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Guest Sierra

Whither Goes The 403(b) Market In 2008?

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Guest Sierra

Chuck Yanikowski of Still River writes: Unfortunately, a single-provider solution has serious disadvantages: • In the 403(b) world, one size does not fit all. There tends to be a dic######omy in products between lower-cost mutual fund providers and high-service annuity pro-viders. The low-cost products are better for self-motivated and financially savvy participants, because the investment choices are varied and the participant does not pay for unwanted on-site marketing and customer services. But the majority of participants need more hand-holding than that and are better served by compa-nies that charge more but deliver more. In particular, companies with on-site rep-resentatives are in a position to persuade non-participants to sign up, or to per-suade small contributors to save more. Despite the cost of such services, partici-pants who respond to them end up with more retirement savings – which is, after all, the goal of the plan. So both kinds of products are valuable, and adopting only one leaves part of the employee group ill-served. And choosing only a com-promise vendor somewhere in the middle may leave almost everyone ill-served. ====================================================================

The above is proof positive that the sharks are what they are, just sharks. Notice just how careful Mr. Yanikowski was not to use the term "advice". I give him credit for recognizing just how legally culpable it is for the professional distributor of retail investment products to dispense "advice".

 

So now the hand-holding comes wrapped up in a box called on-site marketing and customer services. The on-site rep is being paid by teacher Joe who has already signed up, every two weeks, to sign up teacher Jim, a non-partipant and to persuade teacher Joe to save more. Why should teacher Joe pay the rep anything at all for signing up Jim and for spending time with Joe to get him to contribute more? Why should Joe continue to pay the on-site rep every two weeks even after he tells the rep that he will not be increasing his contributions for the next three years? Why should Joe continue to pay the on-site rep for the time he spends in marketing his products? What is Joe getting in return for making these commission payments to the on-site rep every two weeks for an entire work life; i.e. 30-40 years? I ask, Mr. Yanikowski: When during this 30-40 year period do you suggest teacher Joe is no-longer in the need of hand-holding; after 5 years, 10 years, 15 years?

 

Peace and hope,

Joel L. Frank

Pension Columnist

The Chief-Civil Service Leader

277 Broadway

New York, NY 10007

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Joel,

 

I think his statements may actually be accurate considering the ignorance we are dealing with among the general population.

 

 

 

Tony

 

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Guest Sierra

Joel,

 

I think his statements may actually be accurate considering the ignorance we are dealing with among the general population.

 

 

 

Tony

 

Tony: His statements are definitely accurate. That is how the on-site rep 403b distribution system works. It is really disigned to make a living (a very, very good living) for the distributor and its on-site reps. The employer/plan sponsor, however, must recognize that this system is not in the best interests of the sd or its employees. The salary reduction 403b must be operated as if it is the only retirement plan. No Social Security and no PERS. This means that the employer must discard the on-site representative system because it drains the growth of the investments. This means that the employer will get the best bang for its buck by demanding a statewide 403(b) plan. See the Investment Plan of the Florida Retirement System. I would rather see an employer exit the 403b arena rather than sustain the current retail system. Only the ignorant and self-serving defend the status quo by saying if you don't like it the way it is you can always buy a no-load IRA. But I was under the impression that the rep that sells the retail priced 403b product also sells the exact same product to the teacher as an IRA. This is why the rep is called a "professional distributor".

 

 

Peace and Hope,

Joel

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Guest Skeptical

I would rather see an employer exit the 403b arena rather than sustain the current retail system.

Peace and Hope,

Joel

 

I know that I would rather have a private employer DECLINE to offer a DC plan at all, rather than allow a lousy group variable annuity product common with the majority of plans with less than $5 million in assets. Of course the costs are mostly due to...hmmm... Distribution. Why is it so hard for folks to understand the DELL direct model versus the HP retail store model. Of course PC sales are/ have been slowing but the example is valid. That store with people and inventory is EXPENSIVE! Ordering online and receiving a direct shipment is much cheaper. Of course an average to good TSA Rep (Insurance agent) can easily make FOUR times what an outstanding Teacher will be paid. That is ridiculous.

 

Sharks indeed!

 

Jim

 

 

 

 

 

 

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Hi All,

Great comments. I still remember when mr. yanikowski had the audacity to come here and complain that his company lost $50,000 when the MEA was eliminated after the 2001 tax reform bill passed congress and was signed by the pres. This guy and his company is no friend to reform.

 

Mr. y. how do you explain why the 3 VG funds have the most money in LAUSD's 457 out of a list of 18 funds? I will give you a hint: Aig-Valic is the TPA and they have to reveal all fees to participants. The employees are sick and tired of being sold expensive products and for once, the employees now get total fee transparency. Furthermore, any employee that knows a little bit about investing has heard the Vanguard. They don’t need hand holding.

 

Second question: Do you really believe that revenue sharing is too complicated for ordinary employees? I’ll give you a hint. When the 457 oversight committee demanded that revenue sharing be revealed to the teachers, the Valic reps fought it tooth and nail complaining that it is “too complicated.” My response: balderdash! Evidence after a year with the new 457 plan: The Valic reps have NOT reported back to the committee that revealing revenue sharing is too complicated for teachers.

 

Have a good day,

Steve

 

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Greetings, gentlemen.

 

It seems that you want to hear from me, though I know that Joel is usually impervious to any kind of argument that doesn't support his position. But for the record:

 

I am NOT in favor of annuity companies having exclusive representation in a 403(b) plan. I am in favor of CHOICE. I believe that any plan that does not offer BOTH a low-cost provider and a high-service provider is not doing right by plan participants.

 

Even if 90% of participants wanted a low-cost option and were savvy enough to take it, but 10% weren't paying attention and would not participate unless they were talked into it, it would be proper to have someone there to do the talking. I know Joel wants the school districts to cover that cost, and maybe here and there they can be persuaded to do it. But if it is unfair, as Joel argues, to expect Jim (a current participant) to pay for Joe (a new participant) to be persuaded to sign up, why is it any fairer for Sam (a non-teaching taxpayer) to pay for it? It is much fairer for Jim to pay, because Jim probably received the same free benefit when he first signed up. Over time, everyone who participates pays, and everyone who participates benefits. If Sam pays, Jim and Joe benefit, but Sam only loses. Honestly, which is more fair?

 

Joel has always wanted teachers to have a free ride, and he's entitled to want that. He just isn't entitle to get it.

 

And as long as Joel and other plan participants have the option to go with a low-cost provider, which is part of what I am advocating, I don't think he has a legitimate complaint if I also say that a higher-cost / higher-service provider should also be an option. No one's making anybody choose it. But some people will choose it, maybe even a majority. Does that make sense? Yes, for the same reason it makes sense that people can choose between Dell and HP. Some people want to do their own research, get on line, and order their own computer for less. Other people know they aren't smart enough about computers to do that, and would rather go to a store, talk to a salesperson, maybe even try out several machines, and then pick the one they like. Who are you to say that the latter group is wrong? Who are you to say that YOUR idea of the "smart" choice should be the only one offered?

 

It's simply untrue, by the way, that annuity reps are making a killing. I suppose there must be occasional agents who make six figures selling 403(b) plan contributions, but the vast majority of insurance company agents wipe out in the their first four years, and go find work doing something they can actually make a living at (like teaching, for instance). The insurance industry keeps careful tabs on these statistics, and you could look them up.

 

Joel makes sense sometimes, but he is blinded by ideology. He also fights dirty, which he would not have to do if truth were on his side. I resent his misrepresenting my remarks about the financial impact of EGTRRA on my company. My point at the time was that I did NOT oppose the regulations EVEN THOUGH they were going to take a significant amount of money directly out of my pocket. I wonder what Joel would have done in my situation?

 

 

 

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Why could an SD not find a single provider that was both low cost and high service if it were large enough? Could it not use its collective purchasing power to extract a deal from a single provider? In the ERISA 403(b) market, such a single vendor approach is commonplace, with both insurance and mutual fund companies (including the no load companies) offering low cost investment arrays along with excellent services such as onsite meetings if there is enough contribution flow to make it worth their while.

 

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Guest Skeptical
Greetings, gentlemen.

It's simply untrue, by the way, that annuity reps are making a killing. I suppose there must be occasional agents who make six figures selling 403(b) plan contributions, but the vast majority of insurance company agents wipe out in the their first four years, and go find work doing something they can actually make a living at (like teaching, for instance). The insurance industry keeps careful tabs on these statistics, and you could look them up.

 

 

Mr. Yanikoski,

 

If the main value of a high cost vendor is the knowledge, expertise, and saavy of the selling rep, and most have less than a few years of experience (which is completely TRUE by the way) how much value could the rep be providing? In my experience very, very little. Your thoughts?

 

Jim

 

 

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Guest Sierra

Y:

 

Your opinions on allowing bothhigh cost and low cost providers in the same plan is supported in the Deere case.

 

 

The key detail of the case which you purposefully do not reveal to us, is the fact that the Plan sponsor/Deere offers a brokerage window of no-load mutual funds.

 

 

 

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Guest Sierra

Chuck,

Reform has hardly ever been fought with a clean fight.

Check your history books,

Steve

 

 

Hey Chuck: You don't know what playing dirty is. Did you ever witness a fist fight in the school cafeteria between two 403b reps from the same product vendor? From different product vendors? Hey Chuck, how many vendors does the school district buy milk from?

 

I feel terrible that the participants of the Investment Plan of the Florida Retirement System, the participants of the Deferred Compensation Plan of the City of New York and last but not least the participants of the Federal Thrift Savings Plan ( should I list some more single vendor entities?) do not have the opportunity to see a good fist fight at their place of work in addition to receiving "service" from a rep with about 4 years of experience. I will be writing to each of these Plans to tell them of all the "benefits" their employees are missing out on because they, the taxpayers, were so selfish in not offering a retail priced product menu.

 

Glinda, the good witch said to the wicked witch: "Be Gone. You Have No Power Here."

 

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I will only observe, about fighting dirty, that it is the resort of people not sufficiently skilled to win a clean fight. If the 403(b) reps you are talking about fall into that category, so be it. I can't be bothered engaging with them, either.

 

I really do need to go back to my own work, which includes co-chairing an NTSAA committee to set up industry standards for passing data to school districts (or whoever is helping them with compliance with the new regulations), a project that will actually save the schools serious money and aggravation. So I won't be coming back here to continue this conversation.

 

I will only add, in reply to Skeptical Jim's perfectly reasonable question, that true expertise can be found in many on-site reps, though I would guess that you are right in saying NOT in a majority of them. The reason for that is largely, as I mentioned in my last post, that what they are doing is not, in fact, highly remunerative for most of them, and so there is constant turnover, until someone actually does make it over the hump and gets a chance to acquire the desired expertise. Perhaps you will recall, though, that in Plato's Apology, Socrates defends himself not by claiming that everything he said was correct, but by arguing his societal contribution as a gadfly. That is also the primary benefit of even novice 403(b) reps: they encourage people to participate in the plan and to save more than they otherwise would. Expertise is great, but information can be gotten easily these days for free. What you can't get is someone to come to you proactively and persuade you to do something you ought to do, but are probably not even thinking about. Yes, gadflies can be irritating, too, and Socrates ended up with the hemlock to prove it. But Joel and Steve are gadflies, too, in their own way, so you maybe shouldn't be wishing gadflies away.

 

Anyway, we all want whatever is best for the participants (even if we disagree on the details of what that means). So in this holiday season I am going to content myself with hoping that we all get the thing that we all want, however that comes about.

 

 

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Guest Sierra

I will only observe, about fighting dirty, that it is the resort of people not sufficiently skilled to win a clean fight. If the 403(b) reps you are talking about fall into that category, so be it. I can't be bothered engaging with them, either.

 

I really do need to go back to my own work, which includes co-chairing an NTSAA committee to set up industry standards for passing data to school districts (or whoever is helping them with compliance with the new regulations), a project that will actually save the schools serious money and aggravation. So I won't be coming back here to continue this conversation.

 

I will only add, in reply to Skeptical Jim's perfectly reasonable question, that true expertise can be found in many on-site reps, though I would guess that you are right in saying NOT in a majority of them. The reason for that is largely, as I mentioned in my last post, that what they are doing is not, in fact, highly remunerative for most of them, and so there is constant turnover, until someone actually does make it over the hump and gets a chance to acquire the desired expertise. Perhaps you will recall, though, that in Plato's Apology, Socrates defends himself not by claiming that everything he said was correct, but by arguing his societal contribution as a gadfly. That is also the primary benefit of even novice 403(b) reps: they encourage people to participate in the plan and to save more than they otherwise would. Expertise is great, but information can be gotten easily these days for free. What you can't get is someone to come to you proactively and persuade you to do something you ought to do, but are probably not even thinking about. Yes, gadflies can be irritating, too, and Socrates ended up with the hemlock to prove it. But Joel and Steve are gadflies, too, in their own way, so you maybe shouldn't be wishing gadflies away.

 

Anyway, we all want whatever is best for the participants (even if we disagree on the details of what that means). So in this holiday season I am going to content myself with hoping that we all get the thing that we all want, however that comes about.

 

 

Chuck: The Shark/BD remains a shark, even when it comes to sharing gross commissions with the professional distributor. These retail reps need a union. Let's start a union for the underpaid and undertrained 403b agent.

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Guest Skeptical
What you can't get is someone to come to you proactively and persuade you to do something you ought to do, but are probably not even thinking about

 

What Mr. Yanikoski says above is how 403b agents that sell insurance products rationalize their behavior. This is what let's them sleep at night. I'm not saying they are bad people, far from it. Most new agents are seduced with dreams of making a fortune while 'helping people'. When they figure out it's mostly a lie, both the fortune and helping people, they bail. As I've said before, there is much blame to go around for the current state of affairs. But I have to put the bulk of the responsibility on the employer because they get to choose FIRST:

  • Do we sponsor a plan? yes/no
  • If so how will we structure it?
  • What is our standard for selecting the investment products?
  • Should we offer an annuity or a mutual fund (or both)?
  • Should we allow vendors to sell other financial products?
  • If so, do we evaluate and select those products or just trust the vendor?
Of course a HANDFUL of states, including mine, allow any 'approved' vendor to play, so no comments about that please. That these insurance firms generate HUGE cash flow, that they then use to fund political influence is without question. But employers shouldn't be let off the hook. The unions? A different story all together.

 

Mr. Yanikoski,

I for one, as a fairly new participant on the board, would like to see you stick around. We may disagree on the details but I am confident that reform will happen sooner rather than later.

Regards,

Jim

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