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Florida "model" 403(b) Plan

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Fredalan,

 

Again,

 

Its very hard for us to properly evaluate without information.

 

I agree that all fees are passed on to the participants - unless of course the district pays them. Even if the districts paid the fees, they would probably end up paying the teachers $12 - 30 less per year, so yes the participant pays. The question that remains is whether or not it is a better deal for the participant to pay the fee outright and use a low-cost provider, such as Vanguard, Fidelity, TIAA-CREF, T. Rowe Prices, xyz, etc...

 

I don't think that any of us are unhappy that a high cost (let's be honest here) provider like AIG and AXA were named as providers, I think the shock is that the low-cost providers do not, upon first inspection appear to offer a low-cost platform.

 

Of course, if we had the information, we could properly evaluate.

 

ScottyD

 

 

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It seems that the school districts do have a financial interest in this - approx. 350,000 potential participants ###### the compliance fee. If we assume a 30% participation rate and round down - this is about 100,000 potential participants, if the fee is $12 (which seems low to pay for full service compliance) the districts stand to reap $1.2 mm annually. If the districts were paying these fees before this commission, it seems that they benefit greatly from it financially as they are now essentially shifting costs to the employees, something that you would think the unions would be against, not for.

 

I can understand the districts position, I feel for them, these new regulations are overly onerous and almost a punishment inflicted on them for the bad behaviour of vendors. I think the new regs could have been greatly simplified so that the districts were not in this position, however, that is not the current reality.

 

The question is, do the districts see the 403(b) as a valuable benefit for their employees? If the answer is yes, they should consider paying for it as part of an attractive benefit package. If they cannot pay and will not pay, perhaps another method of paying for compliance should be seeked out in which the participant pays the fees rather than the fees being added back into the product.

 

We all know that when fees are added back into the product, that fee becomes magnified many more times.

 

For example, lets say that in order to cover the costs of this program the vendor adds an additional .25% in fees. On an average $20,000 account the fee is $50 per year, much more than the $12 that the compliance is actually costing - compound this over time and it gets much worse. Those with smaller account balances pay less (good deal for new entrants) and those with large account balances subsidize the rest.

 

Was a fee paid by the participant ever put forth as an option?

 

ScottyD

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Guest Sierra

Fred:

 

I am a strong supporter of statewide plans. Why have one statewide PERS and then allow all the individual Counties and their local governments including school districts to operate their own 457(b) and 403(b). THIS IS FOOLISHNESS AND GUARANTEES HIGH COST PRODUCTS.

 

Insofar as the FRS PEORP is heralded, why wasn't it used to offer not only the Model 403(b) but also a Model 457(b)? Why the need for duplication among the hundreds of local governments in Florida? Now, I know that the IRS has repealed its 1967 Revenue Ruling allowing Public Employee Retirement Systems to operate section 403(b) plans but in light of the new regulatory climate I believe that the IRS would be quite sympathetic to a request to re-instate that 1967 Ruling. Fred, did you ever count up the number of voluntary/supplemental Defined Contribution plans in existence in Florida? What foolishness!

 

As far as the Florida State Employees 457(b) Plan is concerned it is unfortunate that its doors are closed to local governments including school districts. This should be rectified this Legislative session.

 

Permit me, at this time. to say something about NY and NJ. NYC, for my money, sets the national standard on just what constitutes a great Defined Contribution plan. It offers a pre-tax 457/401k, a Roth 401(k) and a pre-tax IRA as well as a Roth IRA. In NY outside the City the state makes its 457(b) no-load Plan available to every local public sector employer including school districts in the State. It does not offer a 401(k) because unlike the City it was sleeping at the wheel during the short period of time when state and local governments could establish 401(k) plans.

 

As far as NJ is concerned it is in the dark ages. For the first 25 years of its existence the state's 457 plan was operated by the State's Treasury Department/Division of Pensions and Benefits? The Plan offered 4 basic investment funds, all for the de minimis cost of eight basis points. Fred, would you believe me when I tell you that about three years ago the State decided to farm the operation out to Prudential Financial for about 300 basis points? The Plan is closed to local governments and school districts---but the result is the same---these local public employees are being eaten up by the professionally distributed investment funds that are being hawked, as I speak, in more than 1200 public school buildings in the State in addtion to the hundreds of County government and local government offices throughout the State.

 

Fred, there is always zero unemployment in the 403(b)/457(b) industry in New Jersey. In fact the major predators have a waiting list for those that wish to join their respective sales forces.

 

Peace and Hope,

Joel L. Frank

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Scotty,

 

According to a 2/10/08 article on the TX 403b program that is posted on this website, only 10 to 15% of all eligible employees participate in a SD 403b plan. The reasons are many including the requirement that teachers contribute to their DB retirement plans, low comp levels for younger teachers, availability of other saving options such as 457 plans and roth IRAs, lack of an employer matching contribution, etc. Low participation rates translates into higher costs to operate the plan on a per employee basis. In 401k plans participation usually exceeds 50% and can reach 80% or more where the employer offers a matching contribution or auto enrollment. Since few private employers offer DB plans employees are more motivated to save for their own retirement, unlike SD which provide DB retirement plans. Employers who sponsor 401k plans make investment education available to employees to help them understand how to save for retirement.

 

As for paying for the cost of plan administration, the SD are not going to voluntarily spend non budgeted money to pay for a benefit which has not been bargained for by the union representing the employees because the expenditure would have to be taken from other programs which were approved by the SD or taxpayers. With low participation of 10-15% in the average 403b plan, the union has little interest in negotiating an employer paid benefit that few employees are intersted in especially if other benefits would have to sacrificed by all employees to pay for a 403b plan (e.g., fewer paid sick days). I have no objection if the union negotiates a better 403b plan but I dont think the unions are interested in sacrificing other benefits. Another problem which has been ignored by posters is that the country is in a recession and inflation is up to 7.4% for the last 12 months which makes increasing taxes to pay for additional teacher benefits an impossibility in most SD since the buget will have to be stretched to pay for inflationary increases in operating costs.

 

Before proposing that employees pay for the cost of plan administration you need to check state laws. Some states do not allow for employees to be charged for plan administration. Some SD do not want to be bothered with withholding the fees and remitting them to the administrator for political or budgetary reasons.

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I am so sick of the arguement that a school district should somehow treat 403(b)'s not as benefits and thus not worthy of being paid for. Having an attractive 403(b) plan helps to retain and attract good educators - it won't be the main, or even the secondary reason - but it helps. I'm a taxpayer and I certainly believe that people in education are worthy of a good retirement plan, especially if it costs so little to the district.

 

And why is it so difficult for a district to deduct a fee from the participants paycheck, they're in the payroll business already. If participation is as low as you say it is, then the cost isn't significant.

 

If unions don't bargain for this benefit then shame on them, they should, its an important benefit.

 

We all understand school districts are having a tough time, this doesn't mean that teachers should pay multiples of the true cost of compliance - why don't we think outside the box instead of treating the 403(b) as ancillary benefit akin to Cancer insurance?

 

PS - Almost every survey I've seen shows participation at about 30%.

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I agree with your statement about districts being stretched thin but I believe in much of the country it's more to do with declining home values and the commensurate reduction in property taxes that is hitting districts rather than inflation. You've overstated inflation significantly. The actual inflation rate as measured by the CPI is actually 4.3% rather than 7.4%. This is from the Bureau of Labor Statistics press release from January 2007 to January 2008, the most recent year to year measurement there is data for. The press release is here. 4.3% is still higher than it's been since 1990.

 

I think an argument that teachers can use to convince superintendents and other top district officials is simple self-interest on their part. The administrative officials in most districts are the top income earners in the district and they tend to be active participants in 403b/457 plans simply because they have more money to save. They also tend to have much greater access to school board members than the typical teacher or even the typical teachers' union officials. If you can use a "we're all in this together" argument I think you can go a long way to persuading administrators and board members to view 403b plans as a recruiting tool for ALL employees not just teachers.

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If a 403b plan is so important to teacher retention then why are the teacher unions so uninterested in improving it? Maybe the unions know what their members want better than you think. Whether the particpiation level is 15% or 30% either number is still less than a majority of members.

 

Its difficult to convince taxpayers to pay for an additional retirement plan for teachers when many of them do not have any employer provided retirement plan or employer paid health care benefits. But you can try to persuade them all you want.

 

Most employees can't deduct more than the $5,000 maximum to an IRA (6k if 50) and can contribute to a Roth IRA which is not available in most 403b plans. Low cost IRAs are available from any provider such as VG without the need to negotiate with the SD or get the union's support.

 

Some payroll systems cannot accommodate any additonal deduction slots.

 

Fell free to knock youself out and prove me wrong. You can think outside the box all you want but you still have to work within the system you have.

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I think an argument that teachers can use to convince superintendents and other top district officials is simple self-interest on their part. The administrative officials in most districts are the top income earners in the district and they tend to be active participants in 403b/457 plans simply because they have more money to save. They also tend to have much greater access to school board members than the typical teacher or even the typical teachers' union officials. If you can use a "we're all in this together" argument I think you can go a long way to persuading administrators and board members to view 403b plans as a recruiting tool for ALL employees not just teachers.

 

 

The rate I was thinking of is for food which has increased to 7.4% in the last 12 months and this number is getting the attention of the media. The decline in property values and inflation is causing govts to cut back on budgets and institute staff reductions. NJ is looking to reduce the number of state employees by 3-5000.

 

Your idea of to have SD officials get involved has merit but supts are not going to sacrifice progams and lobby the boards to increase 403b plans if it will increase taxes. In many states it is illegal or unethical for SD board members such as a super to vote on or try to influence board decisions that will affect them personally. In CA a govt offical who votes on board matters that affects himself personally as an employee is subject to criminal prosectution. CA officials who are participants in govt pension plans are being forced to abstain or avoid meetings where benefit matters are voted on which is leading to an inability to transact business.

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Guest Skeptical

Intruder,

 

Well, we know where you stand about these plans. You've argued the same points since you joined the board. That's OK, at least you're consistent in your view. That does not mean I agree though.

 

You compare the lower costs per participant in the 401 market. Of course this is true, because the distribution costs are much, much lower. Employers the size of a typical SD don't have on site reps from multiple firms pressing their employees for a sale. They are more likely single vendor, without any expensive reps as part of the scheme. Don't confuse admin costs with distribution costs. This is the big myth you seem to hammer relentlessly.

 

Second, the myth of the vanishing 403. Do you really think the vendors who are raking in billions from plan fees and expenses will allow employers to let them vanish? Seriously. There is too much cash flow from these products. The industry will fight to the end to maintain their profits. We do not need to be afraid that SD employers will drop 403b plans because they are too expensive or complicated. Recruiting would drop to ZERO in SDs that fail to offer a DC plan. This would be a huge red flag for potential employees.

 

Third, as APteacher points out in this thread, it seems that Connecticut has figured out how to offer a low cost DC plan. Why do you think FLA could not do the same? The other posters like Fredalan point out the very real, practical, political situation that acts as a barrier to reform. But things do change my friend.

 

I'll post more later but you may find it interesting that the IBC claims to have no financial interest in this project, but FASA, one of the four member groups, has the winning vendor AIG as a business partner on their web site. That is one level above a platinum sponsorship which costs $15,000 a year. So some of these underlying groups do receive cash from and have financial relationships with these vendors. To think otherwise is to be naive. How many people will enroll in the (so-called) low cost offering via 1-800 or the web, when a shiny, smiling rep from AIG is standing in the breakroom?

 

Jim

 

 

 

 

 

 

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ah but the facts are a slippery thing ... FASA and VALIC have a 20 yr old relationship that involves a flat fee (a totally disclosed pittance). You are confused about "Platinum" with ASBO. FASA disclosed this - which everyone knew - to the IBC at beginning. You forget the Consultant firm etc that were also part of the conspiracy.

 

Tell me about your source on your statemet - "So some of these underlying groups do receive cash from and have financial relationships with these vendors. To think otherwise is to be naive. How many people will enroll in the (so-called) low cost offering via 1-800 or the web, when a shiny, smiling rep from AIG is standing in the breakroom?" It is your duty to get this exposed. Please provide your phone number or contact and I will have the IBC attorneys contact you this morning. With your source information you will have done a valuable service and we will get this exposed now. Or you will sound like some of the losing Fixed Annuity companpanies

 

VALIC has over 40k Florida K-12 clients - let me you in on a secret - part of the deal is VALIC slashes their fees on all prospective AND exisiting clients ... as did other fims selected. The more assets that occur statewide the lower go the fees. It is called bargaining on a statewide plan.

Gee that ought to make all those VALIC, AXA etc clients unhappy.

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http://www.sun-sentinel.com/news/local/flo...0,2192848.story

 

Fredalan,

 

Saying that fees are slashed and demonstrating it are two different things, when will this information be made available to the public to properly evaluate?

 

Also, it seems like VALIC's 40,000 participants should not have been a factor when choosing vendors, but from your comment it sounds like it was a factor, I'm probably just reading too much into it.

 

Anyway, I've solved the problem of 403(b) funding, it is absurd for anyone to say Florida doesn't have the money to pay for compliance costs for their employees after reading the above story. Close the loophole and use just 1% of that money for 403(b) education and compliance - problem solved.

 

I think taxpayers would be much happier knowing their money was spent on educators who are trying to be independent in retirement (rather than relying on the state) by contributing to a good 403(b) than the current situation where many in the government are taking advantage of a mistake by the legislator.

 

Why doesn't the IBC propose a bill that eliminates the loophole and redirects just 1% of that money to 403(b)?

 

In reality, it appears that money is coming from the retirement system and probably couldn't be used to fund 403(b) compliance - but it proves my point that a little thinking can go a long way.

 

Finally, if we could stop with the whole "nobody has a financial interest" in this model plan idea, it simply isn't true. The County/Districts would gain financially from this deal as they would no longer have to fund compliance - which I know that about 61 of the 67 counties are currently paying for. They are trying to offload this to the employees, with the unions being complicit (this completely amazes me by the way). I think people wouldn't be so put off if they were just honest about it. Now, if they said they were going to pay the fees themselves - then I would believe there is no financial interest. But when you go from paying, to supporting a system where you don't pay - it is dishonest to say that you have no financial gain. Just be honest about it and we'll be fine with that - we know districts are struggling.

 

ScottyD

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Guest Skeptical

EXCERPT ... FASA and VALIC have a 20 yr old relationship that involves a flat fee (a totally disclosed pittance). You are confused about "Platinum" with ASBO. FASA disclosed this - which everyone knew - to the IBC at beginning.

 

 

Fredalan,

 

You just simply acknowledged the financial relationship I pointed out. That it was disclosed in some manner is irrelevant, because disclosure of a conflict (if one exists) does not eliminate the conflict. Here is the info posted on the FASA web site:

 

FASA 2008-2009 Business Partners and Sponsors

 

The first sponsor listed is AIG.

 

To view a PDF of the Sponsorship Levels available click here.

 

 

Excerpt below:

 

PLATINUM SPONSORSHIP - $15,000

Networking connections through the FASA Executive Director

One year Business Alliance Membership (BAM!)

Highlighted sponsorship in the FASA Friday Facts including live link to company website for one year

 

(26 Fridays total)

Company recognition on the FASA website within the sponsor banner rotation on the homepage 4 weeks per year

One full-page color advertisement in either the summer or winter edition of the FASA Communicator

Attend general or concurrent summer conference sessions free of charge

Prime exhibit location including two booths at the FASA conference

One full-page advertisement in the FASA conference program

Named sponsorship of a FASA event during the FASA conference with signage

Display company logo or banner at the FASA conference

Optional hospitality suite at the FASA conference (paid for by sponsor)

Vendor session provided at FASA's summer conference

Registrations to attend FASA Legislative Days Event

 

Second, Do you not admit that accepting a $12 payment for each participant from the selected vendor is a revenue sharing agreement? This would be THE definition of revenue sharing: A portion of the fees & expenses deducted from participant accounts for the purpose of compensating a third party such as a TPA. Someone could draw the conclusion (false as it may be) that the vendors who chose not to bid were put off by having to "pay to play".

 

Finally, don't take any of this personally, it is not intended as such. Participants and their advocates have an obligation to evaluate everything and to question statements offered without supporting data. We will of course remain open minded . Thank you for sharing the details you have so far. It is appreciated.

 

Jim

 

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Guest Sierra

A de minimis cost plan is the plan for all seasons. It has nothing to do with the current state of the economy which is always climbing a wall of worry. The K-12 system in the City of New York has 75 percent participation! Reason: STRONG UNION ENCOURAGEMENT TO PARTICIPATE IN ONLY ONE PLAN--- A DE MINIMIS COST PLAN--- SUCH BEDROCK UNION POLICY IS A TRUE UNION ENDORSEMENT.

 

Having said that, please note that 99 percent of low cost plans use no-load mutual funds on their investment menus. The other 1 percent design their own separately managed accounts with lower expense ratios. Ex: The Federal Thrift Savings Plan, The Florida Retirement System's Public Employees Optional Retirement Program and the Deferred Compensation Plan of the City of New York. In NYC a few years ago when they were using one of The Vanguard funds with an expense ratio of 5 basis points they asked Vanguard to reduce the fee and Vanguard refused. Result: The Trustees changed over to the separately managed account and negotiated a fee of 3 basis points with the Bank of New York. These results can only be achieved when the taxpayer/Deferred Compensation Board is literally obsessed with keeping control of the Plan---this is the NYC experience. NYC administers its Deferred Compensation Plans as if it is the mandatory not the supplemental retirement plan. The participant comes to think of it as part and parcel of a sound retirement plan---without it the Defined Benefit Pension will not do the trick.

 

Peace and Hope,

 

Joel L. Frank

Columnist

Current Pension Topics

The Chief-Civil Service Leader

277 Broadway

New York, NY 10007

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it is great how you are not burdened by seeking facts before you explain your conclusions.

 

almost everything u just said in this e mail is incorrect.

 

earlier u said u knew of transgressions by the other Associations, I offered to have the IBC attorneys contact you if you will provide you phone number or e mail. If you know of wrongs you have an obligation to report them or not make spurious and allegations.

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why not use your enormous knowledge and influence to convince Districts to change their approach. Just suggested to BH for one of her California clients:

Market the 457 - excellent plan that has very very low participation

for 3 years

1. Unions contribute $3 per member (represents about 1/3rd of the annual all-in pay packaage of Union President - who is worth what he is paid)

2. Administration $3 per employee

3. Vendor $5 per employee

Utilize the sophisticated communication facilities of the Union and the District plus the almost $1 million annually in a financial education program. The program is really "let us tell you why u r stupid to be in one of these 403b's when u can be in the Districts 457" - said nicer. 457 is employer plan and no prohibitions against doing this.

 

In 36 months, you have a far better educated group that will now, through education, abandon the terrible 403b plans they are now offered. Today, as you know, the excellent 457 has dismal particpation except among the most financially astute.

 

why don't you organize and effort in California to do this statewide. havin low bp plans only helps those who know how to invest ... unless you fund an education program.

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