"I Have Not Yet Begun To Fight"

According to Wikipedia:

During his engagement with Serapis, Jones uttered, according to the later recollection of his First Lieutenant, the legendary reply to a quip about surrender from the British captain: "I have not yet begun to fight!"

Spotting a Fake Fiduciary

Recently I've come across numerous situations that really tick me off. When I set out to help change the School Employees 403(b)/457(b) world I knew it would take a long time, real change doesn't happen overnight. Don't get me wrong, we've made a lot of progress, but sometimes it feels like employers are taking one step forward and two steps back. What has recently set me off are insurance agents that masquerade as "Consultants" for 403(b) and 457(b) programs. In most cases the insurance agent has convinced the employer that they are knowledgable and will act as a fiduciary - but in the end they are usually looking for a payday. This is of course my experience and my opinion (If you didn't already know, my first amendment right to criticize has been severely curtailed).

These fake "Consultants" even appear to conduct Request for Proposals processes and many times even invite good providers to compete. However the invitation to the good providers is usually just a farce used to gain credibility - the fix is in from the beginning - the consultant already knows who they are going to choose. The chosen providers typically have a revenue agreement with the Consultant. So - how do you spot one of these Wolves in Sheep's Clothing? Look for the following and ask the questions:

Questions for the Consultant?

Do you have a financial relationship with any of the proposed vendors?

Are you licensed to sell the specific product the vendor is offering and do you plan on receiving commissions or fees or trips for selling that product?

Please disclose all compensation you could potentially receive from each of the potential winning vendors?

Do you require a vendor to "Pay to Play" in order to make the finalist list? In other words, will the winning vendor(s) be required to pay money to the "Consultant" if they win? (Note: This is different than a bidder paying agreed administrative payment to the Plan, which the Plan Sponsor may pay out to compensate a Consultant)

Has the vendor paid for any trips you have taken in the past seven years? This is a no-no.

I could list dozens more questions to ask, but I think you get my drift - a True Fiduciary is someone who always acts in the best interest of the participants - ALWAYS.

A True Fiduciary will not take trips paid for by vendors or potential vendors, those trips will be paid for by the Fiduciary him/herself as a cost of doing business. A True Fiduciary will not enter into undisclosed agreements with vendors to receive commissions (or even disclosed agreements). A True Fiduciary will receive income only from their client, not from a vendor. A True Fiduciary will not utilize his/her position of power to benefit him/herself.

Fake Fiduciaries abound, in fact they are the majority. True Fiduciaries are Independent and will put in writing that they are Fiduciaries. True Fiduciaries will always act in your best interest and will not receive income from any source other than their client. They will disclose their conflicts of interest and try to avoid them whenever possible.

The state of the School Employees 403(b) and 457(b) world has trended toward the Fake Fiduciary, in fact it is dominated by Fake Fiduciaries. I come across them everyday. They are scared to death to have any light shed on them and their practices as they will be exposed for what they are - Self-Interested Fakes. This country is in desperate need of True Fiduciaries...School Employees are in desperate need of True Fiduciaries.

School Employees need to demand accountability and employers should work only with True Fiduciaries.

I am a True Fiduciary, are you?


Scott Dauenhauer CFP, MSFP, AIF

Free Speech Non-Existent in San Diego

More to come, but be careful if you criticize a public figure in San Diego - the First Amendment no longer protects you.

ScottyD

Quoted in Forbes: Teachers Facing New Financial Pains

Quotes:

"They have no faith in the stock market and feel they've been misled that stocks produce a higher return [than bonds] or that they'll be rewarded for stock market risk if they just hold on long enough," he says.

Many school districts are also barred from giving financial advice or restricting vendors selling high-cost annuities from campuses, Dauenhauer said. That makes some teachers easy pickings.

"The insurance agents prey on the teachers fears," he said.

What's to be done? For starters, expect that your 403(b) will be as large a part of your retirement as your pension plan, and invest it accordingly. While some teachers may think that their non-pension retirement savings can be invested more aggressively because there is a backstop, Danhauer argues that teachers may find themselves on the hook for more of their health care costs down the line because of the shaky state of government finances.

"The 403(b) has been thought of as supplemental," he said. "My mission is to convince teachers that it is essential to a healthy retirement."

Scott Dauenhauer CFP, MSFP, AIF

SASH - Bad Choice

Douglas Holt of TDS & The Lotter Group Finds New Broker/Dealer

Looks like Mr. Holt found a home, Lighthouse Capital Corporation.

I don't know much about this company other than they are small, though I did come across some weird connections on google, you can review and decide.

Securities and Exchange Commission v. Diversified Lending Group, Inc., et al., United States District Court for the Central District of California, Civil Action No. 2:09-cv-01533-R-JTL

Lighthouse was mentioned in this Dow Jones article as having some connections to Diversified Lending Group, though it is unclear if there are any regulatory issues stemming from this apparent scam.

This seems to me an interesting place for the Lotter Group and Holt to land (assuming the group went with him). The question becomes whether all that 457 money was bulk transferred from his previous broker/dealer to this new one.

Were the school districts affected notified of this? Seems like pertinent information to me.

Security Benefit - Operator of NEA Valuebuilder - Sold to Guggenheim

Not sure of the implications, but we'll follow.

Scott Dauenhauer CFP, MSFP, AIF

Architect to VALIC

Former IRS official and 403(b) expert Bob Architect has joined VALIC.

In an unrelated story, VALIC is sued in California, click here.

Developing....Architect to VALIC

Press Release to follow.

Former IRS official famous for his leadership and knowledge in 403(b) has joined VALIC.

Scott Dauenhauer

Remember This Story - Puplava and FBC

I am reposting the link to this story mainly because the FBC has decided that two days of deposing me is not enough. They are pissed at my involvement in the story behind the scenes and have chosen to subpoena all sorts of stuff. They even made what could only be taken as a threat to sue me in the last deposition (they meaning Dan Shinoff, the FBC attorney). The FBC is suing the former advisors and those advisors are countersuing the FBC. I am not being sued, just deposed....yet! The price you pay for standing up for the little guy I guess. I wonder how much taxpayer money is being spent on this lawsuit?

Scott Dauenhauer CFP, MSFP, AIF

What Happened to TDS's Doug Holt?

I heard a rumor that Doug Holt of TDS is no longer with TDS, as of yesterday. I don't usually report rumors, only things that I can substantiate. I decided to check out his FINRA status on BrokerCheck and sure enough, he is no longer registered and it shows "Termination", though it doesn't state why. I should note that this termination is from Questar, his broker-dealer, so I can't say for sure that he is not with TDS. I'm awaiting an e-mail reply from TDS.

Update: Latest sources tell me Doug hasn't been terminated from TDS, only Questar (his Broker/Dealer). I wonder who the new broker will be on all those 457(b) accounts.

By the way, this is a tad strange as usually you can transfer to a new broker/dealer, there must have been some reason he didn't, we should find out soon.

10/30/2009 Update:

According to FINRA Holt was discharged by Questar on September 14, 2009 for the following reason:

"Registrant was terminated after internal review evidenced failure to provide prompt written notice and obtain written approval to participate in a private securities transaction and used unapproved marketing material."

I have given TDS a chance to respond to this, they have thus far refused.

Scott Dauenhauer

SchoolsFirst to Begin Charging Vendors for Compliance

SchoolsFirst has now joined the ranks of those charging vendors for compliance, citing the high costs of keeping districts in compliance. It makes one wonder how those who claim to do it for free are able to do so (the answer is they are losing money and hoping to make it up on product sales volume of their TPA partners).

For those districts utilizing SchoolsFirst, since the service is no longer free, perhaps it is time to look at the other available TPA's.

Scott Dauenhauer CFP, MSFP, AIF

Schools First Letter 10-14-09

TIAA Cracks Down On Switchers

Evidently enough people caught on to a secret trick that allowed one to reset their interest rate at TIAA (TIAA Traditional). Basically, you would sell into the money market (out of Traditional) on one day and then buy back in the next. This would effectively increase your rate to the new rate. So if you are earning 3% now and TIAA changes the rates to 3.5% you simply sell today into the money market and then repurchase back in a few days later and voila, you are now earning 3.5%. Well it turns out that this little trick caught on last year or TIAA knows that its going to have to raise rates in the future and doesn't want people resetting their rates (at least very often), so they are instituting the following new policy:

When you transfer out of TIAA Traditional and transfer back within 120 days, the amount, up to your original transfer, will be credited with the same interest rates that would have applied if the transfer out had not taken place. Such interest will be credited from the date the transfer in was made. Interest will not be paid for the period from the date of transfer out to the date of transfer in. Do you wish to continue with this transfer?

This will help, though lets say rates jump to 5% on the Traditional and I'm earning only 3%, you think I care if I lose out on 120 days of interest? I'll take that trade any day.

In reality this is a smart move, a daily liquid account like this is dangerous when you have volatile rates.

Scott Dauenhauer CFP, MSFP, AIF

Ed Siedle Speech: "Perspectives on the Future"

Click above to goto a great speech by Ed Siedle.

Since the 1980s the financial services industry has experienced explosive growth. Over the decades dealing with brokers, money managers and other financial advisers ceased to be limited to the wealthy few. As a result of shifting responsibility for retirement planning onto workers and financial product innovation, virtually all Americans (and foreign investors for that matter) that had accumulated any degree of wealth turned to financial services firms for expert, independent investment advice and investment products.

Scott Dauenhauer CFP, MSFP, AIF

Former TDS Representative Sues TDS Group and Robert Lotter

Below is the copy of the lawsuit that Emily Wang has filed against Robert Lotter's TDS Group (Tax Deferred Services). This lawsuit gives considerable insight into what happened during the transition to Lotter. I'm going to decipher some of it for you in commentary to come.

Scott Dauenhauer CFP, MSFP, AIF



TDS Group Sued By Former Rep

Calling a Spade a Spade - Brokers Giving Investment Advice

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20091004/REG/310049996&ht=spade

Shared via AddThis

The "Free Education" Fallacy

Why most financial education programs in the Public School 403(b) and 457(b) world are really just covers for commission-based product sales.

A question that I continue to hear from Public School employers these days is “how do we best educate our participants?” Several companies that work in the 403(b) and 457(b) world have begun to develop and market “education programs” that purport to “raise financial literacy across the entire workforce.” I am all for financial literacy, in fact I think it is imperative that financial literacy is incorporated into our public school curriculum, however it is clear that financial education in relation to defined contribution participants (401(k), 403(b) and 457(b)) has failed.

There is plenty of evidence to support the failure of participant education:

Many participants are eligible for a match (free money) and fail to take advantage

The average participant account balance underperforms

The average participant couldn’t tell you the difference between a stock and a bond

More than 60% of participants don’t participate (about a third in 401(k)’s)


If you look at the dispersion of who is contributing to their 403(b) or 457(b) by age group those who are closer to retirement make up the overwhelming majority. These facts do not support the notion that participant education is working.

Participant education in Public School 403(b) and 457(b) retirement plans is very different than in 401(k) plans. In 401(k) plans there typically is a single plan and signing up is relatively easy, an advisor holds a plan meeting, provides some “education” and then helps people enroll or directs them to a website. This is not the case in 403(b) and 457(b) government retirement plans.

Most 403(b)/457(b) Public School retirement plans are “multi-vendor,” which means that the employer doesn’t have a single provider for their plans, they may have five or ten or in California, up to 76. Not only do these employers have multiple vendors, but many of these vendors also offer multiple products. In many districts in California its possible to have nearly 300 different products available to a participant. Each of these products may be sold by multiple agents, meaning that the number of choices between vendor, product and sales agent are almost too numerous to figure.

Imagine being an employee in one of these plans, you would be completely overwhelmed.

California has a website, www.403bcompare.com in which each of the 403(b) products are disclosed in terms of fees and returns, yet it is unreasonable to expect the average employee to actually analyze all the available options. Its tough enough for the average 401(k) participant to analyze the twenty-to-forty investment options available to them, imagine the school teacher who has to manage nearly eighty vendors, nearly three-hundred products and potentially thousands of investment options within those products and then finally choose from whom she wants to purchase that 403(b). No amount of “participant education” or “increased financial literacy” will enable the average participant to fully understand what is being offered to them.

It is the “multi-vendor” environment that feeds the perceived need for more “participant education.” The sheer number of options overwhelms people and pushes them either into paralysis or into the arms of a commission-based salesperson, who shows up on campus under the guise of “education.” If the education was truly unbiased and not related to commission-based products, there might be an increase in participants making the right choices, however there is no evidence there would be an increase in the number of participants overall.

The true reason behind the push for “participant education” in the 403(b)/457(b) School District retirement plan world is commissions.

While many firms represent that they only want to provide “unbiased” financial education, they are lying. Think about it for a second, can you think of any non-profit financial education companies that are not tied to product manufacturers in some form or fashion? You can’t, its because they don’t exist. When someone comes to your workplace to provide “education” on a 403(b) plan (in a multi-vendor environment) it is for one reason and one reason only, they want to sell you a product in order to earn a fee or commission. They are not interested in protecting your best interest, they have no duty of loyalty to you and they are not providing the “education” in order to increase your financial literacy. Financial education is a front for product sales. There is a reason that the Department of Labor is making changes to the highly conflicted regulations under ERISA that allowed for salespeople to give investment advice.

A few Third Party Administrators (TPA) for Compliance in California sell their “free” services and wrap them in the blanket of “free financial education.” Even worse, some charge for their compliance services and then offer to provide “free financial education.” This is dangerous for both the employer and the employee. Free financial education, if offered without commission-based product sales is fine, but that is not what is offered. The TPA essentially is acting as an agent for the employer - to the employee the TPA appears to be “endorsed” by their employer (either implicitly or explicitly) and this leads to the assumption (right or wrong) that the representatives of that TPA are selling products that have been approved by the employer.

Essentially the employees are trusting the employer made the right decision and they transfer that trust to the TPA representatives, this is exactly what the TPA Representatives want. Once the TPA and its reps have the confidence of the employees (based on the implicit employer endorsement) they need only to get in front of them to sell commission-based products. The means to get in front of them is “participant education.” The TPA is simply a front for the sale of high-cost, commission-based financial products that are rarely in the best interest of participants.

These education conflicts can be avoided by not hiring a TPA or provider of 457(b) plans that earns a commission or a hidden fee for selling financial products. They can also be avoided by not allowing sales agents on campus to “provide education.” There is no evidence this education works and it only facilitates an employee providing a commission to a sales person who has no duty of loyalty to that employee.

If you doubt me, simply ask the TPA sales organization to put in writing that all of their sales representatives will act as a Fiduciary (under ERISA) at all times when working with your employees, none of them will do this.

So what is the solution to the education problem? That’s a story for another time.

Full Disclosure: I am a consultant to the CalSTRS 403bComply and Pension2 service offerings. CalSTRS provides financial education and does NOT receive commissions or fees in exchange for the sale of financial products.

Is There Really “Appropriate Separation” Between ZUK and Great American Plan Administrators?

UPDATE: SEE BELOW AFTER YOU READ THIS SECTION, IMPORTANT NEW INFORMATION PROVING THE QUID PRO QUO.

In a recent letter to School Business Officials (SBO’s) regarding 403(b) Compliance, a ZUK representative claimed it “has appropriate separation between the TPA, product manufactures and education providers thus eliminating conflicts,” but is this statement true? My opinion is that it is not.

One of the “free” Third Party Administrators (TPA) that ZUK uses or at least recommends to some of the districts they service is GAPA, or Great American Plan Administrators. I decided to test this “separation.”

I guess one can measure “appropriate” however one desires, for my purposes “appropriate separation” will mean that the TPA does not benefit financially in the form of commissions from the sale of 403(b) and other financial products. This seems like a reasonable way of defining “appropriate.”

Let’s exam the relationship between ZUK, product manufactures, education providers and GAPA.

GAPA or Great American Plan Administrators is a subsidiary of the Great American Life Insurance Company (GALIC) and is also affiliated with Annuity Investors Life Insurance Company (AILIC).

Great American is a product manufacturer and markets '14' 403(b) products in California according to 403bCompare.com (vendor numbers 1167 and 1092). Each of these products pay a commission to selling agents and Great American earns revenue from the sale and ongoing servicing of these products. My research shows that Great American and Annuity Investors Life Insurance Company are both on all “Approved Vendor” lists that Great American Plan Administrators does the “compliance” for (in California). Does this sound like “appropriate separation” when the administrator who supposedly does the work for “free” benefits financially when certain products are pushed over others? Utilizing my definition of “appropriate,” this relationship doesn’t pass the test and I think we’ve discovered how Great American Plan Administrators can offer “free” compliance.

Of course, it doesn’t end there. We’ve established that there is NO separation between the TPA and the product manufacturer, let alone “appropriate separation,” but what about the appropriate separation between the TPA and the “education providers”.

Who are the “education providers” in this case? ZUK financial advisors. Are conflicts eliminated by allowing ZUK advisors to provide “education” and are the ZUK advisors really separate from Great American?

I’ll let you decide. I went to the public ZUK website and clicked on “The Advisors” link and looked up each advisor that works for ZUK on the state of California Insurance website to see who these advisors were registered to do business with, it is publicly available information.

Of the 19 advisors listed on the site, 16 were licensed and appointed with GALIC and 18 with ALIAC. Only one representative is not appointed with a company affiliated with Great American Plan Administrators. This doesn’t mean that every ZUK representative sells Great American annuities and life insurance or that any of them are required to sell Great American annuities and life insurance. However, it is interesting that ZUK recommends GAPA and states they are “eliminating conflicts” when in fact the conflicts that exist are quite large. Not only does GAPA offer products for sale, almost the entire ZUK advisor team is licensed to sell them. I can tell you from experience in working with clients that were former ZUK clients that nearly every client I took over from ZUK had at least one product sold to them from GALIC or ALIAC. So, is this how GAPA offers capital intensive “compliance” services for free? I think the mystery is solved as to why ZUK offers the GAPA TPA service and how it is offered for free.

Its one thing to advertise yourself as “unbiased and objective” its another thing to be unbiased and objective and I don’t think the evidence presents a case that ZUK “has appropriate separation between the TPA, product manufactures and education providers thus eliminating conflicts.”

Free is an enticing word, however the IRS wasn’t joking when they created the new 403(b) regulations and they expect employers to comply. Using a free service that does not generate revenue from compliance is an open door to problems in my opinion. Entities that perform free services to subsidize product sales will inevitably end up cutting corners (at least in my experience), something employers cannot afford. Employers need a partner whose primary business is 403(b) compliance, not 403(b) product sales.

Full Disclosure: I am a consultant to the California State Teachers Retirement System 403(b) Comply and Pension2 service offerings.

IMPORTANT NEW INFORMATION UNCOVERED PROVING THE QUID PRO QUO

A client of mine is now contributing to a new 3121 plan (commonly referred to as a Social Security Alternative Plan) and that plan is now with Great American. Why is this important? The employer that this plan is with hired the gentleman from ZUK whom I refer to above to take their 403(b), 457(b) and 3121 plan out to bid. Whether the employer knew or understood that this individual worked for ZUK and was a product peddler is unclear at the moment, but an RFP (request for proposal) was conducted and guess who won the bid - ZUK. ZUK brought in their own 457(b) that pays their reps a commission and brought in Great American Plan Administrators as the TPA (the "free" TPA). It was a foregone conclusion who would be hired, imagine ZUK being hired to "consult" and then choosing someone else. So who did ZUK choose to offer the 3121 plan? None other than Great American Financial Resources's insurance subsidiary Annuity Investors Life Insurance Company and guess who is the agent on the policy? The ZUK consultant....sound like appropriate separation to you? This is the Quid Pro Quo, the free administrator is awarded with annuity product sales made by ZUK. Only in the land of non-ERISA 403(b) could this occur.

Five Steps To Restoring Trust in the 401(k) (or 403(b)) System

If you don't know or haven't read Matt Hutcheson's work.....you should.

Matthew Hutcheson Testimony



Scott Dauenhauer CFP, MSFP, AIF

TDS Appears Desperate In Latest Memo

"TDS has not, is not, and will not charge the employees or school districts for our services"

Evidently TDS hasn't read California law, you can read my in-depth analysis:

Here.

In this latest memo TDS attempts to settle down district CBO's who appear to be jumping ship.

TDS maintains their service is free and they will charge vendors..

"TDS will now charge vendors a nominal monthly fee per participant. Many plan administrators do this already and the "vendor pay" model is an acceptable industry standard"

Again, perhaps TDS needs to consult with the law on this, all the documents a district needs to determine whether vendors can be charged in California are located Here..

In a previous post I demonstrated that TDS is only promising to do common remitting in the service agreement with providers - there is no information sharing, which is necessary for compliance.

Also, the TDS nominal fee is an addition to the commission they earn on the products they sell. Plus the nominal fee of $3 per participant is 50% more expensive than full service TPA's available now in California.

While vendor pay may be acceptable in other states, who may have fewer vendors, it is not currently allowed by law in California, of course I've also described in previous post how a loophole has developed where vendors "pay on behalf" of the participants.

TDS believes that charging vendors will not result in a reduction of vendors:

"Despite rumors to the contrary, this change in our model will not result in vast vendor defections from your plan"

On the contrary, its a simple law of economics, the higher the cost to play, the fewer players. Vendors will drop off, whether or not this is a bad thing depends on who drops off. But it is ridiculous to state that there will not be a reduction in vendors if the vendors have to start paying. It is also ridiculous to state that employees will NOT be charged, they will. The employees will pay the $3 fee either as a direct pass through or worse, through much higher product fees or much worse product crediting rates - its a simple law of economics. You can't raise the cost to a product and expect them to simply absorb it, the cost will eventually make it to the employee (which is why perhaps it would be best for the employee to pay the cost directly out of payroll, simple and clean).

TDS goes on to state:

"Please rest assured that TDS will not make any changes to your plan without your approval and understanding."

This, despite the fact that they sent out vendor service agreements that don't provide any documentation that the employers have given TDS permission to act on their behalf to charge this fee. Employers, TDS would be your alter-ego according to the Attorney General and you would in fact be charging the vendor the fee.

Secondly, my understanding is that TDS HAS made changes to employer plans (457(b)) without the approval or understanding of the employers. Of course, I could be wrong, but when all the TDS representatives were released, the broker of record on all those 457 plans must have been changed. The questions the employer must ask are the following:

When TDS let go of the TDS representatives, who became the new Broker of Record and WHO authorized the changes? Thousands of plan participants that were working with a representative suddenly have a new Rep, yet this new rep was not determined by the employer.

Who is this new rep?

Who is now receiving the compensation?

Was the employer for each of these 457 plans notified of the change?

Did a prohibited transaction occur?

No accusations here, the employer is at risk of fiduciary breaches with their 457 plans and when changes are made, they should be aware of them and be involved in the those changes BEFORE they happen. All I'm saying is that the employers should ask the questions.

Am I biased here, absolutely. All I'm doing is providing the information, you can make your own decisions and you can ask your own questions.

Scott Dauenhauer CFP, MSFP, AIF





TDS Memo 8262009