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Wither Low-cost 403(b) Investments In K-12?

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A debate is playing out that could have huge and costly consequences for those who participate in a 403(b) via a K-12 employer. Originally it was hoped that that new regulations would make the K-12 market more appealing to low-cost providers. The line of thinking was that finally some IRS order was being applied where not enough existed in the past. However, there are rumors that the information sharing requirements (see below) in the new regs are unwieldy and onerous. Reportedly, Merrill Lynch, Nationwide and American Funds are getting out of the K-12 market due to these demands. And rumor has it that Fidelity, TIAA-CREF (who have stopped advertising on 403(b)wise), T. Rowe Price (who have also stopped advertising on 403(b)wise) and Vanguard will no longer be accepting K-12 money. These firms would continue serving ERISA-based 403(b) plans, common at the college and university level.

 

A benefits official at a large eastern school district with numerous low-cost vendors believes that the market may indeed get worse in the short run, but in a few years when costs are better understood and made pubic (due to reporting requirements in the new regs) vendors and employers who offer high cost products with surrender charges will do so at their own peril. His feeling is that the new transparency will bring unprecedented scrutiny to the 403(b) market. He believes the best thing a high-fee vendor and an employer who offers such producs will be able to say at this time is “we used to offer those type of products.” This school official believes attorneys and public officials will come down like a hammer on vendors and employers who fail to offer reasonably priced products. His feeling is that there is no way Congressional and attorney action on excessive retirement fees will be limited to the 401(k) market. In fact, he thinks abuse of public servants (school employees) will create an even bigger outcry than abuse of the private sector employee.

 

I am curious what others think on these matters.

 

Dan Otter

 

Information Sharing Requirements

A written agreement between the employer and product vendor must exist in which they agree to share plan and employee information that pertains to eligibility, loans, hardship distributions, deemed distributions, etc. There must be enough information shared to ensure that the requirements of section 403(b) are satisfied since all 403(b) contracts on a specific employee are treated as one for purposes of 403(b).

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Dan --

 

Interesting set of thoughts you have expressed here. Even more interesting -- and frightening -- that some no-load companies have stopped advertising on this site.

 

I have held onto the idea that the no-load companies will disappear in 403(b)s under the new rules. What I hear from district business office folks is three-fold. First, we are busy with the things we HAVE to do, and it sounds like a lot of "work" to understand and / or implement the new rules for a program that's optional, not required. Second, they do not know much about personal finance and the language seems foreign to them. Third, they are "frightened" to death of the new fiduciary responsibilities, perhaps fearing that any minor error may put the district at undue risk.

 

Given that they don't understand the stuff, that they're fearful, and that it's a lot of work.... well, who wants to take all that on? And then, some personable salesman from one of the insurance companies or high colst companies will walk in and relieve them of all three things -- their fear, too much work, having to understand what is essentially a foreign language -- and it will all be handled so they don't HAVE to do any of those things. Of COURSE they will go with whomever is charming and promises they can handle everything.

 

I would be happy to eat my words.

 

Judy Schneider

 

 

Dan --

 

Interesting set of thoughts you have expressed here. Even more interesting -- and frightening -- that some no-load companies have stopped advertising on this site.

 

I have held onto the idea that the no-load companies will disappear in 403(b)s under the new rules. What I hear from district business office folks is three-fold. First, we are busy with the things we HAVE to do, and it sounds like a lot of "work" to understand and / or implement the new rules for a program that's optional, not required. Second, they do not know much about personal finance and the language seems foreign to them. Third, they are "frightened" to death of the new fiduciary responsibilities, perhaps fearing that any minor error may put the district at undue risk.

 

Given that they don't understand the stuff, that they're fearful, and that it's a lot of work.... well, who wants to take all that on? And then, some personable salesman from one of the insurance companies or high colst companies will walk in and relieve them of all three things -- their fear, too much work, having to understand what is essentially a foreign language -- and it will all be handled so they don't HAVE to do any of those things. Of COURSE they will go with whomever is charming and promises they can handle everything.

 

I would be happy to eat my words.

 

Judy Schneider

 

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I predicted that this was going to happen. I am so upset that those who took an interest and used an outfit like Vanguard are going to lose that privledge because the govn't decided to "fix" the 403b. Granted there are alot of problems with the current 403b's offered but having the IRS step in was not the soloution. Education is the soloution. When teachers take an interest they will go to Vanguard or another low cost outfit because they know the importance of keeping costs low. Look at the 90-24 transfer, for some that was the only way to invest into Vanguard or Fidelity but now they can't and wait in limbo till their SD determine who the new players will be. Dan's message sure is concerning. If Fidelity and TIAA-CREF pull out, that surely can not be a good sign. A special thanks to the IRS for screwing things up for the little guy once again!

 

I for one WILL NOT invest thru an insurance company with high costs. My .02

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I truly believe, as the benefits official notes, things will eventually get better. But the short term could be a bit ugly. I think Judy's observation about benefit official attitude/lack of understanding will play a role. In the meantime participants have several options: 1) lobby and educate employer 2) participate in a 457(b) instead, if available, and if a quality choice is available, 3) contribute to a Roth IRA, yes limits are about a third less (going up to $5,000 in 2008) but at least you can pick the exact company you wish to invest in.

 

Dan Otter

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Everyone on this board should let call Vanguard, Fidelity, Price and let them know you want them to remain in the business.

 

I don't want them too leave either, however I could understand if they did - these new regulations are going to cost school districts and vendors a lot of money and in the end, the educators will still have a bunch of compliant over-priced products to choose from. Seems like everyone loses.

 

I hope that the dark ages end soon and that the school district enlightenment period begins shortly - otherwise the retirements of many educators are in trouble. The Roth IRA is looking better and better, but it won't solve the problem, perhaps the 457 is the answer, though that takes enlightenment as well.

 

Let's not give up hope yet. In California we saw this coming and CalSTRS revamped their 403(b) (Called Pension2) and it is low cost and the goal is to get it into every school district in California - perhaps other states will follow California's lead or choose another route that leads to low costs.

 

I've got a couple other revolutionary suggestions.....but I'll leave those for another time.

 

ScottyD

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I just read Charles Shaub is also getting out of the 403b business

 

It almost seems like this was the insurance companies' master plan falling right into place.

 

If it happens I will never invest in a 403 B again. I have had enough of this incompetancy at the expense

of teachers and to the enrichment of the insurance companies with no fair value given the teachers in exchange for their profits.

 

 

Depressing.

 

 

Tony

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Guest Sierra

I predicted that this was going to happen. I am so upset that those who took an interest and used an outfit like Vanguard are going to lose that privledge because the govn't decided to "fix" the 403b. Granted there are alot of problems with the current 403b's offered but having the IRS step in was not the soloution. Education is the soloution. When teachers take an interest they will go to Vanguard or another low cost outfit because they know the importance of keeping costs low. Look at the 90-24 transfer, for some that was the only way to invest into Vanguard or Fidelity but now they can't and wait in limbo till their SD determine who the new players will be. Dan's message sure is concerning. If Fidelity and TIAA-CREF pull out, that surely can not be a good sign. A special thanks to the IRS for screwing things up for the little guy once again!

 

I for one WILL NOT invest thru an insurance company with high costs. My .02

 

 

ft6;

 

I disagree with your findings. The problem with 403b are (were) the authors of the statute which goes back to the Congress of 1958. The IRS is simply attempting to administer the statute as written by others. THE IRS DID NOT WRITE THE STATUTE. The IRS is charged with making sure that the tax laws. rules and regs are followed. In its own best interests it would have been better off to have the Congress re-write section 403(b). The 1958 legislation was simply misguided! It mandated individually owned annuity contracts as the sole investment vehicle while it should have mandated a Trust instrument to own the assets, as is the case for Defined Contribution qualified plans under section 401. Take note of the fact that the 403(b) is the only type of DC plan where the invested assets are titled in the name of the employee. Such an arrangement is custom made for the door-to-door salesman and represents a disinsentive for the low cost investment provider to enter the k-12 market.

 

The reason T/C, the original low cost/no-load provider of retirement products, has been so super successful in the University market is twofold: Firstly, T/C major charge in 1918 was to provide BASIC retirement annuities to the private college/university system. Its growth over the past 90 years is a direct result of making a higher education experience available to all of our citizens. It was only a natural extention of its PRIMARY operation of funding BASIC RETIREMENT ANNUITIES to offer salary reduction 403bs in or around 1970. T/C is THE major player in the higher education system because it is dominant in the MANDATORY DC market place as well as the voluntary salary reduction market place. It's monopolistic shell began to show some ware and tear about 20 years ago when a law professor at Georgetown University began to "pontificate" that compulsory annutization of the BASIC annnuity contract balance was not in the best interests of some and, therefore, should be voluntary. A voice for choice...what a novel proposal!

 

Having said all that the k-12 system is quite different. First and foremost the various school districts throughout the 50 states and territories do not operate their own BASIC retirement plan. This is a function of state government. The 1958 legislation that added section 403b to the Code provided for only one funding/investment product...the commercial annuity. It was not until 1967 when the TRS of the City of New York asked the IRS to allow them to operate a 403b for the City's teachers that a PERS was permitted to do so. In the last 40 years, however, you cannot find more than 5 pubic retirement systems to which teachers belong that have taken advantage of that 1967 Ruling. And therein lies the very REASON why we are stuck with the 403b shark!

 

Notwithstanding the fact the the 1967 Ruling has been repealed there are other ways to skin the cat:

 

1. Statewide teacher unions/associations can follow the long-term experience of the Wisconsin Education Associiation which has a very fine 403b program.

 

2. Statewide School Boards Associations can design there own 403b plan for the local districts to utilize.

 

3. Local school districts should be able to opt into the statewide 457 Plan. NY state allows this but NJ does not. What is the policy in your state?

 

4. Congress can rewrite the 403b statute and permit the public employee retirement system to which teachers must belong to offer a 403(b) plan. IT IS A NATURAL FIT JUST LIKE IT IS A NATURAL FIT FOR T/C

 

Peace and Hope,

Joel L. Frank

Pension Columnist

The Chief-Civil Service Leader

277 Broadway

New York, NY 10007

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I truly believe, as the benefits official notes, things will eventually get better. But the short term could be a bit ugly. I think Judy's observation about benefit official attitude/lack of understanding will play a role. In the meantime participants have several options: 1) lobby and educate employer 2) participate in a 457(b) instead, if available, and if a quality choice is available, 3) contribute to a Roth IRA, yes limits are about a third less (going up to $5,000 in 2008) but at least you can pick the exact company you wish to invest in.

 

Dan Otter

 

 

 

Dan what you say is true but those of us with above average assetts need that tax shelter, So while yes other options still exist we lose that tax shelter so our tax burden will increase . I mean Its not like Vanguard is disappearing but that tax sheltered savings might and that will hurt those of us use the 403B vehicle to lower their yearly tax burden.

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Guest Sierra

I just read Charles Shaub is also getting out of the 403b business

 

It almost seems like this was the insurance companies' master plan falling right into place.

 

If it happens I will never invest in a 403 B again. I have had enough of this incompetancy at the expense

of teachers and to the enrichment of the insurance companies with no fair value given the teachers in exchange for their profits.

 

 

Depressing.

 

 

Tony

 

 

Tony: I REFUSE TO ALLOW YOU TO GET ME DEPRESSED! Let's get some up-beat remarks posted on this thread.

 

Joel

 

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Guest Sierra

Joel

 

I can't help it. To me its a big deal.

 

Tony

 

 

It is a big deal. But getting depressed over it will only make the ###### companies happy.

 

Joel

 

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All --

 

Joel, to answer one of your questions, in my state (WA) we have the 457 option in addition to the 403(b) option and at the current time one can invest to the limit in EACH, permitting a huge amount to be put away. This is what I have been doing, actually; I retired early in order to participate in this way, since we figured that in the end we would have more $$ available by investing $$ instead of getting more credits for time in the DB program. Luckily, I was able to do a post-retirement re-hire.

 

So the folks in my state will continue to have the 457; the Wisconsin deal sounds like a winner and that info should somehow be disseminated EVERYWHERE! Additionally, a state-wide system sounds like a fine option, if some good no-load options were made available.

 

Good news: I talked to a fine fellow today at TRPrice, and someone there is following the thread begun by Dan, in fact! So we count. We're heard.

 

Tony: the reason the companies need the uniform information-sharing form is that they would have some responsibility if someone had multiple accounts and tried to take withdrawals that are limited -- like loans, emergency or disability (I forget the term used) and so on.... in order to manage the system, ALL the companies would need to be aware of what was happening so someone could not illegally "work the system".

 

Joel, I always enjoy your posts and learn something from you. So here's the good news: in the entire United Sates of America, there are about 10 people who understand this stuff (at least a little) and are passionate about it. They post here regularly! 10 is better than 0, right? And I am advocating in my district (they are ignoring me) and with the regional arm of my union (they are not quite ignoring me) and with my professional organization (they used to ignore me, but now I THINK they have Dan scheduled to some to Spokane to talk next year!)

 

More good news: Better-Investing, which is the national organization with educational emphasis that supports individual and club investors has developed a nascent relationship with the NEA. And the NEA is recently more open to the idea of "educating educators" re: investing, I have heard. Could it be that NEA members or people here on this site are having an effect? Or could it be because there is pressure from the outside from other sources such as -- Oh, I don't know -- (drumroll, please) a lawsuit or something?

 

So there you go -- talk more, write here, bug your district / union / congressman, or file a complaint, grievance or lawsuit. Get out there. Just do it. (Short skirts and pompoms optional.)

 

Judy Schneider

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For the most part, I think the industry is overreacting. What is required from an administration:

 

1. Loan Administration The vendors will handle setting up the loan as they have in the past. They will have to report to participants with loans and those that have defaulted.

 

2. Hardship Distributions The school should require that they sign off on all hardship distributions. After signing off, they should stop further contributions for 6 months.

 

3. The school should be provided with a list of distributions made.

 

4. 1099s The school needs to be provided with all the 1099s issued and compare to distributions made.

 

5. Schedule of account transfers. School should verify transfers are made to an approved vendor.

 

Given the power of today's databases, this information should not be a problem to provide by any vendor.

 

I am hearing that reps are telling public school treasurers that they have to be careful about how they structure the plans, or they will be deemed fiduciaries. This is a scare tactic. Public schools are exempt for ERISA and thus a fiduciary obligation does not arise from it. I know that there is talk that state law may convey fiduciary responsibility, but I have yet to see such a case.

 

I have some ideas, I think along Scotty's thinking. Once I worked them out, I will post them here.

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