reimers

ContraCostaTimes.com 01/19/2006 West Contra Costa USD employees invested with Reimers

FYI. The new regulations for 403(b) hopefully will prevent at least some of this stuff.....if districts actually pay a little attention.

Scott

Danville investment manager in East Bay hospital

ContraCostaTimes.com 01/17/2006 Danville investment manager in East Bay hospital

Just an update on PCG and the owner Bill Reimers. I was happy to hear that Bill is recovering from his suicide attempt. While I am extremely displeased and upset about what Bill did I also am glad that he survived and hope that he makes a full recovery. The road will be tough for him as he will be forced to account for all that he has done, but this road is better than the alternative.

My heart goes out to him and his family and I keep them in my prayers. However, the people who lost their life savings via this mess are the real victims, let's not forget them in our prayers either.

Scott Dauenhauer, CFP, MSFP

Once at the top, businessman now faces probe

Yet another story about Plan Compliance Group and Bill Reimers. It seems Bill was running a ponzie scheme with individual investors in order to finance his high lifestyle. None of the people involved ever bothered to check into Reimers, whether he was registered or had any licenses. A simple check would have saved their lifes savings. Apparently one woman did do some checking and decided she didn't want Reimers managing her money, it looks like she was the straw the broke the camel's back. It looks like it was just a matter of time before everything crashed in on him. It's sad, but should serve as a lesson to investors....As Ronald Reagan used to say about the Soviets - "Trust, but Verify."

The school districts could have done a better job as well, they could have verified everything that Reimers told them as opposed to just trusting him.

Scott Dauenhauer, CFP, MSFP

High-flier's sudden fall leaves lives in ruin / Good life apparently was propped up by Ponzi scheme

High-flier's sudden fall leaves lives in ruin / Good life apparently was propped up by Ponzi scheme

A story about the damage Reimers and PCG did on the personal investor side. Trust is not enough, you must verify. You must verify your money is where you send it and not in the hands of an advisor directly. You must verify registrations, nobody did this and everybody lost.

Scott

Plan Compliance Group Update

Plan Compliance Group Update: "The president of Plan Compliance Group, the California company responsible for the disappearance last year of more than $2.6 million intended for retirement investments on behalf of island teachers and university professors, attempted suicide last month as the company crumbled under the weight of spreading accusations of fraud."

Turns out money was also stolen from individual investors, not just school districts.

This continues to be a sad story for all involved.

Scott

PCG Update

StarBulletin.com News /2006/01/11/

Update on PCG Bankruptcy and its effects.

Scott

Company accused of mishandling funds files for bankruptcy

KPUA.net - KPUA Hawaii News - Company accused of mishandling funds files for bankruptcy

It's official, Plan Compliance Group is now defunct. It will be interesting to hear the whole story, though I don't believe it will come out for quite awhile. I think it is sad for both school district employees, employers, TPA's, and Plan Compliance Group. I don't actually think PCG was a bad apple, they did a good job; it takes more than good intentions and a good job to run a business.

As always, I'll keep a watch on this an report on it from all sides.

Scott

Follow Up to Long Live the 20% Surrender Charge & Equity Indexed Annuities Debate

I've recieved quite a few comments from people on my recent article "Long Live the 20% Surrender Charge." Most of the comments were complimentary, but evidently I ruffled a few feathers in the insurance agent community (which is of course the point). I received e-mails from a few reps who called themselves Independent but then claimed to be senior reps with one of the companies mentioned. I don't see how you can be a "senior" rep with a company and still be independent, but that's another story.

I was accused of not presenting the whole story or just not being fair. One agent told me the product had been discontinued, another told me that he had placed 200 clients in that product (a truly scary thought and not something I'd readily admit too). None of these agents actually disputed that these products exist or existed, which is of course the point.

I recieved one e-mail that told me AVIVA now offers a product with only a 12% surrender charge.....only. If this doesn't tell you what is wrong with the 403(b) market, I don't know what will. I can't imagine a 401(k) plan with a 12% surrender penalty and a lousy interest rate, it may happen, but it isn't bragged about as in the 403(b) world.

Companies that are offering products with 10 year surrender periods and excessive surrender penalties shouldn't be allowed to offer products and their agents should be banned from school districts.

Equity Indexed Annuity

Recently I came across an industry publication that is supposed to be for "insurance agent use only" and it listed fixed annuity products along with their corresponding surrender periods, beginning surrender charges, and commission rates. What interested me the most was the commission differential between a traditional fixed rate annuity and the equity indexed annuities that seem to be so hot right now. I'll use Great American as an example since they sell 403(b) products, though keep in mind that I don't know if the products listed are available in the 403(b). What I want to demonstrate are the incentives agents have to sell one type of fixed annuity versus another.

Company Product Sur Period Sur Charge Commission
Great American American Freedom 10-ST 10 Years 9% 8%
Great American American Legend EIA 10 Years 10% 9%

Now, this is actually a pretty good differntial, there isn't that much incentive to sell an Equity Indexed Annuity over the straight fixed product, but there is still an incentive, one must ask why? Some companies have differentials of 7% or more which means an agent would get paid up to 7% more to sell an equity indexed annuity over a traditional fixed annuity, this is just wrong. I'm not picking on Great American, I'm picking on the insurance companies, agents, and marketing companies that continue to lie about the equity indexed annuity and pay higher commissions to promote them. The concept of an Equity Indexed Annuity could actually work (though not like presented by most agents) if it was done on an honest, simple, and commission reduced basis. The industry won't listen, they make way to much money on these products.

I'd love to continue to hear your thoughts and opinions on Equity Indexed Annuities and excessively high surrender charges on fixed products.

Scott Dauenhauer, CFP, MSFP

The Perfect Storm - School Districts Beware

School Retirement Plan Editorial

It’s Time To Get Serious About 403(b)/457(b) Retirement Plans

The perfect storm is developing in the 403(b) world, only this storm has the potential to wreck serious harm on the 403(b) industry, not the employees the industry portends to serve.  The outcome of this perfect storm could very well spell the beginning of the end for the current inefficient distribution method of the 403(b) retirement plan.  It is time the school districts and county office of educations around the country began taking these back burner retirement plans seriously.  The education community has the opportunity to take back a retirement plan that was started as an employee benefit, but has largely become a subsidy for the financial services industry.

What are the events that are precipitating this Perfect Storm?

A Movement Begins

The first event isn’t really an event, it is a movement that began in 2000 when a teacher by the name of Dan Otter started a website called www.403bwise.com that allowed a community of like minded educators to congregate in one place and speak out against 403(b) abuses in the industry and simultaneously provide unbiased education about retirement plans available to school employees.  Dan eventually teamed up with myself to write “The 403(b) Wise Guide,” a manual on how to effectively utilize the 403(b) retirement plan.  The book has sold over 10,000 copies and led to a second book solely authored by Dan called “Teach and Retire Rich.”  These two books have had the effect of educating the educators and have started a “Great Awakening” among them about how best to save for retirement.

The IRS Issues New Regulations

The second event is the Proposed IRS regulations for the 403(b) which are scheduled to become final January 1st, 2007.  These regulations are far reaching and require the employer to take control of the 403(b), whether the employer wants to or not.  The new regulations require the employer to monitor all transfers, distributions, loans, and to create a plan document that governs how the plan will be run.  While the employer is currently obligated to do many of these things already most don’t, but they won’t be able to get away with not complying anymore.  

The new regulations are serious and will create a compliance nightmare if school districts continue to offer a long list of providers.  The 403(b) industry is scared of these regulations and is fighting them.  The spokes group for the 403(b) financial services industry is the National Tax Sheltered Accounts Association and they have attempted to hire a lobbyist to fight these regulations, though they couldn’t come up with the money from their members, mainly insurance agents.  However, insurance companies themselves are taking the battle to congress and they are a powerful lobby.  My hope is that they don’t get their way.  The new regulations will be tough to comply with under the current way of operating, however they will be simple if a new way is adopted.

Intermediaries Fail

The third and most disturbing event is the series of third party administrator (TPA’s) failures over the past 18 months.  These TPA’s were responsible for accepting money from school districts and forwarding it to the 403(b) vendors the educators want to invest in.  The TPA’s were also responsible for keeping the plan in compliance.  Horizon Benefits Administration, NEBSonline, and Plan Compliance Group have not only failed over the past 18 months but are all facing criminal investigations, lawsuits, and worst of all they (allegedly) stole money from school district employees.  The latest, Plan Compliance Group has taken school districts across the country for over $3 million.  School districts across the nation are sending money to TPA’s with very few checks and balances in place to prevent this theft and they are paying for this mistake out of their own pocket.  

Not only are districts sending money to TPA’s who may not be financially viable they are sending money to financial services companies that don’t actually have their own products (I dub them “403(b) Intermediaries”).  There are many “payroll slots” in school districts where money is sent to a financial services firm and that firm deposits the money to their own corporate accounts before sending the money onto another 403(b) vendor.  These companies either don’t have a 403(b) product or their own or they offer their product alongside of others.  Though this is common practice in the industry it is dangerous for three reasons.  

First, the IRS clearly states in publication 571 that “Generally only your employer may make contributions to your 403(b) account” through a salary reduction agreement and “this agreement allows your employer to withhold money from your paycheck to be contributed directly into a 403(b) account for your benefit” (emphasis added).  Thus the IRS requires school districts to make contributions directly to your 403(b) account; they cannot be made through an intermediary that is not a direct agent of the district.  What this means is that money withheld from an employee’s paycheck should not be going to a company that simply re-forwards the money to another entity (presumably a 403(b) vendor).  This appears to be a violation of IRS rules and regulations.

Second, even if it isn’t a violation of IRS rules and regulations to send money to an entity that is not the product vendor it should be a practice that is frowned upon as the district has absolutely no control of the entity it is forwarding the money too.  If the entity a district forwards money too goes bankrupt or just steals the money before sending it to the actual provider the employee has lost money.  Presumably the school district should have exercised better fiscal control and will in the end reimburse the employee for the losses incurred by the intermediary.  School employees and school districts are financially exposed to these “403(b) intermediaries” and should not forward money to them.  In fact, a district should research vendors before allowing them on an approved vendor list to ensure that the vendor actually offers a product and that school employee money will go directly to that product (as required by the IRS).  Districts are not currently doing this and are left exposed.  Districts should be actively policing and auditing their vendors.

The third reason these “403(b) intermediaries” are dangerous is because they act as a middleman in the process and drive up the cost of products and make compliance nearly impossible for a school district.  How is a school district supposed to monitor loans, hardships, and other distributions when it doesn’t even know who has their employee’s money?  

If you take the above three events and combine them with the fact that 403(b) products on the whole benefit the financial services industry more than the employees they are suppose to serve you have a situation of The Perfect Storm.

This Perfect Storm will combine to force the pendulum to swing from an industry in favor of financial services companies (and agents) to an industry that favors the end user, the participant.  There are many ways this can happen, but I believe the best way is for school districts to combine with other school districts (combine buying power) and to move toward a fiduciary based Single Vendor System.

A Single Vendor System would solve all the above mentioned problems and if done right could save hundreds of millions of dollars annually while improving the 403(b).  This system I envision is one that has been rejected outright by the leaders of the NTSAA (the trade organization that represents the 403(b) industry) because they believe it will hurt the agents who are their members.  School districts, their unions, and their employees must come together for once on this issue and stand up to the financial services industry that controls the 403(b) and find a better way.  

There is a better way; the winds of change are beginning to blow.  

Scott Dauenhauer, CFP, MSFP

iLind.net - Plan Compliance Group Follow Up

iLind.net

A Hawaii Blogger is following the events of Plan Compliance Group and has some additional thoughts.

Scott

No Losses For Orange County School Districts

After speaking with the President of Envoy Plan Services I have been assured that no Orange County School Districts (or any Envoy school districts) have been harmed or lossed money due to Envoy's sub-contractors legal problems and allegations of theft. Envoy stopped using Plan Compliance Group in October after running the September payroll.

Plan Compliance Group allegedly stole or misappropriated nearly $3 million from school districts as it acted as a conduit from the districts to 403(b) vendors. The alleged theft took place in September. I will be providing a full report soon on what has taken place.

It is clear that school districts going forward are going to need to put better safe guards in place to ensure the employee's money is not lost due to bad Third Party Administrators. Plan Compliance Group is the third TPA to be accused of theft in the last year.

To be clear - Envoy Plan Services no longer uses Plan Compliance Group for Common Remitting though will continue to use Plan Compliance Group for compliance functions and number crunching through the end of this month. PCG will not have any control of Envoy School Districts money and Envoy is not cited or alleged to have done anything wrong.

More on this too come.

Scott Dauenhauer, CFP, MSFP

25 Schools District Sold A Ridiculosly High Cost Retirement Plan

Press Release - RSG Elite Choice

Perhpas the most scary observation was the following from this press release:

"Denise Smith, Director of Human Resources for the Imperial County Office of Education says, "We found that Elite Choice offered the most comprehensive and competitively priced program. Elite Choice is a total solution for the district and employers. Elite Choice quite simply fits our needs, and so far has exceeded our expectations."

I've reviewed this Elite Choice plan and found it to be among the most expensive retirement options ever offered. The claim that this plan meets a districts fiduciary responsibility is laughable as the fees are absolutely outrageous.

If you've adopted this plan as a district you can expect to pay about 3% in fees annually.

Scott Dauenhauer, CFP, MSFP