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Zippy The Pinhead

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  1. This question has been discussed in a previous thread: http://bwise.ibforums.com/index.php?act=ST&f=2&t=659&hl=
  2. I've taught in K-12 and now teach at the college level. The bottom line, as I see it: It would be nice if school districts functioned more like private industry in certain aspects. For example, I wouldn't mind getting paid two times a month instead of once per month. I wouldn't mind if LACOE would offer a 403(b) plan that was more comparable to private-sector 401(k) plans. I wouldn't complain if they hired people with a little more education than a high school diploma to work in the payroll office. But I'm not holding my breath. No one really seems to be interested in seeing these things change. My experience tends to agree with the Thomas Sowell quote I posted on the first page of this thread. I have taught math courses to credential-seekers at the college level and I have observed that many budding K-12 teachers are borderline functional innumerates (the mathematical equivalent of functional illiterates). Not all, but more than half, certainly. Ask anyone who teaches these courses; if they are honest, they will confirm what I am saying. So I'm not surprised that these same functional innumerates struggle to understand 403(b) plans and how to best make use of them. The teacher unions, IMO, see the rank-and-file as sheep who exist to be sheared. The unions-- and I'm not referring to the local faculty associations, but rather the state-level affiliates of the national unions and the national unions themselves-- couldn't care less about the welfare of their members, so long as the dues dollars keep flowing in. I can't see how anyone would expect the combination of these three factors-- districts that don't care, teachers that don't care, and unions that don't care-- to produce something positive. I'm not saying the guy who is hawking NEA Valuebuilder is innocent; if you asked me about my own experience with people who tried to sell Valuebuilder to me, I would say they were all trying to screw me. But the way they were trying to screw me is no different than the way car salesment tried to screw me when I've shopped for cars, or appliance salesmen tried to screw me (would you like to buy the extended warranty, sir?) when I've shopped for appliances, so on & so forth. I think anyone who does business with a commissioned salesperson has a tacit responsibility to do a certain amount of due diligence before doing business. There is plenty of blame to go 'round.
  3. Some additional background information follows. Word on the street is that there are a couple of districts in LA County which could be bankrupt in the foreseeable future as a result of this sort of thing. http://www.fcmat.org/stories/storyReader$1151 Why retiree benefits will cause budget cuts? Question: Can you explain why our retiree benefits will cause us to make severe budgets cuts and eventually will bankrupt our district? Response: The costs involved with retiree benefits are normally not understood to be as costly as they really are. And since there are not any Education Code or other statutes specifically requiring that dollars be set aside instead of paying year to year, it is an area that has been severely ignored by many agencies until it is basically too late to keep up with the fiscal obligation. The Education Code sections that DO cover aspects of this subject include: Section 42850: Gives the authority to establish a fund for retiree health benefits. Section 42140: *Requires that districts shall certify annually to the governing board the costs of any unfunded benefits for retirees after the age of 65. *Requires that the unfunded costs of retiree health benefits shall be based on an actuarial report that shall be conducted every three years. *Requires reports to the county superintendent and other specific disclosures. But things will be changing soon that will bring this subject to a new level of importance and understanding. The Governmental Accounting Standards Board (GASB) has issued a new standard for retiree health benefit accounting. The phase-in period for this new standard would span three fiscal years—2006-07, 2007-08, and 2008-09, which will be handled like GASB 34 was, with the larger districts/agencies phased in first, determined by ADA. Depending on your district’s situation, this could have a significant impact on how you handle the financial aspects of post-retirement health benefits program. This Statement will require districts to record the full cost or liability for post-retirement health benefits in their financial statements when they are earned by the active employees (the actuarial method) rather than on the pay-as-you-go method that most entities use now. This causes a significant increase in expenditures booked in earlier years rather than later, which has a significant impact on ending fund balances. It is critical for school agencies to assess the impact of this on their future finances now so that steps can be taken to mitigate the impact and prepare for potential significant changes before the requirement begins. The actuarial method involves determining the amount that has to be contributed now in order to generate the required future cash outlay for that individual's retiree benefit amount. Using any one of six acceptable actuarial cost methods, this amount will then be distributed over a period that approximates the anticipated years of an average employee’s tenure with the entity. The amount attributable to each year of employment is required to be recognized as a liability in the financial statements. All of these calculations would normally be done in an actuarial study provided by an outside firm. The actuarial study results would include not only the future liability amount, but also the amount of liability that has been incurred and unfunded from the past. The past liability amount is compared to the assets in the post-employment benefits plan, and the net amount is amortized over a period of up to 30 years. Each year, the liability for retiree health benefits will change based on whether or not the additional expense for the year is more or less than the contributions made in the past. This would be a charge to each year in addition to the current cost of the earned benefits by active employees. School agencies can be prepared for this change by assessing the financial impact and preparing boards, staff, and the community for any changes that will need to be made in order to comply with the new Standard. This may include creating a trust, contributing more each year, and making changes in the benefit plan to reduce the liability exposure. Because we CBO's are so conservative we have always understood that is it critical to set aside money to cover the future cost of retiree benefits. What has been difficult is making others understand the true fiscal impact over time. Through AB 1200 we have had an avenue to disclose this information by putting together information to include with our multi year projections to explain the liability and the potential fiscal impact. But now there is also a GASB standard that backs up what we have been saying for years and will change how retiree benefits are paid for and when. It is important to prepare for this change as soon as possible and to explain to boards, staff and the community that the financial reporting for these benefits will be changing. Costs for retiree health and welfare benefits increase based on both the number of new retirees and the annual increases in health and welfare benefit costs. The annual cost increase can be enormous. If a district does not set aside the future costs of those benefits at the time an employee retires, the costs will encroach significantly on future district revenues. Unfortunately, some districts have accrued-but-unfunded costs for prior retirees to an amount that exceeds even the total annual revenues of the local agency. Some of those districts are funding "pay as you go" costs for retiree benefits--retirees from dozens of years earlier--that are equal to 5% of the district's current-year income. It is absolutely appropriate that you cover the future costs for retirees with funds in the Retiree Benefit Fund. If you now collapse that fund and spend the one-time amount on today’s settlement, how are you going to cover tomorrow’s costs for the benefits you have already granted? 10/06/03
  4. This is sort of peripheral to the 403(b) issue, but it does impact the bottom line for K-14 districts, and may have collateral effects which extend into retirement, retirement planning, and so forth. Posted at: http://www.sacbee.com/content/politics/columns/schrag/v-print/story/12644748p-13498383c.html School health benefits: A disaster in the making By Peter Schrag -- Bee Columnist Published 2:15 am PST Wednesday, March 30, 2005 While the governor and other pension privatizers are warning ominously that California's retirees are about to eat up the state budget, a related but larger and more imminent fiscal hazard is looming over many of California's largest school districts. Put most simply, those districts have collectively piled up an estimated $17 billion in unfunded health benefit liabilities for retired teachers and other school employees, present and future. Many districts try hard not to even think about it. Some may not know how deep they're in the hole. In the coming years, those liabilities are likely to consume an increasing share of the funding for regular school programs - forcing up class size, and forcing further cuts in counselors, libraries, arts, music and other offerings. Thomas Henry, the executive director of FCMAT, the state's Fiscal Crisis and Management Assistance Team, which was created to help the growing roster of California's financially troubled school systems, calls it the most serious fiscal problem he's seen in 30 years: "the tomato that ate New York." The official champion on the list is the Los Angeles Unified School District with some $5 billion in unfunded liabilities - essentially the amount that would be required in a fund that would pay the lifetime health benefits that the district is currently committed to. That $5 billion is the equivalent of about 80 percent of the district's annual operating budget. To properly fund it, said Paul Warren at the Legislative Analyst's Office, the district ought to be setting aside a half-billion dollars a year. But Los Angeles is hardly alone. According to Henry, some 80 large districts are committed to lifetime benefits for retirees and, in some cases, for their spouses, among them San Francisco, West Contra Costa County, Sacramento ($345 million) and the fiscally troubled Fresno Unified School District, whose unfunded liability runs to a whopping $1.2 billion. In addition, there are countless other districts that have contractual obligations to retirees until they reach age 65 or 70. Some districts, in order to attract staff in economically lean times, promised new employees with longtime service elsewhere full health benefits after their first year in the new system. The actuarial and legal history here is complicated. Until the mid-1980s, health benefits, even gold-plated ones like Sacramento's that included cosmetic surgery (a benefit since dropped) and no copays, weren't a huge issue since average per-capita health benefits seemed manageable. But with escalating health costs and new accounting rules, it's becoming harder to avoid. Nor is it hard to explain how districts made those commitments. With the straitened budgets in the years after passage of Proposition 13, school districts, like other California government agencies, negotiated generous long-term benefits in lieu of increased pay schedules that they felt they couldn't afford. Few suspected that the cost of those health benefits, which seemed modest at the time, would balloon in the coming decades. Most probably wouldn't have cared if they had suspected it. Some districts, Elk Grove among them, have created funds to cover retiree health benefits. A few, which have such funds, have since raided them to cover other costs. Most have simply been paying the premiums out of their current operating budgets. But as costs continue to climb, both because of escalating health care expenses and the growing rolls of retirees - retirees who live longer - those costs, as Sacramento County Superintendent Dave Gordon points out, will consume more and more of the money that had been going to the regular school program. For the 400 California school districts - 40 percent of all districts - whose enrollment and state revenues are declining, that's going to be a particularly severe problem. Warren calls it a disaster in the making. The only way to resolve the crisis, says Henry, is for districts to "stop the hemorrhaging" - meaning to renegotiate contracts so at least prospective employees don't get the full lifetime coverage that current employees (and current retirees) are getting. At the moment no one at the state level - or in many cases even at the district level - even knows how large the liability really is. Both FCMAT and the legislative analyst are issuing pointed warnings and advice. "The size of retiree health benefit liabilities," says the LAO in its analysis of the governor's budget, "is so large that unless steps are soon taken to address the issue, it seems likely that districts will eventually seek financial assistance from the state." New accounting rules imposed by GASB, the private but powerful Governmental Accounting Standards Board, that will be phased in beginning in 2006-07 will require districts to record the full cost of funding post-retirement health benefits as part of current expenditures. But beyond the obvious need for better accounting and reporting, there's a more immediate and depressing prospect: No matter what happens, schooling for millions of California kids in the coming years is likely to get leaner, not richer.
  5. There is plenty of blame to go around. In the words of Thomas Sowell, writing in his book "Inside American Education:" "No discussion of American education can be realistic without considering the calibre of people who teach in the nation's schools. By all indicators-- whether objective data or first-hand observations-- the intellectual calibre of the public school teachers in the United States is shockingly low. [...] There are well over 2 million school teachers in the United States-- more than all the doctors, lawyers, and engineers combined. Their sheer numbers alone mean that there will inevitably be many exceptions to any generalizations made about teachers. However, a number of important generalizations do apply to the great majority of these teachers. For example, public school teaching [...] is an occupation whose lack of substantive intellectual qualifications is painfully demonstrable." In other words, as the recent Forbes piece concluded, and as other similar pieces before (Newsweek) have concluded, teachers are responsible to educate themselves regarding the terrain of the 403(b) landscape, and many do not even bother to try, yet complain when they find out they'e getting screwed. It is also the fault of teachers that when ream-ola schemes like the NEA valuebuilder thing come to light, that they stand by and basically do nothing. Is it any surprise the NEA doesn't change its MO? When teachers do nothing about a situation like this, the message the NEA gets is: "We're your sheep. Treat us accordingly." The bottom line: if teachers don't respect themselves enough to look out for their own interests, how can they expect anyone else to respect them and look out for their interests?
  6. It's good to save, own your own home, and so forth. Ron Blue has four general principles which he frequently cites in his writings and his talks. They apply to any income level and any life stage: 1. Spend less than you earn. 2. Avoid the use of debt. 3. Maintain liquidity. 4. Set long-term goals. I think you need to have some long term goals. If you don't have any, how can you know if you're doing well or not so well? For example, how much time would you need to build up the 3-6 months worth of savings? Set a goal. Where do you want to be financially in five years? In ten? Do you plan to retire? When? Do you want to pay off your house?
  7. I'm surprised to get this kind of reaction from people. Consider this: the average growth rate for the population of California has been right around 1.7% annually since the 1970's. The average growth rate of the state budget has been around 7.5% over the same period of time. How long do you think we can sustain that kind of spending? Even if you're a staunch, never-met-a-tax-hike-I-didn't-like democrat, I don't think you can make a cogent argument for taxing this state back to prosperity. History and economics are clearly not in your favor. Right now, STRS is facing a $23 billion shortfall in its funding: http://www.sacbee.com/content/business/story/11642853p-12532004c.html CalPers is facing a $27 billion shortfall: http://www.forbes.com/associatedpress/feeds/ap/2005/02/22/ap1842211.html What are the root causes of this problem? There are two: overly-generous promises made during fat times and poor returns on investments (mainly because of the overall performance of the stock market, but I would also suggest that the "social activist" outlook of the CalSTRS and CalPERS boards are not helping solve this problem). Even if Schwarzenegger is able to transform CalPERS and CalSTRS to DC plans, that will only be for people hired after a certain date. Those plans will continue to be DB plans for the current retirees and employees. More to it, those plans will continue to face funding shortfalls. I'd wager the solution will entail both reductions in benefits and increases in the contribution rate. As things stand right now, the state of California is slurping up an average of $9.38 out of every $100 we make: http://www.nctimes.com/articles/2005/03/13/opinion/commentary/20_58_043_12_05.prt How much will it be in ten years, or twenty? How much is too much? I can tell you this much: if that $9.38 per $100 grows at the same rate as the state budget has been growning, it will be pushing $20 per $100 in about ten years.
  8. And, as if last year's dues increase wasn't enough-- at my campus it was 8.9%, from $84.50/month to $92/month-- they want to increase them again: ===================== http://home.earthlink.net/~mantonucci/archives/20050317.htm March 17, 2005 EIA Exclusive! California Teachers Association's Proposed Dues Increase Would Raise More Than $54 Million to Fight Governor Schwarzenegger Delegates to the California Teachers Association (CTA) State Council will vote on a proposal to increase dues by $180 per member over three years to fund the union's opposition to Gov. Arnold Schwarzenegger's education initiatives. At current membership levels, the increase would put more than $54 million in the union's campaign war chest, in addition to the approximately $11 million already available. Full-time teachers currently pay $533 per year to CTA, of which $36 goes into the union’s ballot initiative fund. CTA will also be seeking cash from the National Education Association, its parent affiliate, which has its own initiative fund for just such a purpose. Though the money will be extracted from teachers’ paychecks over the next three years, the union plans to use the dues increase from the second and third years, plus a mortgage on its Burlingame headquarters building, as collateral for a loan, so that the full $54 million will be available for this year's initiative campaign season. The dues increase from the next two years will then be used to pay down the debt. CTA officials are visiting local affiliates throughout the state to generate support for the unprecedented measure, warning teachers that the governor’s plan puts their careers and retirements at stake. The union also plans to postpone all projects that are not "absolutely necessary" and to cut its regular budget to free up even more staff and resources for the campaign. The 800 members of the CTA State Council will meet in Los Angeles the weekend of June 10-12 to vote on the proposal.
  9. I believe it is available in every state. I'm not a lawyer, but I can't see why it wouldn't be.
  10. Duuuuuuuuuh. In my defense, as a mathematician, I'm trained to ignore most of the details and to focus on the key information. Combined with my usual addled state, this training produces both costs and benefits. Maybe, on account of this Web site and others with similar purposes, and because of articles like this one from Forbes, etc., things are slowly improving. I found a stat from an NEA affiliate site which said that in 2000 the number of Valuebuilder customers was 65,000. Now it's down to 60,000, which represents approximately a 7.7% decrease.
  11. Not that I doubt you, but if you would provide a source for the statistic you cite in your post, I would be most grateful.
  12. Here is the NEA's official reply: =============================== -----Original Message----- From: Kelly, Teresa [NEA] [mailto:TKelly@nea.org] On Behalf Of Wilson, John [NEA] Sent: Thursday, April 14, 2005 1:07 PM To: Board of Directors - Announcements & Information Sharing Cc: bod@list.nea.org; Executive Staff [NEA] Subject: Response to Forbes Article Entitled "Costly Lesson" April 14, 2005 Memorandum TO: State Presidents State Executive Directors FROM: Reg Weaver John I. Wilson RE: Response to Forbes Article Many of you have probably heard about, or seen, an article in the current issue of Forbes Magazine entitled “Costly Lesson.” NEA Member Benefits, in consultation with NEA’s Public Relations Department, agreed to be interviewed for this article in an attempt to provide factual information about the positive features of the NEA Valuebuilder Program, as well as the support that NEA provides to participating members. None of our points were incorporated into the article. The author chose, instead, to cast all 403(b) plans that are distributed by a commissioned sales force together in a very negative light, flattering only companies offering no-load products. In the same vein, the author criticizes public employee unions for offering their members commissioned products without seriously considering the value these programs offer to union members. Let us respond to the key points made by the author of the article. (1) “School districts do not provide retirement planning guidance.” That’s correct, which is why we provide this member requested help through the NEA Valuebuilder representatives who work with NEA members in all areas of the country. Through surveys and focus groups, NEA members have overwhelmingly said they want face-to-face advice from a financial professional when considering these types of products. (2) In the subhead of the article, the author refers to “high fees and low returns,” yet nowhere is there any comparison of returns or performance data from recognized sources. The author conveniently uses only one example of the investment performance of a portfolio over a relatively short time frame that was significantly influenced by a down market, during which many portfolios were negatively affected. The NEA Member Benefits annual product comparison shows that the performance of funds in the NEA Valuebuilder Program are very competitive in the market place. No-load funds don’t necessarily guarantee better investment returns over the long term. (3) The author asserts that “Valuebuilder investors pay annual fees of up to 5.6% of their fund balance…”. The average fee is significantly less. Given the presence of NEA Valuebuilder representatives, who are trained to help members select rider benefits and investment options that are most suitable to their individual needs and expectations, expenses of this magnitude are unlikely. (4) Security Benefit Group (SBG), the underwriter of the NEA Valuebuilder Annuity, pays NEA’s Member Benefits Corporation a fee for marketing and administrative services. These include advertising, creative development, production and media space, affiliate relations support, marketing activity, etc. It is not an endorsement fee. If NEA’s Member Benefits Corporation did not provide these services, SBG would have to go into the marketplace to obtain the service or provide the services themselves. NEA Member Benefits made it clear to the author that NEA in no way charges for an endorsement, receives no fee from any endorsed program, and any money NEA Member Benefits receives is to support NEA Member Benefits program areas. The NEA Member Benefits budget is a break-even budget. Also, dues dollars are never used to provide these programs and services to members. Regarding the amount of the fee, NEA Member Benefits was very clear to the author that the amount he implies as the income we receive from Security Benefit Group is significantly exaggerated. (5) We understand from conversations with some of our affiliates that money received from product support in their states is used to provide members with retirement advice that was eliminated, because of budget cuts, from State Teacher Retirement Systems. We find it unfortunate that Forbes Magazine has chosen to portray the 403(b) market and public employee unions in such a distorted light. It is a disservice to those organizations that strive to understand their members’ needs and respond to those needs with very good products and services. If you have any questions about the NEA Valuebuilder Program, please feel free in contacting Gary Phoebus, President of NEA’s Member Benefits Corporation, at (301) 251-9600 or email him at gphoebus@neamb.com. cc: NEA Board of Directors Executive Staff
  13. http://www.forbes.com/forbes/2005/0425/100_print.html On The Cover/Top Stories Costly Lesson Neil Weinberg, 04.25.05 Some of the biggest names in insurance peddle lousy retirement plans with high fees and low returns. One and a half million teachers blithely signed up for these dogs--often with their unions' blessing. Teacher Michael Cangelosi wandered into the faculty lounge of his grade school in Derwood, Md. at lunchtime one day nine years ago, and a well-dressed man on the sofa beckoned to him with a plate of cookies and an offer of free advice. The adviser was a salesman for AIG Valic, the largest vendor of retirement savings plans for teachers. He later whipped out colorful charts illustrating how Cangelosi, then in his mid-20s and with only a few thousand dollars saved, could avoid a trip to the poorhouse by setting up a tax-deferred teachers' retirement plan. A brochure, listing some mutual funds, touted no initial sales commissions and fees as low as $3.75 a quarter. Sold:In the next eight years Cangelosi put $14,200 into his retirement plan. Belatedly, last summer he addressed the question of whether he was doing as he hoped. By the time he bailed out and paid a $500 kill fee, he ended up with all of $13,655--$550 less than what he had invested over all those years. Why? One big reason was that he had been paying fees of 2% a year, two to three times the rate charged by big mutual funds. This during a time when a low-cost S&P Index fund would have returned 95%. "It was a stinging feeling to realize that, for eight years, I could have been paying so much less for better investments," says Cangelosi. He has since switched his faltering retirement plan to TIAA-CREF, the giant investment firm set up for educators--for what he says is only one-fifth the annual AIG fees. Cangelosi was attracted by the idea of investing in mutual funds but in fact had been lured into buying an insurance plan that can best be described as a coals-to-Newcastle investment. The AIGValic agent had sold the teacher a variable annuity, a basket of half a dozen mutual funds wrapped in a life insurance policy. This type of insurance doesn't pay your surviving family a million-dollar jackpot if you die suddenly--it promises only to pay back the money you had put into it, plus any extra returns it earned. The main appeal of variable annuities is their tax deferral, yet Cangelosi already had that in his retirement plan. The main downside to annuities is stiff fees, often 2% or 3% a year. AIG Valic says it has revised its sales literature to more accurately portray the product. Yet roughly 1.5 million teachers at the nation's public schools have put their retirement savings into insurance plans, for a total $120 billion in assets. The business is stoked by some of the biggest names in insurance:AIG, the world's largest insurer; ING; AXA; and MetLife. Some firms pay first-year commissions as high as 9% to agents, who troll school campuses for prospects. "School districts don't provide education [about retirement accounts]," says Daniel Otter, a teacher and operator of a Web site, 403bwise.com. "So the first time most teachers hear of them is when a salesman shows up in the lounge selling annuities larded with high fees and surrender charges." Teachers unions are complicit partners in this dubious pursuit. Insurers cut murky deals with labor unions to buy exclusive access to their members, sometimes paying the unions millions of dollars in fees in exchange for the unions' endorsement of their annuity plans. Invariably this foists on teachers some of the most expensive annuity products around. "Unions play a very large role in teachers' decision making," says Michael Beczkowski, a consultant with Bolton Partners who evaluates retirement plans for school districts. "Some companies offering these plans make large union donations, so it's very difficult to get rid of them even if their products are substandard. The participants pay for it." The National Education Association, with 2.7 million members; the American Federation of Teachers, with 1.3 million people in its ranks; and New York State United Teachers, with half a million members, all endorse high-cost annuity products. The NEA won't disclose the fees it receives from its retirement savings provider, Security Benefit, a firm in Topeka, Kans. But one source says the fee was likely $3 million. The New York union gets $3 million a year from ING, which gets the shop's exclusive endorsement as a provider of annuities for New York teachers. AFT says it gets less than $100,000. At the center of this thriving scheme is the inelegantly named 403(b), which, like the private sector's 401(k), takes its name from an IRS regulation. Both plans allow workers to invest for retirement free from taxes until the money is withdrawn. The key difference: Private employers have a legal duty to run 401(k)s in the interests of employees and spell out the terms; 403(b)s carry no such burden. All told, 6.8 million educators and other nonprofit employees have almost $580 billion in assets in 403(b) plans. Some 80% of this is in fixed and variable annuities, and the business is growing 9% a year, says Spectrem Group, which consults to insurers. Universities make up just under half the total and take a more patriarchal approach, limiting their 403(b) offerings to a few low-cost, solidly performing vendors selling low-fee mutual funds. The well-regarded TIAA-CREF controls nearly half of universities' $250 billion in 403(b) assets. Public school districts, by contrast, view 403(b) plans as an add-on to traditional pension plans, and typically they offer teachers zero guidance. When teacher Douglas Taylor called the Los Angeles Unified School District looking for a low-cost 403(b) plan in 1997, the district couldn't even provide him with vendors' names. Taylor had to guess at them until he came up with an acceptable choice. Today the Los Angeles school system retirement plan, with 32,000 403(b) contributors, publishes a list of 112 different firms, most of them annuity vendors. But hey, it's the law:California statute requires schools to give access to any retirement firm licensed to sell a product. With so much traffic in the lunchrooms, face time is the key to closing sales. And face time is expensive, a cost that mutual funds can't afford to cover if they want to keep their fees low. "If you're a company like TIAA-CREF with low costs and noncommission distribution, you really can't get any traction [in public schools]," says Richard Hiller, a vice president in the firm's institutional division. Insurers and unions argue that, with 70% of teachers failing to save for retirement, they need a lot of handhold-ing to get them started. Cheaper plans offer no adviser, and variable annuities are best for "people who are uncomfortable performing self-directed retirement planning," says an official at Security Benefit, which runs the NEA program. Insurers insist their brochures disclose all costs, as legally required, and that their agents discuss the negatives in face-to-face meetings. "We're proud of the way we deliver products to that market," says Brian Comer, a senior vice president at ING. "We look at it as a question of needs versus the costs to provide for those needs." Others counter that the shoddy sort of "financial planning" Michael Cangelosi received in Maryland is all too common. "Arguing it's better to have high-cost brokers than nobody is like saying Harlem is better off with dealers since there aren't enough pharmacies," says Edward Siedle, president of Benchmark Financial Services, which investigates money-management abuses on behalf of pension plans. FORBES has written plenty about the many drawbacks of variable annuities, from "The Great Annuity Ripoff" in the Feb. 9, 1998 issue to "Annuity Gratuity" (Feb. 19, 2001) to "No Surrender" (Nov. 29, 2004). Even the National Association of Securities Dealers says the insurance "may not be a good idea" in tax-sheltered accounts. "It will, however … generate fees and commissions for the broker or salesperson." Some plans are horrendous. General American Life Insurance sells an annuity that hits teachers with a kill fee of 18% if they bail out in less than a year; lower "surrender fees" are charged even if an investor sticks around for 14 years. At PlanMember Services annual fees can run as high as 3.7%, plus $25. For one AIG Valic plan, only 3 of 16 actively managed equity funds have beaten their indexes over ten years or the life of the funds. Occasionally insurers' sales pitches to teachers run afoul of the law. CGULife Insurance agreed to an $8.1 million 2002 settlement in a class action involving 14,000 Texas teachers. It also agreed to an injunction barring sales materials that don't clearly state that its reps are insurance agents and banning false statements that its products are endorsed by school districts, unions or others. The NEA is a good example of how unions play the 403(b) game. It exclusively endorses a product labeled NEA Valuebuilder, sold by Security Benefit. The NEA says it selected the firm for "unsurpassed service coupled with innovative financial products." One person familiar with the NEA's previous contract says insurer Nationwide paid the NEA $3 million annually until around 2000. The NEA then put the contract out for bid. One respondent, Great-West Life, offered an attractive option:no variable annuity, and a mutual-fund-only product with a slim 0.15% annual fee and no surrender charges. But Great-West was unwilling to pay the NEA for an endorsement. The NEA says it chose Security Benefit because its members want in-person consultation, while Great-West provided service by phone and Internet. NEA Valuebuilder investors pay annual fees of up to 5.6% of their fund balance, including a "mortality and expense risk" charge of up to 0.9% (TIAA-CREF charges less than 0.1%) and mutual fund charges of up to 3%; cancel in the first year and you take a 7% hit. To get independent agents to flog this dud, Security Benefit pays first-year commissions of up to 8%. That is in addition to overrides, expenses, bonuses and trailing commissions, not to mention "expense-paid due diligence trips and educational seminars." Security Benefit defrays the cost by itself taking kickbacks of up to 0.4% of assets from the mutual fund firms whose funds it offers to teachers. The good news: Only 60,000 NEA members own Valuebuilder, and 40,000 of them are in a mutual-fund-only product that spares them insurance fees. ING also pays unions for endorsements and access. It runs a program for the American Federation of Teachers but pays that union only enough to cover related expenses. In a separate deal, ING pays the Oregon Education Association only $144,000 annually for an exclusive endorsement of its "tax-sheltered annuity" and the right to run "financial planning" seminars for members. ING's biggest deal likely is with the New York State United Teachers Benefit Trust, which spans 500,000 people and has $2.3 billion in assets, most of it in annuities. The prospectus states ING will pay the union trust $6 for each of its members, or $3 million in 2005; never mind that 140,000 members are barred from the plan and must choose a rival plan from the affiliated United Federation of Teachers in New York. Still, "We got a pretty good deal with ING," says union spokesman Dennis Tompkins. For union members the deal includes variable annuity expenses as high as 3.56% and cancelation charges of up to 7% of assets. A teacher who puts in $10,000 for a decade and earns 5% annually will forfeit at least $3,976, or 63% of his returns, in fees. The union's 300 staff people save through a separate, cheaper 401(k) run by Fidelity. Mutual back-scratching between insurers and unions is ubiquitous with 403(b)s, says Daniel Puplava, who sold the NEA's Valuebuilder in California when it was run by Nationwide. "When I did work at the union, I had to pay for tables, provide door prizes and dine labor people to market in their territory," he says. "I felt like a ." These days he runs a 403(b) plan he devised for San Diego County's Office of Education. It charges a reasonable 0.3% administrative fee on top of fund fees and has no surrender charges or loads. The WEA Trust, a unit of the Wisconsin Education Association Council, has shunned the standard model in which unions pawn off on their own members insurance salesman disguised as financial planners. The plan's six certified planners offer teachers retirement planning purely for a salary to avoid dispensing conflicted advice. The total cost to teachers of investing in mutual funds through the trust runs as low as 0.36% per year, or one-tenth that of the most expensive products on the market. Its fixed-return investment option is also paying a guaranteed 4.5% over the next year, at least 1.5 percentage points better than its closest rival, says Randolph Mullis, assistant executive director of the trust. Teachers' advocates recently sponsored legislation in California aimed at forcing school districts to cap 403(b) fees. Insurers lobbied hard against them. Fliers anonymously appeared at schools comparing the proposal to limit high-cost choices to Hitler and the Holocaust. Web sites with addresses similar to 403bwise.com popped up to transport visitors to pro-insurer alternatives. The proposal to limit sales of expensive 403(b)s was itself limited to improving disclosure. California now requires that vendors list plan basics on 403bcompare.com. That may help teachers protect themselves by doing their homework. Just like the rest of us.
  14. On top of the lag time, these guys only do our payroll once per month. I don't know anyone in the private sector who gets paid once per month. Considering the amount of money the CTA/NEA sucks from the pockets of the LACOE-supervised teachers on an annual basis, I guess I would find it refreshing if the union would actually endeavor to make itself useful by prodding the School Financial Services people to abandon their stone-age practices and enthusiastically embrace the concept of customer service. But I'm not holding my breath. Both the CTA/NEA and LACOE could drop into a giant sinkhole and who would notice, so long as the checks kept coming?
  15. LACOE claims to have responsibility over the payroll for 130,000 employees on their Web site. They claim to issue 165,000 payroll warrants per month. I work for one of the districts which falls under the LACOE umbrella. LACOE has no problem doing a direct deposit for my paycheck, but when it comes to 403(b) funds, they don't do a direct deposit, but rather send a paper check (by regular mail), which typically takes anywhere from 15-25 days to show up in my 403(b) account. I once asked them about this and one of the people in School Financial Services basically told me that "there are too many vendors for 403(b) funds for us to do direct deposit." Frankly, this strikes me as BS, because I figure there has to be more banks/credit unions receiving their direct deposits than there are 403(b) fund vendors, but I can't say for sure. My wife works for a private company (around 4000 employees), and when her 401(k) contribution is deducted from her paycheck, it shows up in her account the very same day, i.e., it is deposited directly. The lag time for my own deposits got me to wondering how much the delay was costing me in returns ("interest," if you prefer), so I sat down and constructed an excel spread sheet to calculate the damage. Depending on the level of contribution and the amount of time involved, the damage ranges from a few hundred dollars to several thousands of dollars at maximum contribution levels. For example, if we assume a constant contribution of $1,000 per month, earning 10% per year, over 20 years, a consistent 20-day lag time will cost me around $4400 (in lost growth). Now, admittedly, I probably won't miss $4400 spread over twenty years or whatever. At a $500 per month contribution level, we're looking at $2200 over 20 years; I'd probably miss that even less. But if you do the math, out of 130,000 employees, if just half have a 403(b), over a twenty or thirty-year period, that $4,400 per person adds up to some serious money. It could be as much as $250 million over a twenty-year period. I'm wondering if my union could be of any assistance in this. I doubt that just one faculty association will make much of a difference, but if several started to push for the same thing, who knows... maybe we could even get them to route money to more than one direct deposit location. ================== When I posted this I was pretty groggy so I have edited it for clarity and to amplify my question. Mainly what I am wondering is if pressure from the union(s) could force payroll services at LACOE to step into the 21st century and become more flexible, useful, etc. In particular there are two things I'd really like to see: 1) direct deposit of 403(b) monies. 2) direct deposit to multiple recipients of after-tax dollars; e.g., $200/month to a Roth IRA, $300/month to my "summer saver" account at the credit union, and the rest into my checking account, or whatever. It's worth to note that at the moment, the contract at my district is renegotiated every three years. Our faculty association is affiliated with the CTA, and every three years the CTA slurps between $400K and $500K worth of union dues from the pockets of my coworkers and myself. Since I've been working there I've yet to see the CTA earn DIME ONE of that money. It certainly doesn't cost that much to renegotiate our contract. I'm just wondering out loud if the CTA could actually be of use, just this once, to a working stiff like myself.
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