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krow36

MO districts join to form low cost 403b/457 plans

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Thanks for answering the question about Managed Accounts and explaining how the VALIC advisors are compensated. 

Can you give us an idea of the participation rate and whether it has grown over the 2 years? It’s discouraging to learn that nationally K-12 403b participation is around 30% and most of those are in annuities. I agree that target date funds are an excellent choice. How much more popular is the Fixed Income Option than the TR funds? 

I’m very impressed with how CBIZ and the CSD have set up the Retirement Trust using RFPs. Is it likely that CBIZ and/or VALIC’s fees will be lowered as the RT grows? Does RT consider itself an ERISA plan?

From the History PDF, I believe that the CSD (Cooperating School Districts) organization came before the RT (Retirement Trust). I wonder if this prior phenomenon of school districts working together on a financial level is the secret sauce that allowed a truly fiduciary RT to come about? I also wonder if there was an exceptional leadership factor in setting up the RT, and that person supplied critical financial knowledge that is usually absent? 

Before the Trust, did the districts have multiple 403b and 457 vendors? If so, was there significant resistance to changing to the Trust? 
 

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Some will say the CSD-RT fees are too high—they are not competitive with the low-cost providers such as Fidelity and Vanguard. Perhaps we should look at the bigger picture. We all know that the average fee in a multi-vendor 403b that includes high-fee insurance companies is very high, often over 2%!! Most teachers will choose to work with the high-fee annuity salesperson, and maybe only 5-10% will take advantage of internet-based DIY low-fee providers if available. 

IF your district could choose between a CSD-RT 403b type plan (single providor, multi-district) or a multi-vendor 403b plan of mostly annuity-based plans but which includes a very low-cost DIY Fidelity plan, which do you choose? The former will benefit a greater number of teachers, the latter will benefit the small minority with financial knowledge. Which plan will have a higher participation rate?

We realize it costs money to support a low-cost 401k plan in the for-profit world. Large and/or generous companies are able to pick up the considerable costs of a plan that is ERISA compliant. A small for-profit company often uses a plan with ERs as high as 1% that shifts the costs to the employees. Unless it is very large, a single school district doesn’t have the funds and lacks the economy of scale to support a fiduciary based plan. We want the services for every district that the CSD-RT plan provides, but nobody wants to pay for them. With economies of scale, the K-12 employees can afford to pay for these services. 

CSD-RT Marketing, Legal, Insurance, Administration & Governance-$20 fixed fee/annum. 
Participants pay a 0.32% (32 bps) annual asset based administrative fee.
        VALIC Recordkeeping, Administration, Education, Compliance & Advisors-23bps/annum
        CBIZ Consulting and Investment Advisory Services-8.75bps/annum
 

What do you think? How about some discussion of these ideas! What am I missing? Steve? Ed? Dan? Tony? Others? The silence is deafening.

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Here is my biggest concern because I know for a fact that VALIC parades "Advisors" who are not Fiduciaries as "salaried", but then uses the plans assets to roll into IRAs that makes VALIC money.

 

G) Do the VALIC reps use their status to sell other products which do have commissions, such as annuities, insurance, IRAs, taxable brokerage accounts, etc.? If so, is this what is paying for the low cost of the CSD-RT plans? If so, would this cancel out the low-cost benefit of the 403b/457 plans? 

What say you?

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4 hours ago, Scottyd said:

Here is my biggest concern because I know for a fact that VALIC parades "Advisors" who are not Fiduciaries as "salaried", but then uses the plans assets to roll into IRAs that makes VALIC money.

G) Do the VALIC reps use their status to sell other products which do have commissions, such as annuities, insurance, IRAs, taxable brokerage accounts, etc.? If so, is this what is paying for the low cost of the CSD-RT plans? If so, would this cancel out the low-cost benefit of the 403b/457 plans? 

What say you?

That is my concern as well. Is there any way for VALIC to make money through their reps other than through the 23bps/annum fee? How does the Trust protect the employees from “rollover conflict of interest”? Is the 403b considered to be an ERISA or a non-ERISA plan? Or something in-between?  

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The big secret in the industry is that large plans can obtain good pricing at the expense of exposing their participants to wolves in sheep's clothing. The "salaried" reps are anything but and the money is made by the following: ancillary products (life, IRA's, etc.), rollovers out of the program (into higher cost, commission based programs or fee based programs) and by having access to the participants to get them to move their old money. These reps are not acting in a fiduciary capacity and they are NOT financial planners.

The difficultly is that you want to offer a low-cost option and provide some help, but if you want a lot of reps...that comes at a price, those reps have to be paid from somewhere.

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Update to my comments re: use of Managed Accounts within the CSD Retirement Trust.  Current metrics, as of two days ago, is that the Trust has $5M of its $124M are in managed accounts and about 500 participants, of about 5400, are in a Managed Account.  Again, not a large percentage.

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As I understand, the representatives make more when placed in managed accounts.  I just hope the aspect of earning more money by placing a 24-year old in a managed account doesn't override doing the right thing and placing someone that young in a low-cost target fund.  To the uninformed, a managed account sounds more impressive and if the representative doesn't explain things equitably, many might make the wrong decision.

Also, how do we know the representative won't roll all these accounts over to Traditional IRA VALIC annuities to earn commission after the teacher retires.  I just hope the representative is honest and can ignore the temptations of placing people in a high-fee products to get commission. 

 

 

 

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See earlier response re: due diligence process the Board went through before making the program available to all districts.  As i stated before, most of the the MA participants are ones we inherited when their school district joined.  Yes, if a participant goes into an MA the FA makes more but, based on the pricing of our MA program, it's far less than in a traditional programs.  When a participant is unsure of how to invest their funds, the FAs first advice is to use a TDF which, based on total plan assets invested, is second to the fixed income option in the Trust.  There is no reason for a VALIC FA to roll over a participant into an IRA when they retire because they can leave their money in the Trust.  Because of the DOL fiduciary draft rules VALIC is making all their FAs fiduciaries therefore, as a fiduciary, the FA would have to let the participant know what the fee structure for an IRA would be vs. that of the Trust.  Every time I've been contacted re: rolling over funds, it's been from an FA with another firm asking me about the process or thinking I can sign the form. 

I can only talk about VALIC in terms of the Trust's experience and it has been extremely positive.  In part, it's because my VALIC POC is the same person with whom we started, and he and I agree that this is a participant-centered program.  And, that is reflected in how FA compensation works.  He, along with the responsible VALIC regional VP, is the reason VALIC is promoting the Trust in IL/MI/WI and maybe NJ.  He also tries to get school districts in states he works in into the Trust.  We talk at least weekly.  We're on the same page as is the case with our RIA who has also been the same person from the Trust's beginning.  ALL of US are of the same mind.  I know the VALIC DMs in St. Louis and Kansas City very well and have met with VALIC personnel in the states noted above and with the corporate personnel as well.  I'll probably be in Houston sometime this year to meet with personnel there to talk about how we create an infrastructure that will allow the Trust to go into additional states.  At least once a year I meet with the FAs in St. Louis and KC to exchange experiences and gauge how they're approaching participants.  Not sure I'll be able to do that as we move into other states but we'll see.  Part of my focus on behalf of our participants is to be face to face both with the people leading the FAs and the FAs themselves to ensure the participant is first and I unequivocally believe they are.  I believe VALIC sees the Trust's model as the future and they want to be in the lead.  Bottom line, I trust the people.

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On 2/19/2018 at 12:18 PM, CSDRTCEO said:

There is no reason for a VALIC FA to roll over a participant into an IRA when they retire because they can leave their money in the Trust.  Because of the DOL fiduciary draft rules VALIC is making all their FAs fiduciaries therefore, as a fiduciary, the FA would have to let the participant know what the fee structure for an IRA would be vs. that of the Trust. 

I guess I'm having difficulty with the understanding the economics of the plan from VALIC's perspective. The fees aren't high enough to compensate the VALIC reps at a reasonable wage without them having to resort to selling non-plan products.

If the program has $125mm in assets and the fee is .32%, that generates $400,000 per year, plus the $20 annual fee on 5,400 participants (another $108,000) for a total revenue of $508,000. Now, about $110,000 of this goes to CBIZ. I assume some of the revenue goes to pay you (the Director, btw, how much do you earn from the program and how is that compensation structured?). That leaves about $400,000 to pay for recordkeeping services and salaries of the reps. A financial advisor who does not sell ancillary products will need a salary of at least $50,000 (higher in other parts of the country) and then you add in employee costs (office, car, travel, health insurance, ER FICA, etc.) and you are probably closer to at least $75,000 for someone who can meet face-to-face. There simply isn't enough revenue to cover more than maybe one full time salaried representative and still pay for all the plan costs. Thus, my point, the reps on the plan must not be paid to be full-time, salary only representatives (I'm inferring this, not stating this).

So my questions are as follows:

Are VALIC Advisors committed to selling non-plan products? (meaning have they signed an agreement that they must sell other products that VALIC offers)

What percentage of their overall compensation is salary versus other compensation (product sales), on average?

What is the salary paid to the VALIC representative?

What conflicts (besides the poorly structured managed account conflict) do these representatives face and are these conflicts disclosed to the participants?

What is the average total compensation a VALIC advisor to the plan makes? What is the highest earning advisor making, the lowest?

How is the program administrator compensated?

Why are the reps paid more money to push managed accounts?

If a rep never sold an ancillary product, could they live a reasonable, middle class lifestyle on the salary alone?

 

Please don't feel like I'm picking on you, the program cost structure looks great and I love the non-revenue share nature of the program, but I'm discovering the industry has a different definition of the term "salary" than what I and most people believe it to mean.

ScottyD

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This is a response to all questions/comments since my Feb 19, 2017 post.  My comments are limited so I can focus on:  1) Ensuring current participants are getting the best possible service; 2) Responding to districts/charters that want information about the Trust; and 3) Handling all other issues.

ScottyD.  Your assumptions re: CBIZ/VALIC/Retirement Trust fees are high.  You cite year-end numbers which are not the numbers throughout the year and, even if they were, the amounts cited are at least 16% higher than actual.  Some participants close accounts before a quarter ends so the Trust doesn’t receive its $5 quarterly fee.  Not all assets are subject to the basis point fee (bps), including annuity assets a district rolls into the Trust and assets in VALIC’s fixed income fund (VALIC’s only fund in the Trust).  On 1/1/18, CBIZ reduced its fee to 7.5bps and VALIC to 21bps.  The Trust increased its fee by 3.25bps (no impact on total participant fee) to cover legal, insurance, marketing, meeting and administrative support expenses, etc.

Re: VALIC financial advisor compensation.  The Trust’s agreement is their FAs receive the same compensation regardless of a mutual fund’s investment management fee.  It’s been that way since the Trust began in Jan 2010 because we want the FAs to advise participants based on their goals and risk/reward tolerance to help improve their retirement outcomes.  When FAs meet with Trust participants it’s for their 403(b)/457(b), not on ancillary products.  Participants may ask about other products/programs; it’s up to the participant.  VALIC FAs will help participants in determining whether to roll over assets from another program based on rollover fees, sometimes the fee is such that the participant can’t recover it going forward, even with the lower Trust fees.

Re: assets that participants roll out of their Trust account.  VALIC is preparing a report analyzing where assets go to buy time in Missouri’s educator pension system as well as to financial firms including VALIC.  I will post a response when I have the report.  Anecdotally, if the phone calls and emails I receive are an indicator, much more is going to firms other than VALIC.  We’ll see.  Re: concerns that VALIC FAs must be selling Trust participants other financial products, otherwise they couldn’t make a living.  VALIC FAs have many other sources of income, be it relationships with employees in districts not in the Trust or clients in other entities, e.g. hospitals, local government, Higher Ed, etc.  No, they don’t dependent on the Trust for anything close to 100% of their compensation, and that’s OK.

The Trust, including its partners CBIZ and VALIC, focus on:

·         Each participant knowing the fees they will pay when they come into the Trust and seeing their admin fees on each quarterly account statement.

·         Transparency, that what you see is what you get in investment management fees, i.e. there are no hidden fees, e.g. revenue sharing, 12b1, etc.

·         Quarterly meetings between the investment committee and CBIZ, reviewing each fund’s performance.  In eight years the Trust has replaced just two funds because they weren’t performing consistent with their category. 

·         That from 1/1/10 through 12/31/17, 100% of the Trust’s funds have outperformed their category benchmark and 94% of those funds reduced their investment management fees.  That illustrates the Trust was correct to use an open architecture approach and select funds based on long-term performance and cost, and that consortium buying works. 

·         As a single provider consortium, focusing on education not sales, thus benefiting participants.

·         Continuously improving services and offerings by making managed accounts available for those who want them (and very few do) and a Qualified Longevity Annuity Contract (QLAC) for retirees who want more guaranteed income.  We are now looking at a financial wellness program.

As of 12/31/17, 21% of the Trust’s assets were in fixed income and 19.8% were in TDFs. 

Re: participation rates.  Participation increases when a district joins the Trust but there are two other factors that impact participation.  First, Missouri has one of the best defined benefit plans in the country so employees feel secure enough, but we keep educating to help those who need additional retirement income.  Second, because of time constraints the Trust is always trying to increase awareness through school building staff meetings.

Re: a self-directed option.  The Trust has discussed this as an option.  Our question is how to ensure a participant utilizing a self-directed account is best qualified to do so.  Still, being debated.

Finally, how do you argue with the current program that focuses on the participant, only costs a participant with a $10,000 account balance $52/year in admin expenses and provides the education, best in class investment options with low investment fees, due diligence, oversight, transparency, online tools, etc. that the Trust has? 

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On March 12, 2018 at 8:44 AM, CSDRTCEO said:

Re: assets that participants roll out of their Trust account.  VALIC is preparing a report analyzing where assets go to buy time in Missouri’s educator pension system as well as to financial firms including VALIC.  I will post a response when I have the report.  Anecdotally, if the phone calls and emails I receive are an indicator, much more is going to firms other than VALIC.  We’ll see. 

 

That would be a very interesting report. We look forward to understanding the RT rollover situation. I guess it’s not possible to know the rollover details (based on data rather than anecdotes) in the usual multivendor district, but a comparison with that of RT would be illuminating. 

Quote

Finally, how do you argue with the current program that focuses on the participant, only costs a participant with a $10,000 account balance $52/year in admin expenses and provides the education, best in class investment options with low investment fees, due diligence, oversight, transparency, online tools, etc. that the Trust has?

It seems obvious that RT’s multi-district 403b/457 is a vast improvement over the multivendor, annuity dominated free-for-all that most school districts put up with. Even districts with a low-cost mutual fund based vendor such as Fidelity or Vanguard still have the problem that most teachers will end up with annuity based, expensive 403b plans. 

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I appreciate your responses and I think you have a cool program, but I'm trying to better understand it and few things are still alluding me.

First, on a go-forward basis, my annual revenue numbers appear to be pretty close. My numbers were meant to be projections and barring a large drop in the market, I have a hard time seeing them being any lower than my above estimate.

Regarding the financial advisors, you stated:

On 3/12/2018 at 8:44 AM, CSDRTCEO said:

Re: VALIC financial advisor compensation.  The Trust’s agreement is their FAs receive the same compensation regardless of a mutual fund’s investment management fee.  It’s been that way since the Trust began in Jan 2010 because we want the FAs to advise participants based on their goals and risk/reward tolerance to help improve their retirement outcomes.  When FAs meet with Trust participants it’s for their 403(b)/457(b), not on ancillary products.  Participants may ask about other products/programs; it’s up to the participant.  VALIC FAs will help participants in determining whether to roll over assets from another program based on rollover fees, sometimes the fee is such that the participant can’t recover it going forward, even with the lower Trust fees

Let's start out with terminology. Are VALIC's "financial advisors" actually "Advisors" in the sense that they are legally allowed to provide investment advice? In other words, are they Investment Advisor Reps with a full time fiduciary duty to the participants? It seems like they are actually Registered Representatives who help enroll and service the plan and who can also sell ancillary products, regardless of the reasons for which they actually meet with the participants. You make it seem like the VALIC reps would never voluntarily bring up ancillary products, but that would defy everything that we know about VALIC (and their representatives). Do the VALIC reps make additional income from the program based off selling ancillary products to the participants and if so, how is this monitored? Do the reps always have a fiduciary obligation to the participants (in every single encounter)?

I'm not trying to undermine the plan with these questions, simply trying to understand the underlying economics. My experience tells me that VALIC doesn't make enough money on this program from the fee they charge (I could be wrong, but my experience tells me it's not enough income) and so the Reps are their to make the program profitable to VALIC by selling ancillary products. This doesn't mean that the plan participants are not getting a good deal on the 403(b) plan, but I do think it's incumbent on the Administrator to warn the participants that the program may not be viable IF the VALIC Reps can't sell ancillary products. It's a conflict of interest and should be disclosed, tracked and monitored closely. Again, if I'm wrong here, fine, but none of these questions have been answered satisfactorily.

Participants and Plan Sponsors should understand the motivation of a VALIC Rep who works with the plan and they should fully understand how that Rep is compensated and what conflicts of interests exist. I've personally faced this issue in plans that I work with and it is a big issue.

Another issue that I don't understand is the claim that going to a single vendor solves the compliance issue, it doesn't. The compliance issue is not solved since there are still prior vendors who are technically still part of the plan - who does the compliance on these vendors?

I'm not looking to tear down your program, it seems that for most participants, they are getting a good deal. But you are claiming a level of transparency that I'm not actually seeing and at a minimum, everyone should be able to understand the economics of the plan and the motivations of those companies and reps who are working with it. Whether or not a rep is a fiduciary or a salesperson is also very important. I work with programs who have Registered Reps who service the plan and they are not fiduciaries, this is not an issue if conflicts of interests are eliminated.  I commend you on the work you've done, but I also see some things that I don't understand and that you could be clearer on. Also, almost none of my questions on VALIC Rep compensation above were answered.

 

ScottyD

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11 hours ago, Scottyd said:

I appreciate your responses and I think you have a cool program, but I'm trying to better understand it and few things are still alluding me.

First, on a go-forward basis, my annual revenue numbers appear to be pretty close. My numbers were meant to be projections and barring a large drop in the market, I have a hard time seeing them being any lower than my above estimate.

Regarding the financial advisors, you stated:

Let's start out with terminology. Are VALIC's "financial advisors" actually "Advisors" in the sense that they are legally allowed to provide investment advice? In other words, are they Investment Advisor Reps with a full time fiduciary duty to the participants? It seems like they are actually Registered Representatives who help enroll and service the plan and who can also sell ancillary products, regardless of the reasons for which they actually meet with the participants. You make it seem like the VALIC reps would never voluntarily bring up ancillary products, but that would defy everything that we know about VALIC (and their representatives). Do the VALIC reps make additional income from the program based off selling ancillary products to the participants and if so, how is this monitored? Do the reps always have a fiduciary obligation to the participants (in every single encounter)?

I'm not trying to undermine the plan with these questions, simply trying to understand the underlying economics. My experience tells me that VALIC doesn't make enough money on this program from the fee they charge (I could be wrong, but my experience tells me it's not enough income) and so the Reps are their to make the program profitable to VALIC by selling ancillary products. This doesn't mean that the plan participants are not getting a good deal on the 403(b) plan, but I do think it's incumbent on the Administrator to warn the participants that the program may not be viable IF the VALIC Reps can't sell ancillary products. It's a conflict of interest and should be disclosed, tracked and monitored closely. Again, if I'm wrong here, fine, but none of these questions have been answered satisfactorily.

Participants and Plan Sponsors should understand the motivation of a VALIC Rep who works with the plan and they should fully understand how that Rep is compensated and what conflicts of interests exist. I've personally faced this issue in plans that I work with and it is a big issue.

Another issue that I don't understand is the claim that going to a single vendor solves the compliance issue, it doesn't. The compliance issue is not solved since there are still prior vendors who are technically still part of the plan - who does the compliance on these vendors?

I'm not looking to tear down your program, it seems that for most participants, they are getting a good deal. But you are claiming a level of transparency that I'm not actually seeing and at a minimum, everyone should be able to understand the economics of the plan and the motivations of those companies and reps who are working with it. Whether or not a rep is a fiduciary or a salesperson is also very important. I work with programs who have Registered Reps who service the plan and they are not fiduciaries, this is not an issue if conflicts of interests are eliminated.  I commend you on the work you've done, but I also see some things that I don't understand and that you could be clearer on. Also, almost none of my questions on VALIC Rep compensation above were answered.

 

ScottyD

Hi Scotty,

We have had discussions on how the TPA is compensated. At LAUSD where I have been on the advisory committee for 11 years, every one of the TPAs, Valic, CalSTRS, TIAA and now VOYA were lackluster on providing enough reps in the field. They could not compete with the hundreds of annuity agents all over LAUSD real estate. Its an economic decision. Currently, VOYA bid .24% to get the five-year contract and they deployed 3 reps. That's it! VOYA is no different than TIAA (which I liked but I was very disappointed), CalSTRS, and VALIC. Valic's contract LAUSD required 15 reps devoted to LAUSD and they never had more than 7.  

So we have an Award Winning 457(b) plan and few people in LAUSD know about it because there is no money to get the word out, and you know that LAUSD staff is not going to advertise the plan either. They are still in the old 403(b) model by keeping their mouth shut. What a conundrum that I never anticipated.  But I get it now. What we want (reform and an educated in financial matters) is different than what the typical TPA wants and needs. TPA wants and needs to make money. Reform would lead to eventually reducing their revenue even more! 

This weekend, all three VOYA reps should be at the workshop where 97 people are registered and only one is coming! The reason is simple. VOYA does not make enough money. Fiduciary advice is a complicated topic, but at least our committee requires that at every workshop they make the costs of the plan transparent. We demanded that from every TPA we had. Valic fought the transparency at first but the handwriting was on the wall as the financial world has changed especially since 2008 when EVERYTHING changed regarding transparency of fees with all of those lawsuits in the 401k world. 

So you are right to ask your questions. I want to know too. How can the poster make all of those claims? Sounds too good to be true. We know the 403(b) world inside and out, but California is clearly more negative because of our hideous insurance code than other parts of the country.  

have a great day,

I'll let you and the forum here know how the workshop goes tomorrow.

Steve

 

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