Jump to content
Admin

Illinois Teachers to Get Low Cost Option

Recommended Posts

I have to think this is a result of the NY Times 403(b) stories: Illinois Teachers to Get New Retirement Savings Plan

Excerpt: “We required TRS to create a deferred compensation plan to offer to every school district,” Martwick said. “So now teachers will know they will get a high performing, low-cost deferred compensation plan to supplement their retirement.”

Share this post


Link to post
Share on other sites
19 minutes ago, Admin said:

I have to think this is a result of the NY Times 403(b) stories: Illinois Teachers to Get New Retirement Savings Plan

Excerpt: “We required TRS to create a deferred compensation plan to offer to every school district,” Martwick said. “So now teachers will know they will get a high performing, low-cost deferred compensation plan to supplement their retirement.”

That's quite a leap of faith, but I hope you are right about the NY Times stories influence. From my vantage point, I just don't see change especially here in California. With the exception of the SEC and the CFA showing interest, which are big deals, but both of those potential influencers have political, policy and time limitations. 

Share this post


Link to post
Share on other sites

The article was really light on details, probably because the plan itself is very light on details. It sounds like it is in addition to a pension, 403b, 457b, etc. and all of the predatory plans will be allowed to continue. It also sounds like there may be a 4% of salary contribution limit, which isn't a lot on a teacher's salary.

I'm pretty cynical and un-trusting on this because it reminds me of the "Model Plan" here in Florida. They hit all the right notes with the rhetoric, but then implemented something in direct conflict with everything they said. It is especially frustrating because it is so easy to solve this problem:

  • Expand the TSP so everybody can use it for 401k, 403b, 457b, etc....or create a new plan modeled on the TSP if that is easier.
  • Force school districts to exclusively use that plan.
  • Force school districts to auto-enroll employees in a target date investment with the TSP using a "reasonable" contribution amount that they can opt out of or change if they want.

Share this post


Link to post
Share on other sites

At least 21 states have 457 plans for K-14 districts that are run by the state governments as per the thread I’ve been keeping. http://board.403bwise.com/topic/6130-457b-state-plans-for-k-12-employees/. States are added to the list as we become aware of them. Some states have such a plan for their state employees but K-14 employees are excluded. It’s great that IL is starting a 457 for K-14 employees!

These plans are low-cost and usually preferable to any of the other vendor’s 457 plans on the district list with the exception of Fidelity. I think Ed is correct that the states’ 457 plans compete with those of other vendors, most of whom have sales reps on-site. However several large districts in WA have only the state 457 plan on their vendor list. WA state law preventing districts moving to a single 403b vendor apparently doesn't apply to 457 plans.That’s encouraging and so maybe IL districts will drop their other vendors in the future.

I doubt that Rep Martwick is correct that the contributions will be limited to 4% of salary. The IRS rules for a 457 determine the maximum salary contribution, not state law.

Perhaps the IL TRS will be consulting with CalSTRS about establishing their 457 plan. Their Pension2 457 is probably the lowest cost 457 plan most CA districts have (unless they have Fidelity on their list). 

 

Share this post


Link to post
Share on other sites

"deferred compensation program" or DCP is another term used for a 457. Some plans don't even mention "457". It is unusual for a politician to be out front pushing successfully for a better retirement plan for teachers, isn't it? I agree with Dan that it's likely that the NYT articles probably helped get this started and approved! Kudos to Tara and Ron and all those that participated in the series! 

Share this post


Link to post
Share on other sites

Here in California the 457(b) gets around the hideous insurance code. Back in 2004, I heard about a new plan that LAUSD was thinking about offering. When it came out in late 2005, my friends and I knew very little about the 457b plan, or its name, as krow36 said, "deferred compensation program." It is a radically different model because George Tishler and David Holmquist (brilliant administrators) wanted to offer LAUSD employees lower-cost mutual funds rather than high cost, illiquid annuities (that was MUSIC to my ears!). They also knew that LAUSD was going to have to hire a third-party administrator to consult with the new IRS rules which were implemented in 2007.  The construction starts with competitive bidding for the one record keeping vendor and a mutual fund platform in which the options are decided by somebody. George and David already knew who was going to decide the investments. My friends and I were asked to be on the advisory committee! Wow! This was indeed radical, and as it turns out 12 years later is the absolute key to getting those low-cost index funds as options. We got an Award for Plan Design in 2014 by the National Association of Government Defined Contribution Administrators (NAGDCA). 

I wrote an entire Chapter in my book Fighting Powerful Interests about that first year. You cannot believe what we went through to get a great low-cost plan! Ed has been saying that not all 457b plans are good. Because the vast majority of K12 plans (or 401k plans too) have no employees on the advisory committee or no committee at all. If the committee doesn't know or care about hideous revenue sharing costs (which are finally gone from our and many plans now), then the same high cost, illiquid choices could be on the 457b plan. There are 457b plans that are just another name for annuity platform because the same TPA is running both the 403b and the 457b plans. 

I wonder how Connecticut (how are they requiring 430b transparency and who is monitoring it) and now Illinois are implementing their 457b plans. State plans are the way to go and allow all districts in the state because to do what LAUSD did for every school district will be impossible because of the time and effort from employees to serve on committees. As I said, in 12 years, I have not heard of another public k12 district which as collective bargaining members on the advisory committee such as we do. 

The Illinois auto-enroll requirement is great but who is going to decide which investment they will auto-enroll into? Yeah, there is the DOL guideline but I don't believe public school systems have to follow it. As Ed was saying it looks like a hy-bred plan mixed in with the pension plan. That would require a lot of education to get teachers to know their options. 

I am hopeful too but the key now is teachers could have a wonderful low-cost plan available, but they would not know about it because districts and states will not publicise it while the annuity salespeople will continue to do what they have done since the TSA was first released way back in 1961. Do you think they are going to stop roaming our schools and bursting into classrooms during recess and aggressively selling their riskless, high cost and illiquid plans that will lose money against the standard of living?  

Share this post


Link to post
Share on other sites
8 hours ago, sschullo said:

As Ed was saying it looks like a hy-bred plan mixed in with the pension plan. That would require a lot of education to get teachers to know their options. 

Steve, I think you and Ed are mistaken to think of the coming IL state deferred compensation plan as some sort of hybrid pension plan. This DCP is a 457 plan, that’s all. It is being set up and will be run by the IL State Teachers Retirement System (IL TRS). It will have to use the IRS rules for 457 plans.

CA, WA and other states have 457 plans run by their state TRS. WA has a TRS whose current Tier 3 plan is a “hybrid”—part pension and part defined contribution plan, similar to the Tier 3 of the IL TRS mentioned in the article. I’m a member of Tier 1, a straight pension plan (with no guaranteed COLA).

In WA, the very low-cost funds* offered in the defined contribution part of Tier 3 are also the funds offered in the state 457 plan. I think the article probably was referring to that sort of setup. The pension part the WA Tier 3, and pension Tiers 1 and 2, are invested differently and I don’t think the investments are disclosed in any detail.

*Examples:

US Large Cap Equity Index (S&P 500), ER 0.003%

WA State Bond fund (high quality corporate bonds), ER 0.009%

The additional management fees total about 0.13%

Share this post


Link to post
Share on other sites
On 9/19/2018 at 7:20 AM, Admin said:

I have to think this is a result of the NY Times 403(b) stories: Illinois Teachers to Get New Retirement Savings Plan

Excerpt: “We required TRS to create a deferred compensation plan to offer to every school district,” Martwick said. “So now teachers will know they will get a high performing, low-cost deferred compensation plan to supplement their retirement.”

Krow36, my goodness this is only the first report and you are stating that its definitely NOT a hybrid. I don't know. But what I do know is that the proponents know how politically risky it is to implement a hybrid plan. As we all said, the devil is in the details and I don't think you can rule out hybrid just yet. Believe me, if it weren't a hybrid, it would be printed everywhere in very clear English. So I wonder. That's all I am saying. 

This statement is pretty obvious:  "And the amount that workers were supposed to contribute to a 401(k)-style plan under a Tier 3 pension plan. The Tier 3 plan combined parts of a defined contribution and a defined benefit plan into a new state retirement program."

The keywords that might spell hybrid: 401(k)-style plan and combined parts of a defined contribution and defined benefit plan

I am not totally against hybrid plans until I can determine how they are constructed.

The Calif. 457b and the 403b Pension2 plans are separate from the pension plan as we all know our pension plan is not a hybrid as it would never get through the powerful CTA union. 

Steve

Share this post


Link to post
Share on other sites
On 9/20/2018 at 4:31 PM, sschullo said:

Krow36, my goodness this is only the first report and you are stating that its definitely NOT a hybrid. I don't know. But what I do know is that the proponents know how politically risky it is to implement a hybrid plan. As we all said, the devil is in the details and I don't think you can rule out hybrid just yet. Believe me, if it weren't a hybrid, it would be printed everywhere in very clear English. So I wonder. That's all I am saying. 

Steve

Steve, I think you may have misread the article. The article is about establishing a “deferred compensation program” which is a 457 plan, which I know you are very familiar with. This plan is NOT a hybrid pension plan. According to the article, the IL TRS has already set up a hybrid pension plan, their Tier 3 plan, not fully implemented yet. The coming IL state 457 plan could use the same mutual funds that are used by the defined contribution part of the hybrid pension plan. That’s what WA has done. WA uses a very small number of extremely low-cost funds. What’s your problem with that? It seems only logical to me to make use of economies of scale. 

Share this post


Link to post
Share on other sites
On 9/19/2018 at 8:23 PM, krow36 said:

I doubt that Rep Martwick is correct that the contributions will be limited to 4% of salary. The IRS rules for a 457 determine the maximum salary contribution, not state law.

I didn’t know that a deferred compensation plan is the same thing as a 457b and I haven’t found anything on google yet to confirm a DCP is equivalent to a 457b. In fact, this investopedia page seems to state that DCP is a general term not limited to a 457b. If you’re right then this is confusing terminology because so many other plans are also based on deferring compensation.

I found the article to be confusing. I guess we will see what happens, but this is the quote that got me:

The amount teachers will be able to contribute to the new deferred compensation plan also has to be determined. One possibility is 4 percent, the amount that workers were supposed to contribute to a 401(k)-style plan under a Tier 3 pension plan.

Share this post


Link to post
Share on other sites
10 hours ago, EdLaFave said:

I didn’t know that a deferred compensation plan is the same thing as a 457b and I haven’t found anything on google yet to confirm a DCP is equivalent to a 457b. In fact, this investopedia page seems to state that DCP is a general term not limited to a 457b. If you’re right then this is confusing terminology because so many other plans are also based on deferring compensation.

How about:  https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans

If you look at a few of the state 457 plans in thread I linked above, you'll see they are often referred to as "Deferred Compensation Plans". Sometimes the websites use only 457, sometimes the Deferred Compensation Plan label, and sometimes both. I agree it's not a great label and overlaps the term "Defined Contribution Plans", which includes 401k, 403b and 457 plans.

If you look at the Log In page of Steve's favorite 457 plan, that of LAUSD, you'll see both labels at the top.  https://my.voya.com/voyasso/index.html?domain=lausd457b.voya.com#/login-pweb

10 hours ago, EdLaFave said:

I found the article to be confusing. I guess we will see what happens, but this is the quote that got me:

The amount teachers will be able to contribute to the new deferred compensation plan also has to be determined. One possibility is 4 percent, the amount that workers were supposed to contribute to a 401(k)-style plan under a Tier 3 pension plan.

I agree that the article was poorly written and edited. The writer shouldn't have mentioned the Tier 3 hybrid pension plan because it isn't relevant to the new 457. I'm confidant that a 4% contribution limit can't be part of a 457 plan. Maybe the writer needed to fill up some space? Maybe he got it from the state representative, or from the head of the IL TRS? Who knows?

Share this post


Link to post
Share on other sites
8 hours ago, krow36 said:

Steve, I think you may have misread the article. The article is about establishing a “deferred compensation program” which is a 457 plan, which I know you are very familiar with. This plan is NOT a hybrid pension plan. According to the article, the IL TRS has already set up a hybrid pension plan, their Tier 3 plan, not fully implemented yet. The coming IL state 457 plan could use the same mutual funds that the defined contribution part of the hybrid pension plan. That’s what WA has done. WA uses a very small number of extremely low-cost funds. What’s your problem with that? It seems only logical to me to make use of economies of scale. 

Hi Dan.

I know you love to point out mistakes and most of the time you are right. But you are out of line here, accusing me of having a problem with hybrids! Where did that come from?  You agree that the article is poorly written with very little details. That's fine because it is a brand new plan. I am just taking the article at face value, and my mistake was to comment on the article in the first place. I thought it might add to the conversation because I do feel great about this development. Good for Illinois teachers. My main point is that they omitted to inform us of that detail. In the financial world, an omission is deadly for all investors. Already, I have read too much into this simple little announcement that Illinois teachers might have a better plan than the annuities we are stuck with here in California. 

OK, I misread the article, my goodness. In reality, nobody gives a sh.. about this conversation. Heck, most of our colleagues don't know what a stock is, let alone knowing the difference between hybrid pension plan or our regular plans. Most of our colleagues don't know how pension plans work, and why the benefits are about twice or more than Social Security benefits, but I digress. 

Have a great weekend and don't stop pointing out my mistakes. :- ) 

Steve

Share this post


Link to post
Share on other sites
9 hours ago, krow36 said:

How about:  https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans

If you look at a few of the state 457 plans in thread I linked above, you'll see they are often referred to as "Deferred Compensation Plans". Sometimes the websites use only 457, sometimes the Deferred Compensation Plan label, and sometimes both.

I don't know what the truth is.

It doesn't surprise me to see a 457b listed underneath the "Deferred Compensation Plan" banner; that makes total sense. What I'm not sure about is if 457b plans are just a subset of the plans under that banner. I'm not sure if a 401k, 403b, etc also fall under the same banner; that would make total sense to me.

  • Missouri State lumps 403b and 457b plans under the same banner here.
  • The Round Rock Independent School district lists a 403b under the same banner here.
  • ...from a quick google search I saw other examples. I also saw that there was a particular tendency to refer to a 457b as a DCP. I don't know what the truth is.

Whatever the case, I hope it works out for the teachers in Illinois, but until I see the final details and until those details are clear, I'll naturally assume teachers/investors are being taken advantage of. That has been a safe bet for a long time. I hope I'm wrong.

Share this post


Link to post
Share on other sites

Darn, I see I've made a mistake in my post above when I referred to "defined compensation plans". I meant "defined contribution plans". I'll correct it. It's all the fault of the IRS for cooking up these terms! Defined contribution plans include 401k, 403b and 457 plans, where the employee chooses to contribute. And pensions are called Defined Benefit plans. Only a 457 plan gets the label of "deferred compensation plan". Using DCP for an abbreviation for the 457 plan is not a good idea I guess---I should stick to 457. 

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

×