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Scottyd

Calstrs Releases 403b/457b & Compliance Tpa Rfp

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SACRAMENTO, CA – The California State Teachers' Retirement System has launched a search for one or more firms that are experienced in administering deferred compensation plans for new services that CalSTRS will offer later this year.

 

The final filing date for proposals is March 26, 2007, with selection(s) expected by May 2007. A copy of the request for proposal is available at www.CalSTRS.com/rfp.

 

The Request for Proposal consists of two components and a firm may bid on one or both. One part is serving as third party administrator for recordkeeping of assets for CalSTRS' supplemental retirement savings program for its members. This program will be expanded from its current offering of a 403(b) plan to include a Roth 403(b) and a 457(b) plan. The contractor will perform all recordkeeping and trust functions and act as custodian of program records and assets.

 

"With the expansion of our supplemental retirement savings program, we are at the inception of an unprecedented change in how we serve our members," said Jack Ehnes. "California's educators will have investment vehicles to secure their retirement and from a provider they trust."

 

Additionally, CalSTRS seeks a third party administrator for compliance and administration services it plans to offer to school districts. Proposed federal regulations impose a greater responsibility for school districts to manage their 403(b) programs. CalSTRS will provide a service to school districts that may otherwise have trouble complying with these proposed regulations.

 

With a $157.9 billion investment portfolio, the California State Teachers' Retirement System is the second-largest public pension fund in the United States. It provides retirement, disability and survivor benefits to California's nearly 800,000 public school educators from kindergarten through community college.

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SACRAMENTO, CA – The California State Teachers' Retirement System has launched a search for one or more firms that are experienced in administering deferred compensation plans for new services that CalSTRS will offer later this year.

 

The final filing date for proposals is March 26, 2007, with selection(s) expected by May 2007. A copy of the request for proposal is available at www.CalSTRS.com/rfp.

 

The Request for Proposal consists of two components and a firm may bid on one or both. One part is serving as third party administrator for recordkeeping of assets for CalSTRS' supplemental retirement savings program for its members. This program will be expanded from its current offering of a 403(b) plan to include a Roth 403(b) and a 457(b) plan. The contractor will perform all recordkeeping and trust functions and act as custodian of program records and assets.

 

"With the expansion of our supplemental retirement savings program, we are at the inception of an unprecedented change in how we serve our members," said Jack Ehnes. "California's educators will have investment vehicles to secure their retirement and from a provider they trust."

 

Additionally, CalSTRS seeks a third party administrator for compliance and administration services it plans to offer to school districts. Proposed federal regulations impose a greater responsibility for school districts to manage their 403(b) programs. CalSTRS will provide a service to school districts that may otherwise have trouble complying with these proposed regulations.

 

With a $157.9 billion investment portfolio, the California State Teachers' Retirement System is the second-largest public pension fund in the United States. It provides retirement, disability and survivor benefits to California's nearly 800,000 public school educators from kindergarten through community college.

 

Scotty,

 

Can you clarify? Does this mean that STRS is simply seeking administrative services to augment existing district plans? This would not make much difference to investors if their programs offer poor choices.

 

Fortunately, I was able to work through the carpal tunnel syndrome and pound this out. :)

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Guest Sierra

 

SACRAMENTO, CA – The California State Teachers' Retirement System has launched a search for one or more firms that are experienced in administering deferred compensation plans for new services that CalSTRS will offer later this year.

 

The final filing date for proposals is March 26, 2007, with selection(s) expected by May 2007. A copy of the request for proposal is available at www.CalSTRS.com/rfp.

 

The Request for Proposal consists of two components and a firm may bid on one or both. One part is serving as third party administrator for recordkeeping of assets for CalSTRS' supplemental retirement savings program for its members. This program will be expanded from its current offering of a 403(b) plan to include a Roth 403(b) and a 457(b) plan. The contractor will perform all recordkeeping and trust functions and act as custodian of program records and assets.

 

"With the expansion of our supplemental retirement savings program, we are at the inception of an unprecedented change in how we serve our members," said Jack Ehnes. "California's educators will have investment vehicles to secure their retirement and from a provider they trust."

 

Additionally, CalSTRS seeks a third party administrator for compliance and administration services it plans to offer to school districts. Proposed federal regulations impose a greater responsibility for school districts to manage their 403(b) programs. CalSTRS will provide a service to school districts that may otherwise have trouble complying with these proposed regulations.

 

With a $157.9 billion investment portfolio, the California State Teachers' Retirement System is the second-largest public pension fund in the United States. It provides retirement, disability and survivor benefits to California's nearly 800,000 public school educators from kindergarten through community college.

 

Scotty,

 

Can you clarify? Does this mean that STRS is simply seeking administrative services to augment existing district plans? This would not make much difference to investors if their programs offer poor choices.

 

Fortunately, I was able to work through the carpal tunnel syndrome and pound this out. :)

 

 

At one time a PERS like the CalSTRS could offer directly to its members a 403(b) fixed and variable annuity. The Revenue Ruling that permitted this has long been revoked by the IRS. So when the CalSTRS woke up more than 10 years ago and decided to go into the 403(b) businees they were too late. But were they? Rather than accepting their plight they used their position of trust to become a "403(b) broker/dealer". The CalSTRS is not the investment provider (as one would assume) for the "CalSTRS VIP 403(b) PROGRAM" it is simply a middleman between the teacher/investor and the no-load investment funds on its platform. In addition to the no-load fees paid by the teacher in the form of expense ratios CalSTRS VIP 403(b) PROGRAM collects $50 as a loan fee, $50 as a Custodial Fee and 0.52 percent as a Wrap Fee. I will go as far as to say that the CalSTRS is making a handsome profit on the backs of the teachers that trust them to do the right thing. Is this not a violation of law?

 

ScottyD, what say you?

 

Peace and Hope,

Joel

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Joel,

 

 

I can't comment much at this point but can tell you that CalSTRS is not allowed to make a profit on this plan, so I don't agree with you that CalSTRS is profiting on the backs of employees. The goal of the RFP is to lower costs and expand services. CalSTRS is not a broker/dealer, they subcontracted the work to citistreet, who won a competetive bid several years ago. I believe we will see some positive changes in favor of the employees and participants.

 

 

To correct the record, CalSTRS does not charge a $50 custodial fee (unless you are in the self-directed account). Most vendors charge a loan fee as it is expensive to process loans and will be more expensive in the future as vendors must get district approval.

 

ScottyD

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Joel,

 

 

I can't comment much at this point but can tell you that CalSTRS is not allowed to make a profit on this plan, so I don't agree with you that CalSTRS is profiting on the backs of employees. The goal of the RFP is to lower costs and expand services. CalSTRS is not a broker/dealer, they subcontracted the work to citistreet, who won a competetive bid several years ago. I believe we will see some positive changes in favor of the employees and participants.

 

 

To correct the record, CalSTRS does not charge a $50 custodial fee (unless you are in the self-directed account). Most vendors charge a loan fee as it is expensive to process loans and will be more expensive in the future as vendors must get district approval.

 

ScottyD

 

 

Would you care to comment on the 52 bp as a Wrap Fee? Isn't this particular fee commonly charged by B/D and insurance companies? They may not be offcially a B/D but they are collecting a fee that is common to B/D. This 52 bp Wrap Fee is much, much higher than any of the expense ratios of the underlying investment options. I find this sharklike!!

 

I bet the excess portion of this Wrap Fee is utilize to subsidize the operation of the primary DB CalSTRS. I find it hard to believe that the entire 52 bp is used solely to administer the CalSTRS 403(b) Program. If this is true the CalSTRS is indeed in violation of the law. I'll bet you a pastrami sandwich that the expense ratio for the DB CalSTRS ($150 billion plus in assets) is no more than 10-20 bp. What say you?

 

Best,

Joel

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Joel,

 

I'm a little shocked to even be having this conversation. DC plans cost money to run and this plan does not utilize revenue sharing, so it must charge an explicit fee - would you rather it be hidden? The fee was 95 bps last year and that was way too much, the recordkeeper was collecting the money and making a huge margin, but none of the money went to subsidize the DB plan. The DC plan fees wouldn't even make a splash in the DB plan, even if all fees collected were retained by CalSTRS and used to subsidize the DB plan we would be talking about $1,000,000 being deposited into a $150 billion DB plan......not even a drop in the bucket.

 

The plan charges an explicit, asset based fee, it has fee transparency on top of no-load funds, non revenue sharing funds - this is a good thing. Could the fee be lower? I certainly hope so and that is why there is an RFP.

 

You can find it sharklike all you want, but the fact of the matter is that as the plan grows the asset based fee will get lower and lower since CalSTRS can't make a profit on it. This is exactly as it should be, a plan that will pass the economy of scale benefits onto the participants. There is a cost to running a plan, it is not free and those costs must be borne by someone (and the CalSTRS DB can't subsidize the CalSTRS DC).

 

I haven't been happy with this plan in the past, but it has made some good changes and more are on the way. I find it surprising that you would be attacking the very progress we all fight for on this board.

 

As for the cost of the DB plan, I believe it is around 13bps, give or take, maybe lower. Of course they have $150 billion + and the DC has about $150 million.......I'd be willing to bet that if the DC plan had just $1billion in assets (hopefully within the next five years) the costs would fall to less than 10 bps. Its all about the number of participants and asset size - the more assets the better pricing.

 

ScottyD

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You can find it sharklike all you want, but the fact of the matter is that as the plan grows the asset based fee will get lower and lower since CalSTRS can't make a profit on it. This is exactly as it should be, a plan that will pass the economy of scale benefits onto the participants.

 

ScottyD

 

Scotty,

 

This would be nice; however, I'm skeptical that it will actually occur. If the experience of mutual funds is any indication, then costs will not decline significantly. Over the past 20 years, mutual fund assets have exploded, and costs have not come down as much as might have been expected. In fact, with 12b-1 fees, many funds have raised fees even as their assets have increased.

 

I know that STRS is not a mutual fund company, but it must be tempting even for a public entity to find reasons to avoid lowering fees when economies of scale allow for that.

 

Overall, though, it looks like STRS is trying to improve its 403b offering, and it should be commended for that.

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Guest Sierra

 

You can find it sharklike all you want, but the fact of the matter is that as the plan grows the asset based fee will get lower and lower since CalSTRS can't make a profit on it. This is exactly as it should be, a plan that will pass the economy of scale benefits onto the participants.

 

ScottyD

 

Scotty,

 

This would be nice; however, I'm skeptical that it will actually occur. If the experience of mutual funds is any indication, then costs will not decline significantly. Over the past 20 years, mutual fund assets have exploded, and costs have not come down as much as might have been expected. In fact, with 12b-1 fees, many funds have raised fees even as their assets have increased.

 

I know that STRS is not a mutual fund company, but it must be tempting even for a public entity to find reasons to avoid lowering fees when economies of scale allow for that.

 

 

Scotty: Why did the DB CalSTRS first enter the 403(b) business 25 years after they decided in the early 1970s not to be a direct provider of 403(b) products as authorized by a Revenue Ruling. It seems to me that if they could no longer be a direct investment provider as authorized by that revoked Revenue Ruling then they should not have entered the 403b arena 25 years later from the back door and be simply a middleman.

 

Having said that why should a teacher who has the Vanguard Group on his platform use the CalSTRS 403b platform with the same Vanguard menu. Am I missing something here?

 

Joel

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Joel,

 

How the hell should I know. I don't even know what rev rul you are referring to and I, nor the current leadership have the ability to know what was going through the minds of the leadership 25 years ago. What is the point of even asking such as question - who cares? What is important is that the CURRENT leadership DOES see the 403(b) as important and are doing a lot of good things to see that it is improved (AB 2506 and AB 2462).

 

As for Vanguard, I've placed many clients at Vanguard over CalSTRS (in fact the vast majority). However, with lower fees CalSTRS can be competetive, especially for new accounts (rememeber, Vanguard charges $15 per fund, plus $10 for each index fund under $5k). Vanguard is also not available in many districts. In addition, CalSTRS will offer a wider diversity of funds if that is important to people.

 

If history is an indicator, the fees will come down and continue to come down, they've been cut by 50% over the past year and may be cut by that much again this year. CalSTRS is a public entity and must account for its actions in the public arena, if they don't make good on lowering fees when they have the ability - then you have my permission to come after them all you want. But to come after them now, after they've begun reforming and begun taking steps that benefit current participants and future participants strikes me as absurd.

 

You know I love you Joel, you are a 403(b) warrior and I appreciate you and your contributions, but why don't you give this a chance, I think that as time goes by you'll be pleasantly surprised.

 

ScottyD

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Additionally, CalSTRS seeks a third party administrator for compliance and administration services it plans to offer to school districts. Proposed federal regulations impose a greater responsibility for school districts to manage their 403(b) programs. CalSTRS will provide a service to school districts that may otherwise have trouble complying with these proposed regulations.

 

 

 

Scotty,

 

I can see this as a real positive. School districts that otherwise might get stuck with a high cost provider could use this STRS program as an alternative.

 

Will school districts be able to have more than one provider under the new regs? Even though STRS may provide a good plan, I would still prefer to deal with a provider such as Vanguard or Fidelity directly. I'm concerned that my district will stop providing those choices and instead choose a high cost alternative, which I'm sure outfits like Security Benefit will be pressing for.

 

 

 

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APTeacher,

 

The new regs do not require one provider, though I believe you will see many districts goto one provider or just a handful. It doesn't solve all their problems, but limits some of them. In California you will not see single vendor because of ins code section 770.3, though you may see a vendor list that is greatly reduced and you may see Vanguard excluded. This has happened in many districts in California (and I think it was not done right).

 

CalSTRS is also going out to RFP to start a compliance entity (TPA) to do compliance work for school districts in California, I believe they will have policies that are fair and my hope is that Vanguard will remain on the list. Some TPA's are putting the honous on Vanguard to communicate with the TPA directly for all withdrawals, hardships, rollovers, etc...instead of creating a system that allows Vanguard to continue to work efficiently while abiding by all guidelines. For instance, some TPA's require Vanguard to notify them if there is a distribution, as you could imagine, if Vanguard had to call each district's TPA every time there was a distribution (think thousands of school districts across the US) they could not operate profitably. An effort needs to be made on the TPA's part to communicate with Vanguard that their internal systems should identify which districts require a signature for distribution and then advise Vanguard that they cannot process distributions without a district signature. This system allows both entities to be in compliance and keeps costs down at both while allowing a low cost provider to compete.

 

Unforntunately the TPA's that are kicking out Vanguard are actually doing so because they don't want Vanguard as a competitor. Without Vanguard as a competitor they can act as if they are the low cost provider. Its a shame and I don't believe CalSTRS will compete in such a shameful manner.

 

ScottyD

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How the hell should I know. I don't even know what rev rul you are referring to and I, nor the current leadership have the ability to know what was going through the minds of the leadership 25 years ago. What is the point of even asking such as question - who cares?

 

Scott:

 

I BET THE CalSTRS Board of Trustees care very much that they did not take advantage of the Revenue Ruling like a number of DB TRS Plans did during that era. Sure, it is looking at "what could have been".

 

If they did take advantage of the Ruling and establish their own 403(b) Plan the "teacher" would not have fallen victim to the high priced product. Imagine, a no-load 403b plan for teachers statewide, operated by their own DB CalSTRS for the past 35-40 years. THAT REALLY WOULD HAVE BEEN THE GOLD STANDARD! But "who cares"?

 

In closing, I thought as an RIA based in California and one that specializes in the 403(b) for the k-12 community you would appreciate knowing of that important Revenue Ruling which has since been revoked. I guess I was wrong.

 

Peace and Hope,

Joel

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Joel,

 

I don't really care about a revoked ruling that I can't utilize today. I have to live and work in today's environment, not yesterdays. If I invent a time machine, I'll ask for more info from you on that rev ruling, until then I'll work to make things better in todays environment.

 

ScottyD

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Joel,

 

I don't really care about a revoked ruling that I can't utilize today. I have to live and work in today's environment, not yesterdays. If I invent a time machine, I'll ask for more info from you on that rev ruling, until then I'll work to make things better in todays environment.

 

ScottyD

 

 

Hey what's going on out there in California...first its Steve trying to gag me and now its you with your sarcasm. I'm taking cover!

 

Peace and hope,

Joel

 

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