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Chuck,

 

Please let us know if this ING 403b program meets your standards of a high cost vendor that employs reputable sales agents.

____________________________________________________________

 

The 620 school districts in the State of New York are primary examples of employers that are guilty of not performing their due diligence. Their laissez faire policy results in high cost 403(b) investment products being sold to their employees. School year after school year they continue to shirk their fiduciary responsibility by allowing the high cost ING/NYSUT (New York State United Teachers) endorsed 403(b) programs to be sold to the tens of thousands of teachers in this State.

 

Ironically it is the very same NYSUT that local school districts and their employees can point to as an example of a plan sponsor (employer) that has performed its due diligence. That’s right, since September 1, 1984 the NYSUT has collectively bargained for three 401(k) Plans with three unions that represent its own employees: The NYSUT Managerial & Legal Staff Association, the NYSUT Professional Staff Association and the NYSUT CWA Local 1141. Fidelity Investments is the Plan Administrator for the three Plans.

 

The ING/NYSUT “endorsed” 403(b) program costs the public school teacher about 2 percent while the 401(k) Plans sponsored by the NYSUT costs the NYSUT employee about 0.50 percent. If we start with an initial investment of $30,000 (with no additional contributions), and earn an average 8 percent a year for 30 years the teacher investing in the ING/NYSUT endorsed 403(b) program sees his $30,000 grow to $172,305 while the NYSUT 401(k) Plan participant sees his $30,000 investment grow to $262,649.

 

Apparently the NYSUT believes high costs are both good and bad. It’s good if NYSUT, the union, “endorses” the high cost ING 403(b) program for teachers and then collects some of those high fees teachers pay to ING by selling ING advertising space in the union newspaper. But its bad if NYSUT, the employer, sponsors a similar high cost 401(k) Plan for its employees.

 

The hundreds of school districts in this state must perform their 403(b) due diligence. May I suggest that the leaders of the various local affiliates of the NYSUT call upon the NYSUT Professional Staff Association (PSA), the labor specialists employed by the NYSUT to help local affiliates negotiate collective bargaining agreements with their school districts, for help in negotiating 403(b) arrangements along the low cost lines (no commission, no 12b-1 fee, no surrender fee, no variable annuity) of the 401(k) Plan that the NYSUT PSA has negotiated for its members with NYSUT management. Mr. Jeffrey Cassidy is the President of the NYSUT PSA. He can be reached at 1-800-287-3903.

 

Peace,

Joel L. Frank

 

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Guest Chuck Yanikoski

Hi, Joel --

 

I'm not the "one size fits all" guy, so you may be barking up the wrong tree here. In the case you present, the teacher is probably better off with the low-cost alternative.

 

Or maybe not. Because suppose that some "disreputable" rep from ING is out to make a buck and persuades the teacher, against her initial preference, to contribute an extra $100 a month, and she increases this 3% a year for 30 years until she retires. In this case, she ends up with $309, 227 in her annuity, despite the extra costs. One of the main services an on-the-spot, pro-active rep performs is to persuade people to do what they don't want to do even though it's good for them. Personally, I'd rather have the $309,227 in a high-cost product than the $262,649 in a low-cost product.

 

But you and a few other people I could name do not need the persuasion, and you're going to do the smart thing without it. You should absolutely have the opportunity to go with a low-cost vendor. I agree with that entirely.

 

The reason there should be another choice, though, is that most people do need persuasion (not just education, but actual persuasion). And a lot of times they have other needs that should be addressed, if only to show them that they really could afford to save more -- or if they can't, to show them how to manage their finances better, have some savings for emergencies, be adequately insured, etc, etc. Only a higher-cost provider will provide this kind of service without any extra charge.

 

The low-cost-only system results, realistically, in a situation where a minority can really do well (and I'm all for that!), but the majority, who are insufficiently motivated or just focused elsewhere, will let the great opportunity slip away, or will take inadequate advantage of it. They end up worse off, as in the example we are discussing. My attitude is that these are the people who need options more than you do, because even without a 403(b) plan, someone with your savvy would make smart investment choices and someday retire comfortably. People who are not paying as much attention will not.

 

But what I really say is, let's have a plan with multiple options so that everyone can be served in the degree and manner that suits them.

 

 

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Chuck:

 

So according to you some teachers out there need to pay excessive fees so that they will be "persuaded" to do what is good for them because the no-load vendor is simply not equipped to "persuade" people. According to you the retiring teacher should be thankful for having that high cost agent in the teacher's lunchroom some 30 years ago because if they did not cross paths that fateful day he would not have an additional 47K in his 403b. This is simply the pep talk given to ING agents by the ING Director of Sales. I guess this teacher should also be thankful to this high cost 403b agent for selling him a high cost ING life insurance policy because along the way he told him about the need for an emergency fund. What an expensive way to learn about the need for an emergency fund. How about college funding? I guess its ok to invest in a high cost mutual fund with this ING agent because without him or her the teacher would never be made aware of 529 Plans. Chuck, you sound like ING's Sales Director.

 

Why haven't you responded to the following?

 

Joel said: "Apparently the NYSUT believes high costs are both good and bad. It’s good if NYSUT, the union, “endorses” the high cost ING 403(b) program for teachers and then collects some of those high fees teachers pay to ING by selling ING advertising space in the union newspaper. But its bad if NYSUT, the employer, sponsors a similar high cost 401(k) Plan for its employees."

 

Peace and Hope,

Joel

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Guest Chuck Yanikoski

I am not defending either NYSUT or ING -- not because I am either for or against them, but because I have no personal knowledge of them, their plans, or their products. Someone else will have to stick up for them, if they care to (but I appreciate your trying to line me up for a job with ING, Joel -- if I get it, I'll send you a bouquet.)

 

Obviously I am also not defending "excessive" fees which, by definition, are excessive. What I AM defending is "high" fees in cases where high-grade service is provided to people who want it and will benefit from it. You don't deny that in our mutual example, my teacher comes out ahead, despite the fees. So yes, I am saying that in this hypothetical case, the result is good. Of course, if the teacher could get the same results for a 150 bp fee, or even a lower fee, I would be all for it. If s/he could get it for 50 bp that would be better still -- but that isn't going to happen, in the real world.

 

Your mistake is equating the two products. The high fee is not high because an insurance company is trying to rip someone off. Rather, it is high because they are offering a lot more than investment management -- the most expensive other item being face-to-face personal service. For those of you who do not want or need this element, you should have the option of a low-cost provider who will not give it to you. But a lot of people will end up worse off without this added element, and if you don't give them the freedom to have access to it, you are doing damage to them. I don't see how this is preferable to giving everyone a choice, if your real objective is for people to end up better off in retirement.

 

 

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Chuck,

 

In case you want to become more definitive about your "personal" knowlege concerning the ING Program, information is just seconds away at their public website---let me know if you have trouble locating it.

 

Talking about the real world and for reason's known only to yourself you refuse to give us your example of a high cost/"high grade" service vendor. So let's assume for this discussion that the NYSUT/ING 403(b) is your example of a high cost/high grade service program.

 

ING was first endorsed by the NYSUT in 1989. When do you think the NYSUT will get around to endorsing a low-cost 403b vendor for those teachers who do not benefit from, but rather are "damaged" by the high cost/"high grade" service of the ING Program?

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Guest Chuck Yanikoski

Sorry, Joel, but I really can't be endorsing plans, products, vendors, or sales organizations, especially when I don't have any personal knowledge of them. I'm not sure why it's important to you that I do so, but I really can't accommodate you here.

 

I will say this, however: I would like to see ALL 403(b) plans offer BOTH low-cost and high-cost options (and preferably some in the middle as well). Shame on any organization that is not giving its members a fair range of choices!

 

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Chuck,

 

I asked for you to furnish us with your ideal vendor because you were the one to say that some will benefit from paying higher fees because in the absence of face to face personal service they would never contribute as much. Now you tell us you don't know of any specific plan. I guess we will leave it at that.

 

C'mon Chuck, you know how these things work better than all of us put together. The NYSUT will never endorse a no-load 403b vendor because that's the quid pro quo arrangement they made by giving ING their endorsement. These sweetheart deals are running rampant throughout the various state teachers unions. It is a national disgrace. So you may have some that will accumulate more wealth because of the face to face service you talk about but its done on the backs of their fellow teachers who do not need such hand holding and are simply giving their "rep" a gift every payday.

 

I would like your views on the following: Do you feel that the NYSUT Management should retain the services of ING (or another high cost/"high grade service" vendor) in order to provide "high-grade" service to the three 401(k) Plans that they offer to employees of the union? Afterall, according to you some participants in a low cost plan may not maximize their benefits because the plan does not employ reputable agents that will persuade them to contribute more than they otherwise would.

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Chuck,

 

Did you mean "high touch/service" plans instead of "high-cost" plans? High service doesn't equate to high costs, nor does high costs equate to high service. It is possible to have a reasonably priced plan and provide service to members. Right here in Orange County we have such a plan, it isn't an ultra-low cost plan like TIAA-CREF, but the costs are about 1 - 1.5% lower than the average 403(b) and yet there are representatives that will do enrollment meetings and have one-on-one meetings. The answers are out there if organizations are willing to look. Smaller organizations will have a tougher time, but an organization as large as NYSUT - 500,000 members, they can do better.

 

ScottyD

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Scotty,

 

Organizations like the NYSUT are doing better....they are doing better for themselves. The selling of advertising space to a product provider whose products are endorsed by the union is simply a reprehensible way of raising union revenue without raising union dues. Boy, how slick!! It represents an outrageous breach of trust New York's public school teachers have placed in their union.

 

Peace and hope,

Joel

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Chuck,

 

The face to face service you describe is simply being an excellent financial salesperson by taking full advantage of the 403(b) marketplace. Its called networking. You would say the following scenario is an example of good service I would call it good selling. Enter a workplace and sell a teacher a 403b investment and collect a commission every two weeks for 30 years. Ascertain from her, her marital status and when she tells you she is a single mom sell her a commission based whole life insurance policy (when you know term would be better for her but there is no commission in selling term) and collect a commission for the first 8 years. Her son is entering the first grade, so sell her a mutual fund (make sure it has a load) for her 529 Plan. And after you get finished with her ask her for three friends she feels can benefit from your "high grade"-service. I trust you get the picture. You rationalize this real world scenario by saying all of the products sold to her and her friends and family members were suitable and needed by them and if you did not sign them up for the 403b they may never have bought the other financial products that they need. So this is really not selling it is "high-grade" servicing for which I am entitled to a commission.

 

Now here is where you and I part company as far as the meaning of the word "service". She pays you a commission every two weeks on her 403b investment in order to ACQUIRE the investment not for you to service her investment. Servicing her 403(b) would mean that you monitor the investment fund she chose based on her current circumstances, risk tolerance, etc and overall market and economic conditions and make recommmendations to her to change the investment when circumstances warrant. How many 403b investors out there do you think got a call from their "high-grade" service agent in 2000-01 to sell their equity funds? This would have been servicing. These salespeople, however, know nothing about money management or the economy they just know how to sell. (Moreover, how many agents over the last 8 months got the call out to their customers advising them to switch from their stable value funds back to equities?). And if ING offers a money management service for 1% of assets under management the commission to ACQUIRE the investment would be reduced comensurately. And if you did this as an agent you would be entitled to a personal financial planning fee which is altogether a different business than selling financial products. You would then be prospecting in the 403b workplace to get money management clients and have little time to sell 403b products or any other products. No commission agent does this because that is not his or her thing. He or she simply gets paid to sell. There is no time to service because the INGs of the world don't pay you to service they pay you to sell! As far as the whole life policy is concerned can you tell me what the agent does to service this policyholder that warrants getting a commission for the first 8 years? Or is he entitled to this commission because he explained the need for an emergency fund?

 

The financial services industry always gives the party line when someone complains that they were charged a commission. They seem to appear guilty and defensive; as if to say: "I know I'm ripping you off". So they are brainwashed from the start of their careers by their Sales Directors to think of what they do as "servicing" rather than "selling". Afterall the word "servicing" sounds much more noble and professional while the word "selling" means well...well, you know what it means, it means selling.

 

In closing I would like to make an analogy that I trust will knock the point home. Financial products are commodities just like lawn mowers. You buy a lawn mower. One year later it needs a tune-up, etc. You don't expect your salesperson to perform the tune-up because he is not trained to service lawn mowers...he is trained to sell lawn mowers. You know you go to the service department for the tune-up. You pay twice, once to acquire the mower and another time to have it serviced. The salesperson gets paid for the sale while the repairperson gets paid for servicing or repairing the machine. The consumer knows exactly we he stands. Let's assume you keep this mower for 10 years with ten tune ups. After ten years you credit the salesperson for "selling" you the machine and the service department for "servicing" the machine.

 

ITS A NATIONAL DISGRACE THAT THE CONSUMER DOES NOT KNOW WHERE HE STANDS WHEN HE OR SHE BUYS A FINANCIAL PRODUCT. BUT THE FINANCIAL "PROFESSIONAL" KNOWS WHERE (S)HE AND THE CONSUMER STANDS...SO THE POOR CONSUMER IS BEHIND THE 8 BALL EVEN BEFORE HE SIGNS HIS NAME.

 

Peace and Hope,

Joel

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Guest Chuck Yanikoski

Joel and Scotty, you are both right. What I'm talking about is "selling" in addition to what you would call service. It may seem perverse for the client to have to pay the salesperson for the privilege of being sold something, but that is the way it has to be. If there is no compensation, there will be no sales effort, and if there is no sales effort, there will often be no sale, and if there is no sale, then there is no money at retirement.

 

Granted, not everybody needs to be "sold," especially in a marketplace where the employer is providing easy access to the product as well as (occasionally) some level of free education and maybe even access to a passive service provider (i.e., you get help if you ask for it).

 

My point simply is that some people (a lot of them, actually) DO need to be sold, and if there is no one present to do it, these people will not take proper advantage of their retirement plan. And it seems to me perfectly fair that the people who need this kind of extra help -- which is expensive to provide, by the way -- are the ones who should pay for it (through commissions, normally, though other schemes are conceivable).

 

It may come as news to Joel (probably not to Scotty) that most people who provide this sales/service combination are not getting rich on it. In fact, most of them (about three-quarters, last I heard, some time ago) simply don't make it and have to drop out. within the first year or two, despite subsidies from the insurance companies What they are doing is NOT a rip-off -- in reality, it's a very tough way to make a living.

 

If everyone was as sharp and pro-active as Joel, sales people would be completely unnecessary. The lawn-mower analogy has some problems with it, but as far as I am concerned it supports my point. Some people just want a reliable, basic, low-priced mower. Others, though, want the expensive riding mower with all the attachments and the service package. Still others would rather hire ChemLawn or someone to do everything for them, including all the servicing and all the labor. That's one of the great things about this country -- you can pay less and get less or pay more and get more. People in 403(b) plans should have the same freedom.

 

The main difference is that with lawnmowers, people have to consciously choose to pay more. In the 403(b) world, the high-cost alternative is the default: because if you do nothing on your own you either get nothing at all (the most outcome of all) or you have to wait for someone to come find you, and that costs you money, too. But if no one is there to come find you, you're even worse off, and that's the way it's going to be if all the higher cost providers are sent packing.

 

 

 

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The following article really doesn't match the topic very well, but it should spark some interesting debate. It basically says people can't manage money on their own, this doesn't mean that everyone should have a 403(b) agent, lord knows the majority of them have no clue when it comes to investing. I would appreciate any comments - the article is actually quite surprising coming from William Bernstein.

 

 

The Probability of Success

(Or, Confessions of a Personal-Finance Writer)

By William Bernstein

January 15, 2003

email this article

 

Having spent nearly a decade writing about investment management for the little guy, I have come to the conclusion that I no longer believe in the basic premise of my public persona - a surreal cross between Harry Markowitz and Johnny Appleseed, as a friend put it.

 

A decade ago, I really did believe that the average investor could do it himself. After all, the flesh was willing, the vehicles were available, and the math wasn’t that hard.

 

I was wrong. Having emailed and spoken to thousands of investors over the years, I’ve come to the sad conclusion that only a tiny minority, at most one percent, are capable of pulling it off. Heck, if Helen Young Hayes, Robert Sanborn, Julian Robertson, and the nation’s largest pension funds can’t get it right, what chance does John Q. Investor have?

 

Why the sad state of affairs? It’s pretty simple. To invest competently, you need four faculties:

 

An interest in investing. It’s no different from cooking, gardening, or parenting. If you don’t enjoy it, you’ll do a lousy job. Most people enjoy finance about as much as Carmela Soprano enjoys her husband’s concept of marital fidelity.

 

 

The horsepower to do the math. As Scott Burns explained to me years ago, fractions are a stretch for 90% of the population. The Discounted Dividend Model, or at least the Gordon Equation? Geometric versus arithmetic return? Standard deviation? Correlation, for God’s sake? Fuggedaboudit!

 

 

The knowledge base—Fama, French, Malkiel, Thaler, Bogle, Shiller—all seven decades of evidence-based finance back to Cowles. Plus, the "database" itself—a working knowledge of financial history, from the South Sea Bubble to Yahoo!

 

 

The emotional discipline to execute faithfully, come hell, high water, or Bob Prechter. Mr. Bogle makes it sound almost easy: "Stay the course." Alas, it is not.

I expect no more than 10% of the population passes muster on each of the above points. The devastating part is, to succeed you need to string all four together. Thus, in a state of nature, just 0.01% of investors have what it takes. An optimist might guess a 30% success rate on each count, in which case one percent of the population can make all four.

 

Perhaps I overstate the case. After all, these four abilities are not entirely independent: if you’re smart enough, it’s more likely you’ll be interested in finance and be driven to delve into the appropriate finance literature. But even if true, more than a little luck is involved. Head down to the personal-finance section of your local Barnes and Noble, and you’re more likely to run into Suze Orman than Jack Bogle. You’ll need a telescope to find the really important stuff. Worse, I’m here to tell you that the last condition—the ability to deploy what Charley Ellis calls "the emotional game"—is completely independent of the other three. I wish I had a nickel for every smart, savvy, and motivated financial type I’ve met who simply could not execute.

 

There are exceptions. Come to a Vanguard Diehards meeting and you’ll think there is hope. Then travel a few feet down the hall where the gurus of the month are holding forth and you’re quickly brought back to reality.

 

Call Me Vladimir Illych

 

In my opinion, about the only way to disseminate financial competency among more than a few percent of the population would involve totalitarian methods—establishing an Efficient Markets Propaganda Ministry. Investment reeducation camps would be set up for the likes of Jim Glassman, Abby Cohen, and the Beardstown Ladies, featuring several hours per day of remedial math and statistics.

 

Short of that, the Forces of Darkness will remain ascendant. It cannot be any other way. In a society with an increasingly abbreviated attention span and burgeoning innumeracy, the logic of asset-class-based passive investing has about as much appeal as the vegetarian buffet at a cattleman’s convention. There is no place for CNBC and 95% of the nation’s financial journalists in the World According to Bogle.

 

Of course, I’m not recommending the establishment of efficient-market martial law, administered with an iron fist from Valley Forge, Chicago, and Santa Monica. Rather, I’m pointing out that in a liberal democracy, the overwhelming majority of the population will always invest incompetently. Our society pays many costs for our precious civil liberties; this is surely one of the smaller ones.

 

The good news is that this increases the rewards to those who make the effort. After all, in a world where everyone knows how to calculate realistic expected returns, eschews high expenses, and trades little (and then only concavely), the marginal reward for doing so is low.

 

The main purpose of this exposition is not to consider how we can increase aggregate investor competence. This is a process so glacially slow that the grim reaper easily outruns it. Take a look around after every bubble and you’ll find that the only investors left reasonably intact have gray hair.

 

Rather, I want to focus debate on just who should be running the nation’s investment pools. An overriding concern for public safety mandates that those commanding the nation’s airliners, nuclear power plants, and military hardware obtain and maintain a precisely defined degree of competence. We should demand no less of those managing the country’s retirement portfolios. The events of the past few years underline the bankruptcy of the notion that every worker can be his or her own portfolio manager. The default option for retirement accounts should be a professionally managed low-cost balanced approach, preferably passive. Only those who can demonstrate competence in evidence-based finance should be licensed to drive their retirement vehicles on the public highways of our capital markets.

 

Scott Dauenhauer

 

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Chuck,

 

So when do you suggest the school districts accross the country allow Weight Watchers to come into the 403b workplace? Afterall, obesity in this country is a major health problem and we can't leave it to chance that these people will do the right thing for themselves. Getting a monthly newsletter out on diet, health, exercise, etc. to all personnel will simply not suffice. In order to improve the health of these teachers the employer needs to have WW use its powers of persuasion face to face on these overweight people. The school district simply cannot have on its collective conscience that a school teacher runs the distinct risk of sudden death due to severe obesity. C'mon Chuck, you would not want to be the one to tell this teacher's child after she died that "your mother simply did not read the monthly newsletter on diet and heath or if she read it she did not follow it." But if we allow the WW representative into the teachers' lunch room and this teacher dies in her sleep we can always tell her children: "Its just a shame that your mother never signed up with WW...afterall the WW rep has been in the teachers cafeteria once a week for the last 40 years"

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Scott,

 

In my view the last 3 years has proven how devastating a "stay the course" rule can be, especially for the retirees. In my view no one should invest in equities without an exit strategy. But knowing when to enter and when to exit is the whole ball game. Is there anyone out there who has been successful in knowing when to enter and when to exit...I'm sure all of us would like to hear from you. Is there anyone out there who got back in last spring after being out for 3 years?

 

Peace,

Joel

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Joel,

 

The myth that exists right now is that this has been a devasting three years. While many investors lost a lot of money, a well diversified portfolio held up just fine and in fact had a positive return. The problem is that most people did not have a well diversified portfolio - they only held growth or tech. The s & p 500 is growth dominated and fell 49% from its high at one point - this is not a diversified portfolio. Retirees need to ensure that they plan for market events such as the last three years by having plenty of money in cash and short term bonds/annuities to ensure they can ride out any big market drops. Stay the course does actually work with a diverified portfolio and a proper plan - most people just didn't diversify and had no plan. An good advisor would have prepared the retiree for these events, the problem is that there are very few "good" advisors which is why most advisor sold portfolios did just as bad or worse than most indiviudal portfolios.

 

My overall philosophy is that you need to know what the minimum rate of return is that you need in order to meet all your goals - once you have that figured out you can decide for yourself if you want to take more risk than is neccessary.

 

Does this help?

 

ScottyD

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