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Hi AP,

I found the discussion quite interesting from John and Danc of the complexity of plans. Our 457 plan is really quite simple, but still too expensive in my opinion. We have a list of all no load mutual funds and the TPA cannot sell 403bs, only the 457 plan. (That restriction took care of the fix annity ripoffs) There are three types of fees: 15 basis points for the TPA, revenue sharing on most funds, but not the Vanguard funds (No surprise there) and the expense ratio of the mutual fund. Because our committee is tough, knowledgeable and demanding, we forced the TPA to disclose all of these fees to the participants. Even as tough as our committee was, the TPA and the financial consultant, ignored our demands for a detailed budget of the expenses of the plan: educational seminars, administration, website, bonuses paid to reps and sales materials that justified the fees. I could not imagine what our plan would have looked like in terms of choices and costs, if we were not involved.

 

This is no small operation, it’s the LAUSD 457 plan with over 100,000 employees. It does not have to be as complicated as John were talking about. Heaven forbid, you know if it is, the employees are getting charged way too much because there are probably no employee oversight committee that is knowledable enought to take on the sales jobs. The old sales job of "the expenses will pay for itself IF the performance is great," it pure bull. And if it does pay for itself, its pure luck because it is not long lasting.

 

Good News: I believe you know that the LACOE has TIAA CREF for its 457. Also, CalSTRS has recently passed into law their own version of TPA for the 457 statewide for all K12 school districts.

Take care,

Steve

 

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In response to AR Teacher:

 

You said: I move that we abolish 401k, 403b, and 457 plans and just allow folks to invest in individual retirement accounts. Is there anything wrong with simply allowing folks to invest pre-tax dollars directly with funds? Why do we need such complex programs with hundreds and hundreds of pages of rules and regulations?

 

I say: Are you aware that many employers use retirement plans (qualified for preferential tax treatment) as a way to attract & retain employees? And further that the position of the federal government & the IRS has been to promulgate rules (including non-disrimination reules that prevent employers from skewing benefits only to the high-paid & business owners) that such plans must comply with in order to obtain such favorable tax treatment?

 

Do you really think that it would be wise to overhaul the system without first identification of an underlying philosophy as a guide for such radical change? There is a long history here and employers and employees alike have built in expectations as to how the government will provide tax incentives in exchange for a private retirement system that does cover substantial rank & file employees?

 

The system is not built upon a philosophical foundation of low cost & to go to that at this point in the game is (in my opinion) not realistic. I'd be interested in your underlying thoughts regarding your earlier post. Should low cost be the goal at the exclusion of ALL other objectives with respect to a private retirement system???

 

Thanks,

 

Danc

 

 

Dan,

 

All I am suggesting is that the 401k, 403b, and 457 plans have seemed to have created a bureaucratic nightmare. My underlying philosophy here is simplicity: allow each worker to set aside money in his/her own personal account. Period. Low cost is not really my primary objective here, although I think that would follow. Employers, I am sure, would be creative enough to find other incentives to hire good employees.

 

 

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I think that without the incentives of a good match, you'd find far less people willing to contribute to their retirement plans.

 

Many school districts have approx. 30-40% participation. (some more, some less.) (see link)

 

That would be a terrible rate in a 401k plan, most have around 70% participation. (see link)

 

Because it is an incentive, it's also encouraged by employers (especially because of top heavy rules) While it may be frustrating in many senses, it's also a very necessary benefit to employees.

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I think that without the incentives of a good match, you'd find far less people willing to contribute to their retirement plans.

 

Many school districts have approx. 30-40% participation. (some more, some less.) (see link)

 

That would be a terrible rate in a 401k plan, most have around 70% participation. (see link)

 

Because it is an incentive, it's also encouraged by employers (especially because of top heavy rules) While it may be frustrating in many senses, it's also a very necessary benefit to employees.

 

 

 

Vince I would agree that participation in 403 b plans are low, but could it be that most people eligible for 403 b plans have others sources of retirement income in the form of pensions. I would be willing to bet that the number of people contributing to a 401 k and also have a pension is very low.

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Very good point indeed. Good question to ponder - if they didn't have those pensions, how much would participation change?

 

 

Here's a scarier piece of data: Year 2000 taxpayers who contributed to an IRA: 15.1 million. Only 9.4% of those eligible.

 

Now you could make the same point that contribution may be so low because of ready access to 401ks 403bs, and pension plans. But... still.. 9.4% is a scary number.

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This topic has been debated in the past with no consensus. Having worked in the private and public sectors, the main reason (other reasons too) why public sector workers have a less participation rate is access. I still remember getting herded down to the auditorium and looking at charts that showed how your monthly contributions added up over many years. I was shocked to see how the compounding and growth worked with my little ole $50 or $100 a month in a 401k plan. The point is that my employer was required to reveal the plan to all new employees.

 

When I went to work for LAUSD, nothing like the private sector presentation ever happened. I started my 403b plan by meeting a TSA agent at a conference. A few years later, I had to find the right office to get a list of mutual funds and the lady would NOT send any paperwork to me. She literally told me over the phone all 30, that’s right 30, mutual funds available on the list. Then I had to look them up in the newpaper to find out which were no loads. Years later, I wrote an article for the teacher's union newspaper about this lunatic practice called the "Don't ask, Don't tell" policy that all school districts have. If you don't ask, district’s will never tell you about their plan. Sadly, LAUSD, has a pretty good 403b plan, but few, very few people know all their options.

 

The second reason is educators’ thinking. They will work long enough to earn enough money from their pension plan to cover their retirement years in comfort. It’s a kind of "institutional thinking." The district takes care of me and the pension plan takes care of me. That’s fine if you are healthy enough to work at least 30 years and you love to teach. But as you can see, there are incredible risks with this thinking. Furthermore, people never calculate the required ordinary income taxes on your pension benefit and the 2% increase per years is not linked to inflation because it is a fixed rate. Over time, the great benefit turns out to be not so good.

 

Just some thoughts,

Steve

 

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Guest Sierra

 

The second reason is educators’ thinking. They will work long enough to earn enough money from their pension plan to cover their retirement years in comfort. It’s a kind of "institutional thinking." The district takes care of me and the pension plan takes care of me. That’s fine if you are healthy enough to work at least 30 years and you love to teach. But as you can see, there are incredible risks with this thinking. Furthermore, people never calculate the required ordinary income taxes on your pension benefit and the 2% increase per years is not linked to inflation because it is a fixed rate. Over time, the great benefit turns out to be not so good.

 

Just some thoughts,

Steve

 

=====================================================================

Steve: I could not agree with you more. Your analysis may very well influence our recent retiree Ralph to effectuate a lump-sum rollover transaction from his CalSTRS account.

 

Peace and Hope,

Joel

 

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Joel,

What…???

You are taking my post out of context. I was offering an explanation as to possible reasons why educators do not use 403b to supplement their pensions and why they SHOULD supplement. You know my position. I have never suggested nor implied the lump-sum option as a general rule. To take people from their institutional thinking (defined benefit plan) straight to a non institutional thinking (i.e., defined contribution plan), would be disastrous. People need time and support for such a drastic move. Perhaps in a generation or two, when people learn to invest we could do away with pension plans, but we are not there yet.

Steve

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Guest Sierra

Joel,

What…???

You are taking my post out of context. I was offering an explanation as to possible reasons why educators do not use 403b to supplement their pensions and why they SHOULD supplement. You know my position. I have never suggested nor implied the lump-sum option as a general rule. To take people from their institutional thinking (defined benefit plan) straight to a non institutional thinking (i.e., defined contribution plan), would be disastrous. People need time and support for such a drastic move. Perhaps in a generation or two, when people learn to invest we could do away with pension plans, but we are not there yet.

Steve

 

 

You are entirely accurate with this "institutional thinking" on the part of the k12 crowd. The public post k-12 crowd got away from this institutional thinking more than 40 years ago when they were given an opportunity to participate in a DC Plan called TIAA-CREF as an alternative to the DB CalSTRS. At that point the average college teacher was as well versed about the ways of Wall Street as the average k12 teacher. Why was the k12 crowd left behind?

 

Joel

 

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Guest Sierra

 

Joel,

What…???

You are taking my post out of context. I was offering an explanation as to possible reasons why educators do not use 403b to supplement their pensions and why they SHOULD supplement. You know my position. I have never suggested nor implied the lump-sum option as a general rule. To take people from their institutional thinking (defined benefit plan) straight to a non institutional thinking (i.e., defined contribution plan), would be disastrous. People need time and support for such a drastic move. Perhaps in a generation or two, when people learn to invest we could do away with pension plans, but we are not there yet.

Steve

 

 

You are entirely accurate with this "institutional thinking" on the part of the k12 crowd. The public post k-12 crowd got away from this institutional thinking more than 40 years ago when they were given an opportunity to participate in a DC Plan called TIAA-CREF as an alternative to the DB CalSTRS. At that point the average college teacher was as well versed about the ways of Wall Street as the average k12 teacher. Why was the k12 crowd left behind?

 

Joel

 

The average K12 teacher in 2007 is much more versed today on the ways of Wall Street than the educators at the public institutions of higher education were 40 years ago. So, based on your learning curve, it is long over due to give the k12 crowd a CHOICE of plans. The reason they have not and will not get the DC as an ALTERNATIVE choice is because of the public employee unions. The unions derive political power (internal and external) by keeping the DB in place and lying to their membership every chance they get by asserting that the DC is inferior to the DB and, therefore, is best used as a supplemental plan. The unions would rather live with a watered down DB formula for the unborn than having a choice of plans.

 

Steve, do you know anyone at the higher education level that has complained or is sorry that he elected the DC alternative? Do you know anyone at the higher education level that is/has voluntarily annuitized his DC balance upon retirement and, thus, converted it to a lifetime "pension"?

 

Peace and hope,

Joel

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Guest Sierra

Joel,

Just curious. How long have you been a libertarian?

Steve

 

 

libertarian: "A person who advocates full civil liberties" I sure am! And I trust you are too. Are you not?

 

Don't you hold very dear your property rights, a very critical civil liberty? Of course you do!! Assume the taxpayer of California has contributed $500,000 to your DB pension. Is this not your property? Of course it is. Is it not deferred compensation? Of course it is. But do you have full property rights when it comes to the distribution method? No you do not! You must annuitize! Why? Because the union says you are unable to manage it yourself! What arrogance!!

 

Q.: Why were the educators at the higher education level (forty years ago) given a greater degree of property rights when it comes to the taxpayer funding of their retirement benefit? Why is there two schools of thought? The k12 union says you must annuitize while the higher education union says it is up to the individual educator.

 

Peace and Hope,

Joel

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Joel,

 

We agree on just about everything, but for the life of me I can't understand why you cannot see why folks value the defined benefit plan:

 

1) They like the certainty of benefits.

 

2) They like the fact that they can properly plan for their retirement when they have that certainty. They like the fact that they can go to the CalStrs web site and calculate EXACTLY what their pension will be. With that knowledge, they can make appropriate retirement plans.

 

3) At a time when so much risk and liability are being foisted onto the individual (just think health care insurance), folks like the idea that when it comes to retirement, their own personal risk is reduced.

 

I see two strong points that you have made regarding DC plans:

 

1) Control of one's own money.

2) The ability to pass on this money to one's heirs.

 

Yes, those points have a good deal of merit. As for me, they are outweighed by the positive aspects of a DB plan.

 

As I have said before, this does not have to be an either/or situation. I LOVE the fact that I have the certainty of a DB AND the opportunity to contribute to a 403b plan that I will not have to annuitize. It is the best of both worlds.

 

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Joel,

You did not answer my question. How long have you been a libertarian? Recently and or your entire life…

It partly explains your hated of unions and the public pension systems.

 

FYI, I may not be where I am today if it weren’t for unions. My mother worked for MMM during the 50s and 60s when I grew up. She was a blue collar worker, a union member and she managed to save enough money, a couple of thousand for me to attend my first year of college.

 

If my mother had the type of working conditions that exist now at the same MMM plant in my small hometown farming community in northern Wisconsin, she would be fired every six months so that she would not get any benefits, no raises, minimum wage scale forever. I kid you not. I was shocked! These conditions are occurring NOW. Of course the union was abolished decades ago. I would be very poor with not the same opportunities that I had with my mother’s union. Times were better in the 1960s than they are now!

 

Libertarians believe in individual and property rights as you said, but politically they go much farther than that, abolishing all unions, public education, and some extremists want to abolish public roads, utilities, turn everything that is now public into a private enterprise. It’s not a pretty sight. It’s all about individual and their rights.

 

I think there is tremendous value in having the common good. Or as our founding fathers wrote “to promote the general welfare..”” Perhaps someday when all people are on the same playing field, then we could see something politically different from what we have now. I don’t know what that is but to limit it just to individual rights only, without the public good, would render us to a uncivilized society build on private police, barricaded communities and gangs everywhere else. Futuristic ######s and books have been written about this horrific image. In this day and age, we are not that far from it.

Just some thoughts,

Steve

 

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