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Everything posted by BenefitsGeek

  1. It seemed easier to find out this way. Have you been able to get good info. from the TIAA-CREF Executive Offices? I would suggest an additonal method of getting to the bottom of this issue and that is contacting you employer. Employers, as plan sponsors, can and do have imput with TIAA as to the extent wealth management services are provided to their plan participants.
  2. Steve, thank you for you prompt and thoughtful reply. It made me think about the fact that when I started with my firm almost 20 years ago, hospitals, museums and the like were similar to how school districts are now, and how today they are completely different. So I beleive change is possible if the message of 403(b)Wise and others continues to be repeated over, and over, and over again until someone listens!
  3. I don't work with school districts (we consult for private tax-exempt plan sponsors who 99% of their time choose low-cost providers such as TIAA as their exlcusive plan vendors), so I may be ignorant on the issue, but why is it that despite such articles being published time and time again,and the existence of watchdog websites such as 403(b)Wise, and state AG investigations of vendors in the very area of charging unreasonable fees on annuties (mostly to teacher) ,there does not appear to be much change to the status quo of teachers getting the short end of the stick? I realize some states mandate multiple vendors, but even in states that do not there are similar messes; the two favorable-fee states cited in the article seem to be the exception rather than the rule. Do states just not care about the 403(b) given its frequent status as the supplement to the state db plan? All it would take is one RFP for an exclusive provider (in states that would permit one provider). It just seem's patently unfair that, if you work for a university, hopsital, museum, etc. you are more often than not contributing to a low-cost provider, but if you're a public school teacher, sorry, it is you versus the vendors, with the vendor often winning (and to be fair to the vendors, they are in the business to make a profit (save perhaps for TIAA, but that is another discussion...). Feel free to educate me if I am completely missing the point.
  4. Thanks, Steve. The article summarizing the variouys studies is in the attached link: http://www.tiaa-crefinstitute.org/pdf/rese...dialogue/85.pdf The issue I am referencing is at the begining of page 7. Sorry if I was not articulate about it, this equity investing in taxable accounts and bond investing in tax-deferred accounts is new to me as I always thought that one should diversify among equity and bond accounts in a tax-deferred retirement plan.
  5. Mr. Schullo In placing equities in a taxable account to those who have multiple accounts, what if you have an equity mutual fund that is tax inefficient? Or are we assuming that we are using index funds if we are using mutual funds since tax inefficiency is not an issue? I saw one study that indicates that even for a tax inefficient mutual fund the taxable portfolio was the proper placement, but I am curious as to your thoughts.
  6. Yes, the ETFs that are common in the marketplace are generally NOT 403(b)(7) custodial accounts. Only if the the ETF is regulated as a mutual fund under IRC 851. I thought ETFs were traded on a stock exchange not a mutual fund. Some ETFs fall under the category of UITs, which fall under the definition of a regulated investment company. This would allow inclusion in 403b7. I would imagine it would not be easy to administrate such an arrangement, but it is definitely a legal and viable option, albeit rare.
  7. FYI, ETFs are generally not available in 403(b) plans, as they do not qualify as a a permissible investment under Code Section 403(b) (i.e., they are not 403(b)(1) annuities or 403(b)(7) cutodial accounts/mutual funds)
  8. One of the only reliable predictors of future fund performance is cost, and if we are talking about the standard Equitable Variable Annuity roster of funds vs. the standard Vanguard roster of mutual funds here, the Vanguard funds would be far less expensive, a margin that the Equitable investment options would be hard pressed to overcome. Think of it as a horse race, with the Vanguard horse being allowed to start 2 seconds before the Equitable horse, that's the fee that the Equitable funds would need ot overcome in terms of perfromance. On the index side, it is a margin that is impossible to overcome, because the Equitable Horse would be running at the same speed as the Vanguard horse. On the active management side it is theoretically possible for the Equitable horse to be faster than the Vanguard horse, but probably not enough to overcome the 2-second head start given the fact that the majorty of active fund managers do not outperform their benchmark indices. Of couse, you would need to examine the particulars of your program. Does your plan add fees to the Vanugard arrangement? Is the AXA/Equitable contract in your program available at a lower cost than their standard program?
  9. You will also want to make certain that these are mutual funds offered by Fidelity directly, as opposed to Fidelity Advisor funds which add a layer of expenses and are sold only through brokers (though even the Advisor funds might be the least expensive of this bunch).
  10. Is anyone aware of any low cost offerings from the five vendors involved? My experience (albeit limited) wiht these vendors is that they are among the most expensive in the industry, but I know that vendors are always providing new offerings, so i certianly have an open mind about this. If these products are indeed high cost, I would woner why the IBC, which its presumed purchasing power, could not have obtained a true low-cost offering
  11. Why could an SD not find a single provider that was both low cost and high service if it were large enough? Could it not use its collective purchasing power to extract a deal from a single provider? In the ERISA 403(b) market, such a single vendor approach is commonplace, with both insurance and mutual fund companies (including the no load companies) offering low cost investment arrays along with excellent services such as onsite meetings if there is enough contribution flow to make it worth their while.
  12. Thanks for everyone's informative thoughts; this dialogue has been very helpful in educating me about the advantages and challenges of a single vendor SD plan, and I appreciate everyone taking the time to respond. To clarify, I was not stating that onsite representation from no-load mutual fund companies was common in a mutliple vendor SD environment. What I stated was that it was common in a single vendor 403(b) plan of some size (generally 500 employees and up, though I have seen smaller organizations obtain such representation as well depending upon the circumstances). And for larger nonprofits, often the mutual fund companies will offer as many onsite visits as the insurance and other financial services companies. And, even among the insurance companies, the investment offerings consist of low-cost mutual funds; I have not seen a vendor propose variable annuities or mutual funds with added charges in the exclusive provider marketplace for several years now. Admittedly, this is mostly an ERISA environment with employer contributions, but I have also worked with religious organizations with elective-deferral-only plans (churches are non-ERISA unless they affirmatively elect ERISA), and the results are largely the same if a single vendor is used. All of the vendors put their best foot forward in an RFP process if they know that they will be the exclusive provider going forward. And indeed, if many SD'd choose to go with one vendor (I am getting the sense from these posts, however, that this is far from a trend, especially in the short term), it will present a tremendous opportunity for some vendors who are used to pricing in an exlcusive environment and can pick up significant amounts of 403(b) business.
  13. Can anyone explain to me the advantages/disadvantages of a single vendor approach for School District 403(b) plans? I work in the ERISA 403(b) marketplace, where single providers are common, and low cost providers (e.g. Fidelity or similar) are the rule among mid to large size plans (500 employees and up). Among these plans the issue of onsite vendor representation is moot, as most all vendors (including the no load mutual fund providers) will provide onsite reps to meet with participants. However, even after reading some of the articles on the 403(b)Wise website, I must admit to still being unfamiliar with the reasons why SD's would be resistant to such plans. Are many SD's too small to obtain decent value in a service provider even with consolidation? If so, can't they band together to obtain a low cost vendor? Or is the 403(b) such a low priority for school administrators that they are too busy to give it a second thought and have no budget to hire a consultant to give it a second thought? Forgive me if my questions seem naive as someone who does not work with school districts.
  14. I beleive that some of the fund families (Fidleity comes to mind) make it somewhat easier for you by actually providing the brokerage commission in the SAI as a percentage of the average fund assets for the year, so the percentage can easily added to the expense ratio. Also, do index funds generally incur less brokerage commissions than actively managed funds, since there would ostensibly be fewer trades and hence less commissions? Finally, since brokerage commissions are not included in a fund's expense ratio, are the also not accounted for in the returns net of expenses disclosed by fund families (in other words, do I need to deduct the brokerage commission from the "net" return in order to derive the actual return of a mutual fund)?
  15. I was only stating that you cannot equate the standard of care that is required of an employer for a 403(b) plan with the standard of care required for a payroll deduction IRA, since the IRS does not equate it; via these 403(b) regs, they are clearly stating that the employer (or its designee) has many responsibilities; there are no similar regs. for payroll deduction IRAs. Regardless of the fiduciary argument, more employer responsibiltiy = more potential employer liability in my book, whether as a fiduciary or not.
  16. The very first question in the IRS checklist is as follows: "Does your organization qualify as a public educational institution or as a charitable organization exempt from tax under IRC 501©(3)? Only public educational institutions described in IRC 170(b)(1)(A)(ii) or 501©(3) organizations may establish a 403(b) plan." Seems clear to me that it states who exactly can establish a 403(b) plan, but feel free to dispute. As for the privacy issue, I'm not saying is valid, I'm only saying that I've seen published reports which indicates that vendors are stating this remarkable reason as a reason why they will possibly will not comply with information sharing agreements. The larger issue is that we've seen reports on this board indicating that some vendors have already desided not to accept transfer monies after 9/24, presumably because they will not comply with information sharing agreements. Regardless, I do not beleive that it will be the simplest issue for a TPA to collect the highest outstanding loan balance information from 50+ vendors, updated on a continous basis, but perhaps I am naive as to the abilities of TPAs.
  17. Can't say that I disgree with your points, but I would add that I feel that there is a difference between a payroll deduction IRA and an 403(b) plan since the IRS now says there is; imposing a written plan requirement and requiring the level of employer involvement required in the final regs., I beleive implies a hire standard of care than your run-on-the-mill voluntary benefit. As for the ultimate question of whether school districts have any responsibility for plan investments, I cannot point to a law that definately states that they do, but with many reputable organizations (e.g. Reish and Luftman, Center for Fiduciary Studies, etc.) indicating that they do. I'm not convinced that, in an era where there are congressional hearings over retirement plan fees and where 401(k) plan sponsors are being sued over alleged ERISA breaches that are seemingly not present at all in ERISA, that these organizations are all incorrect in what might be a practical, as opposed to a legal postion. If the SD is required by the regs. to become more involved in their plan (or hire a third-party desginee to do so) regardless of whether fiduciary law applies (due to the coordination of loan rules, distribution rules, etc.), and probably will reduce the number of investment providers, would it not make sense merely from an employee relations perspective NOT to limit the offerings to providers that would offer imprudent investments (which, by the way, I would define as ones that would not satisfy a fiduciary standard of care under applicable law) with unreasonable costs? In an environment where there has been increased particpant litigation over the quality of investment choices and the level of fees, I believe the answer is yes. But, of course, I've been wrong before!
  18. That might indeed be an issue, as 403(b)(1) states that only public schools, 501©(3) charitable organizations, and certain self-employed ministers may establish a 403(b) plan. I do not believe that this rule has been changed by the final regs. In fact, this is the number one item on the IRS checklist for 403(b) plans (see attached link--first time I have posted a link so let me know if I screwed it up!) Question: will the TPA model work when there are thousands of investment options scattered among 50+ vendors (a likely scenario in an "any willing provider" state), and some of the vendors simply will not disclose the information necessary to adminster loans, etc., citing an inability to do so, privacy concerns (believe it or not, I have heard of this objection, despite the clear mandate in the final regs.), or both? Don't know the answer, just asking the question! Believe the concept has merit, though, where it may not be possible to reduce the number of vendors in states such as Texas, or where it is simply impossible for SDs to reduce the number of vendors due to lack of resources to devote to the issue. IRS Checklist
  19. Assuming that this is an ERISA plan since you mention Section 404© of ERISA, beleive it or not, if the funds are in a group custodial agreement with T. Rowe, the employer can actually transfers the funds en masse to Principal, assuming that they haven't committed a fiduciary breach by doing so. In many cases where this is done, the new vendor is far more prudent than the old, as evidenced in an RFP or other due dilgience process. We don't have the facts here, such as the relveant expenses of each arrangement. Sometimes due to contractual issue or other impacticalities, the employer permits particpants to retain existing assets with the prior vendor, but all future contributions much be remitted to the vendor the employer has chosen. Employees may transfer funds to the new vendor, but, as you point out, they may not wihtdraw/roll over funds, since they have not incurred a triggering event (e.g. a plan terminatioin) that would permit a distirbution; the employer merely switched vendors. Thus, you are indeed "stuck" with the new vendor. But all may not be lost; ERISA 404© only applies if the employer was prudent in selecting the investment provider in the first place, so hopefully the new Principal investment array is not a bad as you might believe. If you have not undertaken this excercise already, you might wish to examine the new vendor option closely, especially with respect to fees. Even though the sector funds are gone, it is certainly possible that there exist prudent choices if the empoyer did its fiduciary hoimework.
  20. As a practical matter, I beleive that these "any willing provider" laws create a HUGE issue in light of the 403(b) regs. that has nothing to do with investments--HOW IN THE WORLD ARE SCHOOL DISTRICTS WITH 50+ PROVIDERS GOING TO BE ABLE TO COMPLY WITH PROVISIONS OF THE REGS THAT REQUIRE EMPLOYER LEVEL (OR A THIRD PARTY THE EMPLOYER DESIGNATES) COORINATION OF CODE PROVISIONS SUCH AS LOAN LIMITS? Being the party responsible for determining the highest outstsnding loan balance in the last 12 months for EACH participant with outstanding loans among an array of 50+ providers, some of whom may be uncooperative in providing such data, is not a job I would wish on anyone! The question is, will these states realize the obvious (at least, obvious to me) conflict with the IRS regs, and revisit such laws? Or am I dreaming if I believe that would happen? Feel free to criticize me if I am off topic here or otherwise inaccurate, but if the states repealed such laws, for the reasons that I cite, that would remove a major barrier to SDs obtaining prudent investments for their plans through vendor consolidation as other poster have indicated.
  21. I beleive that, in a state where adherence to UPIA is voluntary, if the written plan were to state that UPIA were not to apply, then it would not apply. However, if state law REQUIRED adherence to some sort of fiduciary standard (UPIA or other) the pertinent issue would then be if the 403(b) program were excluded from state law fiduciary provisions due to the fact that it is not a trust. I'm not an expert of the laws of all 50 states, but I suspect that this might be somewhat of a grey area that has probably had few tests in the state courts; I generally see references to state fiduciary law when state AGs conduct investigatios, but many of those cases are settled, so it is difficult to draw conclusions. If I was a plan sponsor whose plan contained imprudent investments who viewed plan participants as potential litigants, such ambiguity might be cause for concern. Since the IRS has already made it more difficult for SDs with a plethora of service providers to maintain their arrangement due to employer (or third party desginee) level coordination requirement for loan maximums, etc., some SDs may simply eliminate providers with less prudent choices, (or may remove providers based on those who can work with their third party designee--e.g. TPA--which might be more troubling from a particpant perspective since the more prudent investment choices might be removed), as a practical matter, regardles of the application of fiduciary requirements. However, I have also seen points of view indicating that SDs may do nothing, simply due to the fact that they do not have the time or resources to address the issue (I would be especially interested in hearing your opinion--or anyone elses-- as to this school of thought!) Note that I am only discussing SDs and nonelecting church plans here; it is quite possible that the "UPIA does not apply" language would be an excercise of employer discretion which might casue a voluntary-only arrangement of a nonchurch/nongovernment tax-exempt to fail to satify the DOL safe harbor for avoidance of ERISA. The DOL stated that a written plan would not subject such an arrangement to ERISA, but plan language that implied employer discretion might be problematic. All in all, it looks like it will be an interesting 2008! Will SDs limit providers? If so, will they limit providers to low-cost choices? Or more expensive providers, since they are the ones who will be able to work with the third party designees/TPAs? Or will that status quo remain? Stay tuned!
  22. There have been a lot of excellent points raised in this discussion, and the issue may be more a practical matter than a legal one. Though, as I previosuly pointed out, the new regs. do not use the term fiduciary at all; however, some the responsibilities that the IRS is stating is that of the employer (or an third party that it desginates), such as adminstering plan investments in accordance with applicable law and and the plan document, are generally thought of as fiduciary duties. So it is one of those situations where the IRS is not saying that an SD literally needs to be a fiduciary, but is ascribing duties to the SD (or its designee) that are generally considered to be fiduciary duties. One other point, although the UPIA (which is usually the relveant state law in non-ERISA plans) does indeed apply to trusts (and there is not trust in a 403(b) as we know, except for certain church plans), reputable firms with signficant expertise in this area, such as the Center for Fidudicary Studies, have stated that the UPIA should be the default fiduciary standard when any other standard, such as ERISA or MPERS, does not apply, and they specfically cite non-ERISA plans. I beleive that these are possibly the reasons why an extremely reputable law firm such as Reish and Luftman has indicated that SDs do have fiduciary responsibility, even though a literal intepretation of the law might not lead to that conclusion. State Attorneys general have investigated entities that the law would seemingly state are not fiduciaries (e.g. where SD plans are involved, and there is no trust) for alleged breaches of fiduciary duty under state law, so maybe much of the published guidance (and there is a significant amount) that is indiating fiduciary responsibility for SDs as a practical matter is erring on the side of caution. Feel free to critique my comments as harshly as you see fit; this is a complicated area, and I feel that through criticism I learn a great deal. Thanks for continuing such a robust discussion in my absence.
  23. Thanks. I agree that, given the level of employer involvement that is required under the new regs. it would be difficult, if not impossible, for the employer not to assume fiduciary responsibility, and I believe that the Reish piece is expressing this position as well.
  24. Yuch! I am going to assume that your employer does NOT match your contributions or otherwise does not contirbute to the plan; if the employer does contribute, such a contribution should more than offset your lost investemnt return, so you should defer to the 403(b) despite the poor choice of provider. Fuirthermore, I will assume that you invest in the 4.5% fixed fund only due to the fact that a) there are not mutual fund options, or b) they are extremely cost prohibitive. Assuming there is no match and no better investment option in your plan than the 4.5% fixed account, and that you earn too much to be eliigble for a Roth IRA, you do indeed have a dilemna; and the SEP solution, even if it is a solution ( and I am not a sep expert), appear to be quite a complex solution to the problem. Have you considered simply investing after-tax without any deduction? If you buy and hold mutual funds, for example, I beleive that you are subject to the lower capital gains tax rate as opposed to ordinary income on investment earnings. Though you do forego the tax deduction on the contribution, if you invest with a low-cost provider such as Vanguard this option may still compare favorably to your high cost 403(b) Furthermore, I would suggest that you continue to lobby your employer in this regard; with the new 403(b) regs. they will be required to have greater invovlement wiht their plan at any rate, and they may not like what they see when they check under the hood.
  25. The regs themselves do not mention the term fiduciary even once; I believe this is due to the fact that fiduciary due diligence in not a matter of IRS involvement; the DOL is responsible for the fiduciary provisions of ERISA plans, and I believe that state fiduciary law would govern non-ERISA plans. Having said that, the regs cite the need for employer involement an oversight of their 403(b) plans to ensure compliance of the tax code in several areas, which is somewhat of the change from the prior guidance (or lack thereof), where it was assumed that the employee could self-certify compliance with areas such as premissible loans and hardship distirbutions, a responsibility which the new regs. place squarely at the feet of the employer (or a third party that the employer designates, but NOT individual employees, as expressly stated in the regs). Since employers will now be required by regulation to have involvement with their 403(b) plans to ensure tax compliance, such involvement, as a consequence, may ERISAfy the former non-ERISA plans of tax-exempts, which would subject such arrangement to the fiduciary provisions of ERISA (though the DOL issued a bulletin indicating that one of the requirements of the regs., maintianing a written plan, would, in and of itself, not subject the plan to ERISA). Though public schools maintain governmental plans that are, or their face, not subject to ERISA, such involvement would not subject school districts to the fiduciary provisions ot ERISA. However, I beleive that school districts have always been subject to the fiduciary provisions of state law (which mirrors ERISA in many states). With the increased responsibility to ensure compliance wiht IRS rules, it is possible that school districts will no longer ignore their fiduciary responsibility under applicable state law since they are now required to be involved with their 403(b) plan to ensure tax compliance; I believe that such sentiment lies at the heart of the Reish artcile.
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