AB 2462 Signed By Schwarzeneggar Today

The Governator signed Assembly Bill 2462 today. This bill will allow CalSTRS to offer Third Party Administrative services to school districts as well as adding safeguards to TPA's doing business in California. CalSTRS is expected to be offering their TPA services by mid 2007.

Scott Dauenhauer, CFP, MSFP

Official IRS Announcement of 403b Reg Delays

Delay in Effective Date for Regulations Under Section 403(b)
The Internal Revenue Service announced today that the general effective date for the regulations regarding section 403(b) arrangements that were proposed in 2004 (including the related controlled group regulations under section 414(c)) will be extended.

In order to provide employers, employees, insurance carriers, and mutual funds involved in section 403(b) arrangements a reasonable advance period before the regulations go into effect, the final regulations generally will not be effective earlier than January 1, 2008.

Scott Dauenhauer, CFP, MSFP

I reported this several months ago...

CTA Retirement Piece

A pretty darn good piece on 403bcompare.com and what CTA members should be doing now to save for retirement.

A chart created by me was also included.

Scott Dauenhauer, CFP, MSFP

403(b) Regs Will Be Delayed

I have it on good authority (Source at the IRS) that the 403(b) proposed regs that were supposed to be released and finalized tomorrow (June 30th) will be delayed till the fall. In addition, the effective date of the regs will be delayed by at least a year as well. When the proposed regulations become finalized they won't be effective until January 1st, 2008 (they were due to become effective January 1st, 2007).

It appears the hold up is an issue between the IRS and Department of Labor that might subject non-government non-profit voluntary only plans to ERISA. The IRS apparently doesn't want this to happen and is working with DOL to ensure this doesn't happen. Governmental plans will still not be subject to ERISA.

In addition, it seems that there will not be any significant changes (from the proposed regs) in the final regulations as they relate to governmental 403(b) plans.

I'll keep you posted as to further developments, but it looks like the proposed regs won't become final until either before or shortly after the elections.

Scott Dauenhauer, CFP, MSFP
Co-Author of The 403(b)Wise Guide

Can Pricey Target-Date Funds Be Competitive?

Great article by Morningstar that rips into high cost Target Date funds. If you don't know what a target date mutual fund is you are not alone, they are relatively new.

A "Target Date" mutual fund is supposed to be a one-stop fund that a person can utilize for retirement. You pick a retirement date (or one that is close to the funds Year) and the fund does the rest, including the asset allocation and becoming more conservative as you get closer to your retirement date.

For example, if you plan to retire in 2035 (my planned phase out date) you might choose the Vanguard Target Retirement 2035 fund (VTTHX, expense ratio .21%). This fund currently has an asset allocation that is 87.5% Stocks and 12.5% Bonds and will slowly adjust as the years pass by so that by the time I am retired (or phasing into retirement) the allocation will have adjusted to 42% stocks and 58% bonds.

I am a fan of the Target Date concept, but not of the implementation. Currently most target date funds are too expensive (the point of the Morningstar article). The ones that are priced well (Vanguard) aren't diversified enough. At this point I haven't found a target date fund that I like. Other problems with Target Date funds are that you can't customize a persons portfolio to fit them or to adjust to different economic environments.

I believe that as this concept evolves the expenses will come down and they will be better diversified. I also believe that these funds are best used in retirement plans like 403(b), 457(b), or 401(k) . They are also best used for smaller account levels, as your asset grow so should your asset allocation strategy.

Scott Dauenhauer, CFP, MSFP

New York Teachers Union Settles Retirement Probe

The 403(b) world is changing and for the better. Unions are finally getting the message that endorsing high cost product in order to boost revenues for their Member Benefits units is a bad idea. ING just got slapped with a fine and it seems to me that the NEA is about to find itself in similar travails. Both have announced that they will bid out their programs and offer low cost products and just this week the United Teachers of Los Angeles worked to ensure that the new 457 plan that will be offered to employees is in the employees best interest.

The CTA and CFT recently endorsed legislation (AB 2462) that would allow the California State Teachers Retirement System to offer a compliance program to school districts along with a low cost 403(b) and 457(b). I think unions might finally be getting the message - supplemental retirement plans matter and they can have a big hand in making these products the best that they can be.

Many people have worked hard to get to this point, but the work is not over. We need to build on this momentum and keep pushing for better options, more disclosure, and education.

Scott Dauenhauer, CFP, MSFP

NYSUT agrees to retirement plan reforms to end probe

NYSUT - New York State United Teachers got away with a mere $100,000 penalty for intentionally taking "steps to conceal it." "It" being the fees and conflicts of interest that are so vary prominent in their ING Opportunity Plus program. ING pays NYSUT Member Benefits over $3 million annually to get the NYSUT endorsement.

The settlement also has some additional stipulations, as follows:

• conduct open bidding for future retirement plan endorsements,
• provide full disclosure of all payments from insurance companies,
• provide free and impartial investment advice to members and allow them to roll over current savings to a new endorsed plan at no cost.
• It will also hire an independent consultant to oversee reforms and report to the attorney general's office.

This is actually a decent settlement, but I am doubtful anything will actually change. Sptizer commented "A simple rule that my office has enforced time and time again is that fiduciaries must place the interests of their clients first." ING is clearly running the show and making the investment decisions, not anybody at NYSUT and ING is conflicted. NYSUT should hire an outside investment advisor to help them make investment decisions in the plan and bar ING from making those suggestions.

I will tell you this - if this was a public firm (like a fund company) the fines would be in the millions, people would be indicted, and ING would be in the hotseat, but Spitzer needs the NYSUT endorsement as he is running for Governor......talk about going soft on your buddies.

We'll keep on top of this and continue to hold NYSUT to a higher standard - though we are doubtful they will live up to it.

Press Release from NYSUT regarding announcement

ScottyD

NH Accuses ING of Fraud

ING apparently failed to disclose revenue sharing agreements and the state is ticked. They should be, however they should have known not to deal with a company like ING in the first place unless they could dictate the structure of the deal. I find it hard to believe that New Hampshire couldn't find out about these revenue sharing deals - I could have done it in about 15 minutes of work. Simply look at what funds are being utilized - this tells you everything. It appears the fiduciaries where asleep at the wheel allowing ING to dictate what funds to use - as if ING was going to work in New Hampshires best interest....that is laughable.

Scott Dauenhauer, CFP, MSFP

AIG VALIC Successfully Completes Major Re-Structuring of Its Fund Options; Fund Substitutions Result in Reduced Fund Expenses

Yes, it is true, fund expenses have dropped. But through a nifty maneuver they have apparently increased their revenues by 26%. I'll explain how they did this in a later post.

ScottyD

Illegals granted Social Security

Interesting. Someone from another country can come to the United States illegally and recieve Social Security benefits, but the Educators who teach our children (and the children of those here illegally) will be denied Social Security benefits they legally earned. I feel as if I am in the twilight zone.

Scott Dauenhauer, CFP, MSFP

Results expected soon in attorney general examination

Dick Iannuzzi - NYSUT President "There is no intermingling of NYSUT and Member Benefits funds. Any fees NYSUT’s Member Benefits Trust receives are used to fund the nearly 40 programs and services offered by the Trust. No money from the Trust or vendors is used to fund daily union operations." This quote is from www.edwize.org

The linked to article also quotes Iannuzzi as saying "Member Benefits uses approximately half the fees from ING to directly enhance the benefits received by 403(b) participants, including providing term life insurance and a survivor financial counseling program to inservice participants; and a legal services plan and financial counseling program. The remainder of the fees are used to help cover the costs of administering the 403(b) offering and the more than 40 Member Benefits programs and services, Trust managers said. There is no mingling of Member Benefits funds and NYSUT funds, union leaders noted."

NYSUT admits to using the assets of a trust (the 403(b) plan) to fund other Member Benefits programs and services, this is egregious. In Iannuzzi's defense on the NYSUT website it does disclose the following:

"The ING Opportunity Plus Program is a NYSUT Member Benefits-endorsed program. Member Benefits receives an expense reimbursement/endorsement arrangement of $6.50 per NYSUT member for the year 2006 with a member cap of 515,000 for this program. All such reimbursements are used solely to defray the costs of administering Member Benefits programs and, where appropriate, to enhance them. Member Benefits acts as your advocate; please contact Member Benefits at 800-626-8101, if you experience a problem with any endorsed program."

I do not know if the prospectus specifically states this or if materials given to potential and current participants disclose what is going on.

I do know that using the assets of one trust to pay for benefits for another trust (with different beneficiaries) could easily be seen as a breach of fiduciary responsibility. Imagine if a school district started a 457(b) plan and required the investment provider to overcharge the participants so that it could use the funds to pay health benefit costs for the employees of the district - I am pretty sure NYSUT would be outreached at such a breach - yet they are doing the same thing.

As a fiduciary of the 403(b) program it is shocking that they would use plan assets to subsidize other programs. I believe this to be a breach of fiduciary responsibility and an abuse of trust - even if fully disclosed.

ScottyD

School System Sues Over Teachers' Retirement Planning

Not again.......

Scott Dauenhauer, CFP, MSFP

Spitzer vs. NYSUT

Elliot Spitzer is finally investigating the New York State United Teachers and their relationship with an endorsed product provider ING. I raised concerns about this relationship several years ago and send an e-mail to Sptizers office encouraging him to look at if a Fiduciary breach of responsibility is occuring. Nothing ever happened. Finally, thanks to a series of articles that have appeared in Forbes magazine, the LA Times, and other publications Spitzer is looking into this cozy relationship. What follows are links to a few of the articles - most require either a free subscription, some you must pay for the article (yea right, like we're going to pay for it)....

New York Times: Spitzer Studying ING's Tie to Teachers' Union

New York Post: Where's Elliot?

Reuters: New York AG probing teachers' union ties with ING

LA Times: New York Is Probing 401(k) Plans

New York Post: ELIOT TAKES A 'PASS'

I'll continue to follow this story and pass along all pertinent articles.

Scott Dauenhauer, CFP, MSFP

NEA Rebuttal

What follows is the NEA’s rebuttal to the LA Times article that came out a few weeks ago. I am still of the opinion that this program is not in the best interest of the members and that the NEA should discontinue it. I’ll follow up with my comments in a few days.

Scott Dauenhauer, CFP, MSFP

Some facts about NEA's Valuebuilder plan

On April 25, 2006 the Los Angeles Times published an article titled "Unions' Advice is Failing Teachers." The article suggests that teacher unions, including the National Education Association, sponsor 403(b) annuity products for their members to generate revenue for the sponsoring union. The article's conclusions are flawed and rooted in a misunderstanding of the K-12 403(b) marketplace and a misapplication of traditional 401(k) principles.

NEA Member Benefits is a wholly owned subsidiary of the National Education Association. Its mission is to provide the 2.8 million members of National Education Association, as a benefit of membership, the highest quality products and services at the lowest possible price. Although it is a for-profit company, it operates as close to a break-even margin as it can and any surpluses it may have are poured back into the services and products that NEA Member Benefits provides. It has made agreements with many of NEA's state affiliates to offer products and services to NEA members working in those states. Those states receive some compensation to facilitate the delivery of products and services.

No dues dollars are used to support NEA Member Benefits.

The following factual information is helpful in understanding NEA Member Benefits' Valuebuilder Program, along with background information to clarify and correct the misleading information in the article.

The facts about fees and expenses

NEA receives no money as a result of the sponsorship. NEA Member Benefits receives a relatively small payment from Security Benefit Group, the underwriter of the NEA Valuebuilder Program, to help market the program and ensure that the investments, relative to the marketplace, represent a good value for members. If NEA Member Benefits received no money from Security Benefit Group, there would be no material impact on the pricing of the product. The only impact would be lower quality, less visibility for the program, and fewer opportunities for members to participate in a great program.

While everyone prefers lower fees, research clearly indicates that NEA members want investment advice. Agents and brokers have been the best vehicle to provide that advice at a reasonable and disclosed price. For the segment of members who may want to do it on their own and enjoy the benefits of lower fees, we will be developing (assuming we can find a company willing to develop the product for us) a high-quality, low-cost product. NEA Member Benefits hopes to have this available by year's end.

403(b) and 401(k) plans are different

It is important to note that school district based 403(b) plans are not distributed in the same manner as employer-based 401(k) plans. In fact, there are significant differences between an employer with a centralized workforce, supported by a centralized HR department that provides a narrowly focused and often employer-matched 401(k) plan, and a school district with no employer plan or involvement, undifferentiated product offerings. One of the major differences is these decentralized plans often have substantial barriers to acquire the mechanism for making payroll deduction which enables tax-deferred contributions to an employee's investment of choice.

In a 401(k) environment, there are few barriers to participation so distribution costs in the form of brokers, financial planners and salespeople are not incurred. In a school district environment where work sites are spread across a city, county or municipality, there are huge barriers to participation. If it weren't for the information, service and support that brokers, financial planners and sales people provide, a large percentage of our members would not be participating in any investment plan at all, thereby losing the critical tax-deferred benefits and supplemental retirement savings opportunities that 403(b) annuities and mutual funds provide.

All things being equal - lower is better; but all things are NOT equal

All things being equal, lower fees are better, but everyone knows that things are usually not equal. In the late 1980s, NEA Member Benefits, in partnership with Mutual of America, created a very low-fee annuity program for members. The program was based on member activism, telephone support and no sales agents in the field to consult with members and obtain a mechanism for members to make contributions directly from their paychecks. After years of nurturing the program, it failed to appeal to members. In a retrospective evaluation of the program, members were asked in focus group sessions and surveys why they did not participate. Members indicated clearly that they preferred representatives, agents, brokers, and/or financial planners to help them understand investing and their investment choices. In addition, NEA members preferred to have representatives navigate the school district's administrative maze, to acquire the administrative mechanisms to make payroll deductions and participate in the program.

Programs to meet the unique needs of NEA members

Based on responses shared in multiple focus group sessions, individual interviews, and surveys, NEA Member Benefits reached the conclusion that it had an obligation to develop a program that would meet this specific need of the membership. Subsequently, the NEA Valuebuilder Program, a 403(b) program that provides members with face-to-face investment advice with quality, trained professional investment experts was developed and offered to members. The NEA Valuebuilder Program has a cost associated with it that members have explicitly expressed a willingness to pay. It is also worth noting that since its inception in 1991, the NEA Valuebuilder Program has become one of the best-received programs that NEA Member Benefits has developed for NEA members.

You can't compare apples to oranges

When compared to similar programs distributed by financial planners and brokers, the NEA Valuebuilder Program is very competitive. But you can't compare the NEAValuebuilder Program to programs that do not provide a similar level of service; this would clearly be comparing apples to oranges. Many people who have time and consider themselves to be savvy on investment matters want to make their own investment decisions, but research indicates that a large percentage of NEA members prefer to have assistance in making important investment decisions.

NEA Member Benefits understands that a segment of members are comfortable making these types of investment decisions without face-to-face consultations. NEA Member Benefits is developing a high-quality, low-cost, phone and Internet-driven product to meet the needs of these members. Unfortunately, there are not many companies interested in providing this type of program. It is not because of fees "the union" would demand for sponsorship; it is because those companies understand the barriers and the difficulty in providing high-quality, low-cost products, in the decentralized school district environment. Companies like TIAA-CREF and Vanguard have indicated that they can't reach critical mass in a program that has to acquire payroll slots and communicate a complex investment message, without an on-site expert.

NEA Member Benefits is very proud of the NEA Valuebuilder Program. If you have any questions, please email them to Gary Phoebus, president, NEA Member Benefits Corporation gary.phoebus@neamb.com or John Wendland at jwendland@neamb.com. For more information you may also visit http://www.neamb.com/.

Special Problems Areas for Pensions

Special Problems Areas for Pensions

Not sure of the agenda of this organization - but they are correct in there assessment.

ScottyD

Teachers union criticized for pushing retirement plan -- Newsday.com

Teachers union criticized for pushing retirement plan -- Newsday.com

This isn't news, but perhaps it will have some positive effect. I've sent e-mails to Spitzers office, the SEC, and the NASD about the ING plan offered by NYSUT over the past several years and have never gotten a response (perhaps because Spitzer needs NYSUT to get elected Governor). I am doubtful anything will happen, but am glad to see this finally getting publicity. I believe a national revolution is forming and that the 403(b) will look very different 10 years from now.

ScottyD

Unions' Advice Is Failing Teachers - Los Angeles Times

Unions' Advice Is Failing Teachers - Los Angeles Times

Kathy Kristof's article on how unions are failing our teachers when it comes to the 403(b) and 457(b). I believe our unions (of which my wife is a dues paying member) can make a huge positive difference in the 403(b) world if they really wanted to, the question remains whether they want to. The only way they will change is if the membership lets them know that they want help. Send this article to your local, state, and national union leadership.

ScottyD

403(b)wise : Features : One Educator's Take on the NEA and the 403(b)

403(b)wise : Features : One Educator's Take on the NEA and the 403(b)

I started the assault on the NEA Valuebuilder product several years ago with an article entitled "Does the NEA Practice What It Preaches," since then several other people have come to the same conclusion. Kathy Kristof (article to follow) of the LA Times wrote about it recently and now a member and former product owner of the Valuebuilder has written an article. The article is posted on 403bwise.com.

ScottyD

New retirement savings plan is portable for school workers

The Bristol Press - New retirement savings plan is portable for school workers

Ok, the Connecticut Association of School Business Officials has created a 457 plan - great. They say it is low in cost, however they have partnered with ING, a company that is not known for low cost plans. Furthermore, they fail to mention that the funding mechanism for the 457 plan is a Group Annuity Contract. Why would they adopt a variable annuity for their funding vehicle? If they were truly looking to offer a great product at a great price they would not have settled for a Group Annuity Contract. There was no disclosure of expenses and in fact I did not see any mention of fees in the motion passed by the CASBO board in November.

I am doubtful that is plan is what it is says it is - though I am willing to review it if CASBO would like to put out a press release disclosing all the costs and how to get a copy of the prospectus and state publicly that they don't recieve any money from ING.

The article cites the Ohio 457 plan, they are right, it is a good plan, and it has $6 billion in assets and low costs. It utlizes mutual funds, not an annuity contract (though the recordkeeper is an insurance company).

I'm not optimistic at this point as I have seen other endorsements by ASBO states of 457 plans that turned out to be turkeys.

ScottyD

Court Blocks W.Va. Pension Merger

News Articles [PLANSPONSOR.com] - Court Blocks W.Va. Pension Merger

The closing of West Virgina's DC plan and the folding of it back into the DB plan (pension) is hitting some snags. This is something to watch if only because it will be used to show that switching to a DC plan or giving a DC plan as an alternative doesn't work in the public sector. Whether true or not, this will be a landmark event.

ScottyD