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Dan Otter

The Best K-12 403(b) In Nation?

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We have just posted a story about the 403(b) plan offered by the Littleton Public Schools of Colorado. Here is a district that gets it. They initiated a Request for Proposal (RFP) to choose one quality vendor that would offer attractive, low cost investments to employees, provide a high level of service and education, plus ensure that the district is in compliance.

 

Through the RFP process the district selected TIAA-CREF. Plus, the district makes available a 457(b) plan (also offered through TIAA-CREF). For the icing on the icing, the state of Colorado makes available a 401(k) plan and provides a 1 percent match to contributions to any of these plans - 403(b), 457(b) or 401(k).

 

This is exactly the kind of evidence we urge employees to show their school districts and other employers. Here is the evidence that quality 403(b) plans can and should be made available. Here is the link to the story:

 

http://www.403bwise.com/features/model403bplans.html#littleton

 

Dan Otter

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Guest Chuck Yanikoski

This district did a lot of things right, but I personally would disqualify them automatically for picking a single vendor. I say this, first, because no one vendor, no matter what it is doing or what it charges, is best for everybody. And second, because competition is almost always a good thing. A monopolist has too many temptations to take advantage of its position -- having at least one other good choice gives you leverage.

 

Littleton gets an A- in my grade book.

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Chuck,

 

Since 1918 the TIAA-CREF organization has evolved into the nation's primary retirement system for the college set. This was accomplished with individually owned annuity contracts issued by TIAA-CREF. Are you saying that this "monopoly" has not served its market with distinction?

 

Joel

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I would have to agree with Mr. Yanikoski. TIAA CREF is a very solid, respectible company; however, their service model is not a good fit for every employee. I can assure you that the school district has a large percentage of employees that want personal service and want someone to meet with them one-on-one. They are not going to get that from TIAA-CREF. Now, I have read where TIAA CREF is changing it's model somewhat to provide more personalized services (and this may be a district they are piloting this change with), but that will be a slow process of change for a company like TIAA CREF. Those same employees may be able to access personalized financial advice through an independent planner in their area; however, they are faced with sorting out the knowledgeable ones from the not so knowledgeable.

 

Also, unless TIAA CREF is offering their mutual fund options, you are still talking about an annuity product with it's added expenses. I would think the district would like to offer it's employees a 403(b)7 mutual fund option (Fidelity, Vanguard, etc.) in addition to the TDA. That would offer up low cost competition and a truly different choice of provider while allowing the district to keep control over who is providing investment services to the employees.

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dbmdawg and Chuck,

I disagree with both of you. TIAA CREF is not a company, it is a non profit pension institution that has served the 5000 colleges and universities for decades. Why is it that once they start entering the K12 market, then all of a sudden TIAA CREF becomes something else. They become this static inflexible beast. As long as the fees are tiny, I love static inflexible beasts. All of the other 403b vendors charge huge fees with their so called choices and flexibility. There are very few people who complain about TC, mainly commissioned based vendors and TSA sales people who cannot compete with TC fee structure.

dbmdawg, with all due respect, you don't know what you are talking about regarding the fees and expenses. I own the equity index annuity and pay .36%, which tracks the Russell 3000, minus tobacco stocks. And TC offers one to one service at LAUSD. Only Vanguard has lower fees and the only other company that is a not for profit status. All other companies are for profit.

The last argument is about competition. Where in the world has competition got K12 teachers in the last 45 years, nothing but expensive rip-off annuities from large insurance companies and loaded mutual fund companies. Talk about a monopoly.

If the only vendor is TC for most teachers, the 403b would be reformed for the best interests of educators.

Steve

 

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On personalized service. All the members of my family that use TIAA-CREF for their 403(b) can meet with TIAA-CREF reps one-on-one. All they have to do is to sign up for an appointment.

 

Also, competition and more choices are not always better. Especially if people have limited investing knowlegdge and limited willingness to learn. Talk about easy pickins' for salesman.

 

The only 403(b) vender that I've seen with lower expenses than TIAA-CREF's retirement annuities is Vanguard. Fidelity's fees are higher and Fidelity doesn't provide personalized service.

 

- Alec

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Guest Chuck Yanikoski

I don't have much of anything in particular against TIAA-CREF. On the contrary, my impression is that they have done excellent work at a very good price for a very long time. If you had to pick one company to do business with, you could certainly make a lot of worse choices.

 

But you DON'T have to pick just one company. That's my complaint. And I think that the college experience is actually instructive in that regard.

 

It used to be that TIAA-CREF did have a virtual monopoly in that market, until the courts determined that this was anti-competitive and unfair. In those days, there were a complaints about some of TIAA-CREF's practices, but there was nothing much that participants or even plan sponsors could do about it, except hope that the company would respond. I suppose that sometimes they did, and sometimes they didn't.

 

But now things are different. Although TIAA-CREF still holds an overwhelming share of the higher ed market, there are other choices, and other companies are often selected over TIAA-CREF by employees who have had years of experience with TIAA-CREF. As I said before, this is good on two counts: first, people who want something different, for whatever reason (and maybe they just didn't happen to like their TIAA rep), are able to find something or someone that suits them better; and second, TIAA-CREF has had to become more responsive to the marketplace, something which I suspect has made them a better company, too.

 

Sometimes there are good monopolies, but that is by chance. And even the best monopoly could probably be better. If it has to prove itself every day, then perhaps it will become so. If it doesn't, the odds are against it. It would be unfair to go so far as to say that monopolies are un-American, but the reality is that most progress in this country has been made by competitors facing off against other competitors. Even NASA, a monopoly if there ever was one, did a hell of a lot better when it was competing against the Russians than it has done since the competition went away.

 

I'm still giving Littleton, Colorado an A-. They do not need to play big brother for their employees. A true A+ plan would provide additional choices, and some education about the pros and cons of each

 

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I have great respect for the thoughts and comments of both Chuck and dbmdawg. I would like to add a couple of comments on this issue:

 

• In the Littleton plan TIAA-CREF provides "on-site individual one-on-one counseling sessions on an appointment basis."

 

• Studies show that more vendor choice leads to less participation. I encourage anyone who hasn't read the Vanguard story "Can there be too much choice in retirement plans?" to do so. http://www.403bwise.com/pdf/vcrr_choice.pdf

 

• Two or thee quality vendors is not a bad way to go at all. However, with one quality vendor there is a much better chance to have an education environment instead of the usual sales environment.

 

• While I realize competition typically leads to lower prices, the competition should occur during the RFP process. Plus nothing prevents an employer from conducting an RFP down the road if they are unhappy.

 

I look forward to hearing other's comments on this issue. I fully recognize that Chuck is calling this a quality plan.

 

Dan Otter

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Hi Chuck,

 

An employment based DC Plan can never, never meet the needs and desires of 100 percent of the participants. I feel if the plan is more than satisfactory to at least 90 percent then the plan is doing the job that the employer wants it to do. To satisfy all employees you need to use the IRA.

 

Having said all that, Chuck, can you give us your example of an A+ plan. Not a blueprint but a fully operational plan.

 

Peace,

Joel

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Chuck,

Which company or as you prefer which companies would be in your A+ plan?

Give us specific names.

Which fund(s) in that company?

What are the fees and expenses?

Remember we are only talking about 403b and 457 tax deferred plans with K12 school districts.

If the fees and expenses are lower than either TC or Vanguard, Ill be the first to sign up. Of course there is one catch, they have to be signed up with my school district, but don't worry, there are about 140 vendors available, so the chances are good.

We are waiting....

Steve

 

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Excellent discussion here. To sschullo, it is also from personal experience that I mentioned that TC has not always given personal service. My wife works for a small college that has TC and you cannot always get TC rep to meet with you one-on-one. She has heard several complaints about representatives sent by TC. The last person they sent to the benfits fair was not very knowledgeable or helpful. I assume that LAUSD is the Los Angeles School district? I am sure TC will make sure they have personal counselors available to large employers (big $$$). Smaller employers may not be getting the same service (at least in our experience). If TC can give the same level of service to all the employer groups they are providers for, then I don't see how their competition could survive anyway.

 

Dan, your comments hit the nail on the head. This plan provides for one-on-one service. If an employer group is going to chose only one vendor for their plan, they better make sure the vendor can handle one-on-one counseling. It looks like TC stepped up to the plate.

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Guest Chuck Yanikoski

I would like to make several points in further response:

 

1) Granted that TOO MUCH choice is confusing and counter-productive, the study does not suppot the idea that NO CHOICE is preferable to a reasonable (small) number of choices. My instinct is that NO choice will lead to lower participation, because people who don't happen to like the one choice offered have no alternative except to drop out.

 

2) Whether there is an "education environment" or a "sales environment" will depend on who is doing the educating. If it is a representative of the vendor, it is automatically a sales environment, because the interest of the vendor is to increase contributions. From my point of view, this is actually a good thing. Employees should not just be educated, they should be PERSUADED, to contribute to the plans, and this is most likely to happen in a sales environment. The real difference is that where there is only one vendor you have a non-competitive sales environment. This in turn means that the nature of the presentation is determined mainly by the presenter, over which the actual or potential plan participant has no choice. In a competitive sales environment, employees can refuse to do business with people they don't like (incompatible personality type, not perceived as competent, whatever), and choose to move instead to those that they do like. At Littleton, it sounds like they won't have this option.

 

3) I rarely deal with school districts directly, nor is it my business to evaluate products and vendors (I deal with many different vendors). So I do not know enough to nominate either a specific district or a specific product for any plan. What I would do, though, if I were making this decision for a school district, is to find at least one good low-cost vendor (like TIAA-CREF), at least one high-cost high-service vendor, and at least one in the middle. I would base the latter two not primarily on the specifics of the products (which tend to change frequently), but on the service reputation of the local provider. Perhaps there is no such reputable provider in the Littleton area, but in many places there is at least one, and often several, experienced, respected providers who give excellent support and service for their clients, not just in managing their 403(b) plan but in other financial areas as well. The people who do the best at this are well worth the higher cost. Maybe not for those of you contributing the maximum allowed by law. But if you're putting in $25 a month, and you are getting full across-the-board personal service and advice in return, you are getting a much better deal than TIAA-CREF is likely to be able to give you. And you should have that choice.

 

4) TIAA-CREF is so big that they have the opportunity to employ economies of scale and offer lower costs. But if they offered personal, face-to-face counseling to ALL their clients, their expenses would have to go up a lot. If they are doing this in Littleton, it means they are either charging Littleton more (not so likely) or that they are spreading the costs to their other clients, who are so numerous that no one would ever notice (more likely). This is a model that by its nature cannot take hold across the board. I do congratulate Littleton for negotiating such a deal, though. Or perhaps the school district is paying a third party for the "free" advice.

 

5) I also congratulate Littleton on its willingness to take on what appears to be an enormous legal risk. The school district does have a fiduciary responsibility, but normally this is minimized by offering employees a variety of choices. If the employee makes the final choice, and the vendor does a bad job, well then it's not the employer's fault, because the employee and not the employer made the choice. But when the employer arbitrarily limits the choice to a single provider, then the liability falls squarely on the shoulders of the employer, if things go bad. Should this happen -- and it could arguably stem from just bad investment experience, rather than from company mismanagement -- Littleton will have a hard time wiggling off the hook, I'm afraid. Nice of them to take that on. This is not something that I would recommend as a "model" to other school districts, however, unless Littleton has found someone else to hold them harmless. (Note that this problem does not arise in 401(k) plans, because there the employer does not have the option of having multiple vendors. But in 403(b) they do have the option, so if they refuse it, they take on all the added risk.)

 

 

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What I would do, though, if I were making this decision for a school district, is to find at least one good low-cost vendor (like TIAA-CREF), at least one high-cost high-service vendor, and at least one in the middle. I would base the latter two not primarily on the specifics of the products (which tend to change frequently), but on the service reputation of the local provider. Perhaps there is no such reputable provider in the Littleton area, but in many places there is at least one, and often several, experienced, respected providers who give excellent support and service for their clients, not just in managing their 403(b) plan but in other financial areas as well.

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

Chuck,

 

I assume when you use the term "local provider" you mean the vendor's agent. Would you please give us an example of a high cost vendor that employs reputable agents?

 

Peace,

Joel

 

 

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This is been an enlightening discussion and, for the most part, focused on the the issues. The site continues to need diverse opinions, so that it doesn't become a conduit for TIAA-CREFF business.

 

There are lots of ways to look at choice. Of course, multiple vendors does not equal a better plan. I think we can all agree on that. I like to stay focused on the basics and here is a basic fact, our raison d'être, is the accumulation of wealth, so that we can do more things, have options, as we age.

 

I believe that a model that looks at our constituents' habits and then, utilizing our best fiduciary abiltiies, creates options that each of us would be proud to offer to our son or daughter.

 

Here are the "habits" that have instilled themselves into our constiuents:

 

1). Some people like the investing game. They love researching funds and trying to choose those that have added "alpha" or manager-enhanced return over time.

 

2) Some people want to get advice from people they trust about which pre-screened funds would be best for their particular situation. In this case they want low cost funds, but sometimes they also want funds that are sparkling, exceptional funds with high ratings along a variety of dimensions.

 

 

3) Some people want to make a simple decision to have their money go into one fund that does it all for them, including diversification, so that they don't have to keep making decisions.

 

In my opinion, a model 403b/457 plan would satisfy all these groups by offering the following:

 

1) A "window" to the stock market, so that group one can satify their urge make their own choices.

 

2) A group of low cost mutual funds with high percentile rankings, high sharpe ratios, lower average expenses relative to the peer group, long manager tenure, etc. etc.

 

3) A group of "life-style" or other funds or low-cost annuities, that allow this group to choose one fund and then to "let go" of the investing decisions (allocations, market-timing, etc.)

 

 

I believe that the above criteria, would benefit any school district. Let's keep the dialogue going.

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Why pay 2% for a fund when the same type of investment is available at 0.50 percent? There is a reason why some plans charge more than others. The 403(b), for example, is really not a plan at all but a legal arrangement between the employee and the investment provider. The assets are individually owned through an annuity contract or custodial account agreement. The employer is simply responsible for deducting a pre-determined amount from the employee’s paycheck and sending it off to the investment provider for investment pursuant to the employee’s instructions.

 

The 403(b) arrangement contrasts sharply with the other two popular salary reduction plans, the 401(k) and 457(b). The 401(k)/457(b) are formal retirement plans and as such the law requires the plan sponsor (employer) to perform its due diligence and establish a Board of Trustees, prepare a written Trust instrument, write a Plan Document, appoint a Plan Administrator and write a Summary Plan Description. The 403(b) arrangement is generally much more costly to the employee because the employer is not required by law to perform any due diligence. It simply allows the investment provider to sell commissioned based funds to its employees through a network of stockbrokers. It is not uncommon for these stockbrokers to be found in the workplace prospecting for customers. I bet on any given day there are about 1000 stockbrokers in the hundreds of schools of the LAUSD prospecting and representing the 140 approved 403b vendors. IS THIS NUTS OR WHAT? On the other hand, the due diligence required on the part of the employer with the establishment of its 401(k)/457(b) Plan has the result of assuring that a minimum of expense is incurred by the employee (no commission, no 12b-1 fees, no surrender charges, no variable annuity).

 

Because the 403(b) does not require meaningful employer involvement and never will I say let's chuck it in favor of the 457(b). Why bang our heads against a brick wall? THE 403b is no longer necessary! As written the 403(b) is made for commission salespeople first and the teacher second and last... a very distant last. We will only become 403bwise by adopting more 457(b) Plans. If your employer has yet to establish a 457(b) request that it be done as one of its new year's resolutions.

 

Peace and hope,

Joel

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