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New Heros In 403b Reform Movement

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This should be useful when making case before caring executives...

Ted

 

Compounding -- The Black in the Magic of Compounding

 

See May 2002 issue of AAii Journal

 

Future Percentage Loss from Compounding Cost

 

If

EOR Length of Investment Horizon

5yrs 10yrs 20yrs 30yrs 40yrs

0.10% - 0.45 - 0.91 - 1.80 - 2.60 - 3.57

0.15% - 0.68 - 1.36 - 2.69 - 4.01 - 5.31

0.20% - 0.91 - 1.80 - 3.57 - 5.31 - 7.02

0.25% - 1.31 - 2.25 - 4.45 - 6.60 - 8.70

0.50% - 2.25 - 4.45 - 8.71 -12.77 -16.66

0.75% - 3.36 - 6.61 -12.79 -18.56 -23.94

1.00% - 4.46 - 8.73 -16.69 -23.96 -30.60

1.25% - 5.55 -10.80 -20.43 -29.03 -36.69

1.50% - 6.63 -12.83 -24.01 -33.76 -42.26

2.00% - 8.77 -16.76 -30.72 -42.33 -52.00

2.50% -10.96 -20.54 -36.86 -49.83 -60.13

 

When an employer compares a low cost vendor’s expenses of about 0.20% with a high cost vendor’s expenses of about 2.50%, even an ignorant employer can conclude their retirement plan will result in their employees being short-changed in retirement:

 

5yrs 10yrs 20yrs 30yrs 40yrs

Short=changed 9.95% 18.74% 33.29% 44.52% 53.11

 

Here are the After-Cost Percentage of Market Return (assuming a 10% Market Return

 

5yrs 10yrs 20yrs 40yrs

An S&P500IndexFund @ 0.20% 99% 98% 96% 93%

An Actively Managed Fund @ 2.00%

 

Press On

 

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Guest Daniel Clark

This post is in response to questions posed by Tampa Gator two posts back in this thread.

 

1. Yes, you can add Vanguard/TIAA-CREF or any mutual fund or annuity as these are the permitted investment choices under 403(b) regs. You are not adding a plan, you would be adding funding instruments as alternatives to VALIC under your current plan.

 

I am troubled that you report that the contracts are between VALIC and participants. This does not jibe with the fact that your plan involves (significant?) employer contributions and would thereby likely be deemed an ERISA Plan. Natural questions following include: By what authority did participants enter into these contracts? How are the contract parties identified in the contract? How are the participant accounts titled? Does the Plan Document allow contracts between participants & a vendor? Is there any contract between VALIC & your company? Or service agreement?

 

The addition of investment choices while keeping VALIC will create administrative complexity and significantly reduce your ability to negotiate the best terms with new providers. This is true with respect to existing plan assets as well as new contributions.

 

Are you going to have VALIC provide consolidated financial reporting, or Vanguard or TIAA-CREF? Who will perform compliance testing and provide the 5500 report? Will participants receive multiple, un-consolidated reports?

 

2. Yes. I would not advocate this approach, but you can effectively force participants to move by removing investment options from the plan that are presently in use. I'd argue that because your plan is an ERISA Plan, you should be eliminating investment choices that do not meet minimum performance standards. To do otherwise will increase employer liability.

 

I'd be careful about differentiating between employer & employee funds regarding treatment of investment choices.

 

Technically, by retaining VALIC, you are going on record that the contract (and all investment subaccounts contained within it) is meeting minimum performance standards for your plan.

 

Does your plan even have an investment policy or established minimum performance standards? - it should.

 

3. If you can get VALIC to reduce their M&E or better yet convert (without surrender charges) the entire plan out of the group annuity contract & into VALIC's Mutual Fund Platform (under which you could offer low-cost index funds & non-proprietary funds from Fidelity, Vanguard, T.Rowe Price, DFA, etc.) that would be a great alternative. I'd pursue this alternative first. (I doubt VALIC has told you about this product available from their parent AGFC)

 

Lets "work the problem" people.....

 

DC

 

 

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DC, I also have Valic and we met with their local and state Rep. I asked them if they could give me some information about their mutual fund products, they said they would and it's been about 6 weeks and I have not heard from them. I really don't think Valic cares about the people that invest with them or it could be that I'm dealing with some lousy Reps. Hopefully we are going to switch to TIAA-CREF soon. However, I'm getting some resistance from the VPs. They don't see why we need to switch. They don't think this will help the average employee. If we don't switch, maybe I can go directly to Valic's parent company and request some changes.

 

Garry

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Guest Daniel Clark

Lets not kid ourselves, VALIC's primary concern is their income from the case. The local & state reps will resist the mutual fund approach because it takes money out of their pocket and puts it back into the hands of participants.

 

Your VP's will not really care until they fully understand they have personal financial liability & are exposed as a result of the arrangement with VALIC. They are more at risk because you've shown them alternatives to the current arangement that put the interest of participants ahead of the interests of your vendor.

 

I encourage you to document your analysis & communication with all decision makers.

 

DC

 

 

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1. Yes, you can add Vanguard/TIAA-CREF or any mutual fund or annuity as these are the permitted investment choices under 403(b) regs. You are not adding a plan, you would be adding funding instruments as alternatives to VALIC under your current plan.

 

THANK YOU. THAT IS WHAT I THOUGHT.

 

I am troubled that you report that the contracts are between VALIC and participants. This does not jibe with the fact that your plan involves (significant?) employer contributions and would thereby likely be deemed an ERISA Plan. Natural questions following include: By what authority did participants enter into these contracts? How are the contract parties identified in the contract? How are the participant accounts titled? Does the Plan Document allow contracts between participants & a vendor? Is there any contract between VALIC & your company? Or service agreement?

 

I JUST FOUND OUT ON FRIDAY IT WAS UNDER ERISA FROM OUR HR DIRECTOR. AGAIN ALL PARTICIPATIONS GET A 6% CONTRIBUTION (NOT A MATCH). MY PROBLEM IS THAT I STILL HAVE NOT SEEN A CONTRACT BETWEEN THE EMPLOYEES AND VALIC. I BELIEVE THAT ALL EMPLOYEES ENTER INTO THIS CONTRACTS VOLUNTARILY. HOWEVER, I GUESS IF EMPLOYEES DON'T CONTRIBUTE ANY MONEY ON THEIR OWN THEY STILL HAVE TO SIGN A CONTRACT WITH VALIC FOR THE 6% EMPLOYER MATCH.

 

I DON'T THINK WE HAVE A SERVICE AGREEMENT WITH VALIC BECAUSE THE PLAN DOCUMENT DOESN'T MENTION ANYTHING LIKE THAT. I ALSO DON'T THINK THERE IS A CONTRACT BETWEEN VALIC AND OUR COMPANY PER THE PLAN DOCUMENT, BUT I AM NOT SURE AGAIN.

 

I NEED TO RESEARCH THIS MORE BUT I HAVEN'T GOTTEN THE HELP I NEED YET. MAYBE THE CONTRACT IS NOT BETWEEN VALIC AND THE EMPLOYEES. I HAVE NOT GOT MY HANDS ON A CONTRACT YET. SEE THE PLAN DOCUMENT SAMPLE BELOW.

 

THE FOLLOWING IS PER THE PLAN DOCUMENT (=COMPANY NAME)

 

HAS ESTABLISHED TAX DEFERRED ANNUITY PLAN FOR THE PURPOSE OF PURCHASING ANNUITY CONTRACTS FOR ITS EMPLOYEES PURSUANT TO SECTION 403B OF THE IRS CODE OF 1986, AS AMENDED. THE PLAN ADMINISTRATOR SHALL BE .

 

THIS PLAN SHALL BE FUNDED EXCLUSIVELY THROUGH THE PURCHASE OF ANNUITY CONTRACTS. ALL PURCHASE PAYMENTS UNDER SUCH ANNUITY CONTRACTS, INCLUDING THOSE MADE THORUGH PARTICIPATING EMPLOYEES' SALARY REDUCTION AGREEMENTS, SHALL BE CONSIDERED PART OF THIS PLAN. THE TERMS AND CONDITIONS OF SUCH ANNUITY CONTRACTS SHALL BE CONSIDERED PART OF, AND SHALL BE CONSTRUED AS HAVING INCORPORATE INTO, THIS PLAN.

 

FOR THE PURPOSES OF THE ERISA, THE EMPLOYER AND THE PLAN ADMINISTRATOR ARE NAMED FIDUCIARIES OF THIS PLAN.

 

THE ACCOUNT ESTABLISHED AND MAINTAINED UNDER THE ANNUITY CONTRACT FOR EACH PARTICIPANT WITH RESPECT TO HIS INTEREST IN THE CONTRACT. THE TERM "ACCOUNT" MAY ALSO REFER TO THE SEPERATE ACCOUNTS MAINTAINED FOR EMPLOYER CONTRIBUTIONS AND ELECTIVE DEFERRALS.

 

The addition of investment choices while keeping VALIC will create administrative complexity and significantly reduce your ability to negotiate the best terms with new providers. This is true with respect to existing plan assets as well as new contributions.

 

AGREE THAT NEW PROVIDERS WANT ALL THE ASSETS AND WILL GIVE US WORSE DEALS WITH ONLY NEW CONTRIBUTIONS GOING FORWARD. HOWEVER, THREATENING VALIC ABOUT PUTTING ALL NEW MONEY INTO TIAA-CREF SHOULD MAKE VALIC GIVE US BETTER RATES BECAUSE THEY WILL KNOW FUTURE MONEY WON'T GO WITH THEM.

 

Are you going to have VALIC provide consolidated financial reporting, or Vanguard or TIAA-CREF? Who will perform compliance testing and provide the 5500 report? Will participants receive multiple, un-consolidated reports?

 

I AGREE AND DIDN'T THINK OF THAT PROBLEM. HOWEVER, HOW DOES THE STATE OF FLORIDA OFFER ITS EMPLOYEES 5 DIFFERENT OPTIONS (TIAA-CREFF, VALIC, ING, ETC). I ASSUME THE STATE TAKES CARE OF THIS THEMSELVES AND NOT THE UNIVERSITIES THEMSELVES. I GUESS I WOULD NEED SOMEONE TO HELP US WITH THAT AND I KNOW OUR HR DIRECTOR IS CONCERNED BIG TIME ABOUT NOT DOING MORE WORK. ANY SUGGESTIONS HOW COMPANIES DO THIS???????

 

2. Yes. I would not advocate this approach, but you can effectively force participants to move by removing investment options from the plan that are presently in use. I'd argue that because your plan is an ERISA Plan, you should be eliminating investment choices that do not meet minimum performance standards. To do otherwise will increase employer liability.

 

HOW DO YOU DETERMINE MINIMUM PERFORMANCE STANDARDS. I DON'T THINK WE HAVE ANYTHING LIKE THAT.

 

I'd be careful about differentiating between employer & employee funds regarding treatment of investment choices.

 

Technically, by retaining VALIC, you are going on record that the contract (and all investment subaccounts contained within it) is meeting minimum performance standards for your plan.

 

Does your plan even have an investment policy or established minimum performance standards? - it should.

 

I HAVE NO CLUE UNLESS VALIC IS DOING SOMETHING. I DON'T THINK WE ARE DOING ANYTHING INTERNALLY.

 

3. If you can get VALIC to reduce their M&E or better yet convert (without surrender charges) the entire plan out of the group annuity contract & into VALIC's Mutual Fund Platform (under which you could offer low-cost index funds & non-proprietary funds from Fidelity, Vanguard, T.Rowe Price, DFA, etc.) that would be a great alternative. I'd pursue this alternative first. (I doubt VALIC has told you about this product available from their parent AGFC)

 

I THINK THIS IS A GREAT POINT. I GUESS I NEED TO QUESTION VALIC ABOUT THE PLAN YOU REFER TO AS VALIC'S MUTUAL FUND PLATFORM. THAT IS THE BEST OPTION. HOW WOULD YOU GO ABOUT ASKING THEM FOR THE BETTER PLAN.

 

THANKS FOR ALL YOUR HELP. BARE WITH ME AS THIS IS NOT MY EXPERTISE AND I AM LEARNING ON THE FLY AND TRYING TO TEACH PEOPLE ABOVE ME SO ITS BEEN HARD.

 

ANY OTHER SUGGESTIONS WOULD BE APPRECIATED. WHAT WOULD YOU ASK VALIC IN OUR MEETING IN A WEEK? ITS MORE OF A GENERAL ANNUAL MEETING AND NOT A NEGOTIATION MEETING, BUT MY BOSS SAID I CAN ASK PRETTY GOOD QUESTIONS TO START THIS PROCESS MOVING.

 

THANKS AGAIN.

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Daniel:

 

Per you below:

 

If you can get VALIC to reduce their M&E or better yet convert (without surrender charges) the entire plan out of the group annuity contract & into VALIC's Mutual Fund Platform (under which you could offer low-cost index funds & non-proprietary funds from Fidelity, Vanguard, T.Rowe Price, DFA, etc.) that would be a great alternative.

 

HOW CAN I GET INFO ON THIS ACCOUNT AND TO DETERMINE ITS TRULLY AN OPTION SO WHEN I MEET WITH VALIC I CAN BE INFORMED INSTEAD OF THEM BLOWING ME OFF. I CALLED VALIC, BUT FOR INFO LIKE THAT THEY WANT YOU TO TALK TO THE LOCAL REP AND I DON'T WANT TO DO THAT.

 

IS IT TRULY REFERRED TO AS "VALIC'S MUTUAL FUND PLATFORM"????

 

Thanks,

 

Tampa Gator

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Guest Daniel Clark

John;

 

My firm was retained (approximately 2-3 years ago) by a non-profit hospital to do a vendor search for alternatives to existing 403(b) vendors - at that time ING, VALIC & Lincoln. The search/selection Committee established criteria early on that specifically excluded annuity-only vehicles (as a major motivation for the search was to obtain lower expense structures for participant use). We included incumbents as bidders but made it absolutely clear that annuity-only bids would not be considered responsive to hospital objectives.

 

The representative from VALIC brought in the American General Financial Corp product which was a genuine mutual fund platform, and fairly attractive. I know the VALIC rep was not pleased, but I believe they figured that something was better than being eliminated entirely.

 

As I recall, the AGFC offer was attractive in that assets transferring to it from the VALIC product would have surrender charges waived. The contract they offered would have had a five year term with recourse. We also required waiver for change in control, and a few other items. AGFC was not the winning bidder.

 

In general, your organization needs to take the lead in managing its plan, rather that let the vendor marketplace define what you get.

 

DC

 

 

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The Q & A's are flying!

 

 

IMO, I believe that Dan Clark has given all of us concise action steps that will help you get your organization in the right direction.

 

My interpretation of the logical and reasonable procedure of initiating the "Reform Movement" within an organization thus far is:

 

Get the official plan document or a signed copy and understand what the document states. This is the only document that will give you details of the contract. If you have multiple providors you get each plan document so as to understand how the deferred benefits package works together. You must also establish whether your company's plan is subject to ERISA compliance.

After these are in hand and understood you begin with:

 

The first step is to get the fiduciaries to recognize thier repsonsibility to the employees. Provide them with examples of your current situation compared with a better benchmarked alternative.

 

The second step is to establish the structure of the currently expensive plan, its impact on the employee, and identify liabilities to not only the organization but to the fiduciaries, and especially to the fiduciaries.

 

Third step may be to encourage the decision makers to create or realize, that they DO have options and you can provide them with some of those options.

 

The forth step will probably be something like; they will be overwhelmed and need and seek some outside advice from legal or financial expert or recognize that you can provide them with alternatives.

 

Somewhere along the line an investment plan should be established and the Request for Proposal process should begin after identifying the the specific parameters of your RFP.

 

I'm not sure where it goes from here, but maybe someone else can offer a logical series of events that MUST take place first. Then move on to the second...

 

In my brief experience with these issues, it is that change is difficult(and time consuming) for all of us, but if we move in a logical and methodical direction, we'll end up nearer to our goals.

 

Resectfully and patiently,

Warren P.

 

 

 

 

 

 

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Guest Garry

I'm still hoping my company will switch to TIAA-CREF. However, I'm still working with Valic. I spoke with my Rep yesterday and he has put in a request with Valic's underwriters to reduce the M&E fees for our plan. He told me that it would cut down on his commissions. Oh well! He doesn't know how much they can come down, but I'll find out next week. Also, they do offer a mutual fund product that is not an annuity, but to get in this plan a company must have at least $10M in assets. My company has $5M. They also offer the Schwab self directed account. But I don't know of anyone who uses it. Also, there's been some talk about Valic employees not using Valic's own products for their retirement plan. According to my Rep (and I have to take his word for it) they do invest in the same products that they offer companies, but they pay lower expenses.

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Gary:

 

That $10 million limit could be made up. I am meeting with VALIC next week and I will be asking the same types of questions and then we can compare our notes.

 

As for the reduction in his commissions. Hmm, he is happy and your 250 employees (guess) are told to bend over. Oh well.

 

Lets hope it works out for both of us. DOWN WITH VALIC!!!!!!!!!!!!!

 

Tampa Gator

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My post of 16 August failed to give credit for these "nail in the coffin" statistics regarding to the compounding costs association with high fees.

A CEO or a union leader that can't understand the impact on these numbers is in the wrong job--they certainly haven't earned being in a leadership position. There is just so must opportunity cost because of folks who should know better to crunch the numbers.

 

Thanks to Albert J. Fredman for his work in the May 2002 AAII Journal piece.

 

Ted

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I believe you should have seen this information before.

 

Fairfax VA has what I consider a model 457 plan.

 

Fairfax County uses three vendors:

VALIC (but by negotiations by HR and insistence of focus groups of employees, VALIC can not and does not provide annuities to Fairfax County employees.) VALIC does charge 26 basis points on top of the Expense Ratio. Therefore Fairfax employees can buy Vanguard Index 500 at Expense Ratio of 0.18 plus 0.26 = 0.44. Employees can also buy Vanguard Total Bond Index Fund at Expense Ratio of 0.22 plus 0.26 = 0.48.

 

All three vendors provide group financial education and and one-on-one financial planning. HR Department also provides group financial education.

 

I believe such education is fundamental, but it but be negotiated for and "managed" by the HR Department.

 

Other vendors are:

ICMA-RC

and

T. Rowe rice.

 

For more information call Paul Brown in Human Resourses, 703-324-4916 and pick his brain. I don't he was believe on the job at the time when Fairfax's HR Department sold the 457 changes to the leadership, but he should be able to help.

 

Also FYI:

 

Expense Ratios for the products sold by ICMA-RC average about 0.91

(range is from 1.50 to 0.42. Outside this average and this range are the low cost leaders with Expense Ratios of 0.29 for Vantagepoint BROAD MARKET INDEX; 0.27 for VantagePoint 500 Stock INDEX; and 0.28 FOR VP CORE BOND INDEX. ICMA charges an annual maintenance fee of $18 per year, deducted $4.50 per quarter.

 

Expense Ratios for the products sold by T. Roew Price average about 0.82 (range is from 1.00 to 0.45. Outside thisaverage and this range is the low cost leader with Expense Ratios of 0.35 for Equity Index 500. T. Rowe Price charges an annual maintenance fee of from $10 to $5 per year, deducted $2.50 to $1.25 per quarter.

 

The HR Department publishes quarter performance data with Expense Ratios and cost clearly highlighted. Performance for each fund is provided by:

 

Fund Category (Small/Med Cap; International; Large Cap Core/Growth; Large Cap Value; Index; Fixed Income; MM; Stable/fixed; Asset Allocation Portfolio funds.

 

Name for Fund

 

Performance

2nd Quarter

YTD

3Yr

5Yr

10Yr

 

Press On.

 

Ted

 

 

 

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Guest Garry

Ted, I assume Faifax County is able to work out these deals with these vendors because of the size of the county workforce. We're probably talking about thousands of employees. I believe it would be hard for smaller companies to get the same deal. I've been trying to get Valic to reduce our fees. I hope I'm successful. I'll know more next week.

 

Garry

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