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403(b) Summit Last Week

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I have never heard Dan declare himself a non-profit. He's businessman who is beginning to reap the benefits of a solid reputation.

 

Creating a simple, web-based solution to the educational requirement that school districts face is a wonderful business idea that is also a benefit to school districts.

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AP,

The question is, who pays Dan's fee? MCPS writes a check directly to Dan, no problem. Vendors write checks to Dan, hmmmm.

Suppose Fidelity wants to pay Dan more or provide more advertisements on 403bwise. Any conflict, maybe. Should it be transparent? You be the judge.

 

TR,

 

Those are interesting questions. It seems like you are asking three things here:

 

1) Did Dan take any money from vendors of the MCPS plan?

2) Does Dan receive any other incentives from vendors?

3) If either of these answers is in the affirmative, should Dan disclose?

 

Obviously, I do not know the answers to these.

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Guest Sierra

I know, I know--- no one reads the individual items that make up their monthly telephone bill but Federal regulations require such monthly itemizations both for direct and indirect or pass-through amounts.

 

In a similar manner all charges---no matter how small or insignificant should be fully disclosed to the investor if such charge represents a reduction in the value of the individual's investment. Let's assume the individual investor was required to prepare and file an Income Statement with the IRS dealing with just his/her pre-tax retirement account(s). Under the current system it would be IMPOSSIBLE to list and more importantly DESCRIBE each and every expense on such a statement. It would be rejected by the IRS because it does not conform to generally accepted accounting and auditing standards. No CPA/Lawyer/Enrolled Agent or Actuary would dare sign off on such an INCOMPLETE financial statment.

 

Peace and Hope.

Joel L. Frank

Pension Columnist

The Chief-Civil Service Leader

277 Broadway

New York, NY 10007

 

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In a similar manner all charges---no matter how small or insignificant should be fully disclosed to the investor if such charge represents a reduction in the value of the individual's investment.

 

However, if I understand this correctly, there has been ZERO reduction of value in the individual's investment. The fees for Fidelity are exactly what they normally are. Fidelity Spartan fees, for example, are .10, not a penny more.

 

Again, I could be reading this incorrectly, but I do not see any financial harm - zero - that has been done to investors. I am able and willing to be corrected.

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Hey AP,

 

No and no. And you are absolutely right that there has been zero reduction of value in MCPS employees investment choices as a result of the Portal. They still have Fidelity Spartan for 0.10%. As I have tried to explain these vendors are willing to trade an extremely small amount of their profit for access to a billion dollar plan. Scott clearly showed how much vendors stand to make under such a scenario.

 

I'll throw out another scenario: Lets say a low-cost vendor comes to us and says: we offer great, low-cost products and services. You offer great objective information. Lets team and try to sell our services to an employer. We would totally look at doing that. Why wouldn't we do that? Conversely, if a high-fee vendor came to us and made the same offer, we wouldn't do it. As an aside we would never tie payment for our services to vendor success. It will always be a straight up payment for site creation. It's the same with this website. We are thrilled to have had Fidelity, T. Rowe Price and TIAA-CREF provide sponsorship. We hope one day to have Vanguard on this site. [i am happy to disclose that I invest with all of these companies in one form or another] We have politely rebuffed advertising inquiries from numerous other vendors whose fees and services we do not support. I totally get how beaten down 403(b) participants are, and how skeptical they are. They have right to be. Like many here, my introduction to the 403(b) was from the lunchroom crowd who came into my classroom pitching TSAs. I once had a benefits official in Riverside County, California tell me he could care less about the quality of 403(b) investments. I did receive a nice apology note from his superior, but no change in the type of investments they offered.

 

Dan Otter

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Guest Skeptical

Let me be clear that I have no issue with the value of the web portal. It seems like a very well-designed, effective tool. And by all accounts Dan is a good guy who has done very tangible things to improve the outcome for participants.

 

My Perspective:

 

There are fundamental, basic flaws in the current retirement system. The biggest villain in my view is the pervasive nature in which expenses are hidden from participants. Until this horrible practice is eliminated the system will not truly change. It's black & white. There is no gray. Plans are either transparent or opaque. We cannot and should not make exceptions for the good guys. Of course it's easy to rationalize the practice:

 

--It's a tiny amount and it's a small piece of vendor profit.

 

--It provides a valuable service

 

--It's free to the sponsor

 

--Everyone else does it

 

--We're not selling products so it's OK

 

Until plan sponsors recognize that: 1) participants have a fundamental right to know EXACTLY how much is deducted from their accounts, and 2) that they are spending participant resources, the system will not change.

 

So, a Plan Sponsor issues an RFP requiring vendors to pay $50,000 per year directly to the employer for administrative expenses. The employer is then free to use this cash flow for any purpose not prohibited by law:

 

--Office space rent

 

--Travel to professional conferences

 

--Computers & Software

 

--Membership dues to professional groups

 

--Staff salaries

 

--Copier repairs & supplies

 

--Website development

 

--Lunch for the investment committee meetings

 

--Mileage for committee member travel.

 

You get the idea, it's a SLIPPERY SLOPE. It's either not permissible or anything goes. Because once it's OK to do this, we then debate what is reasonable, and I can make a compelling argument that every expense I cited above is reasonable.

 

It's also easy to say that vendors do not pass this cost through to participants. Perhaps there is a ban on adding a specific surcharge in order to make the required cash payment. But where does this money come from? Vendor profits. OK and where do vendor profits come from? From the fees charged to participants. SOMEONE is paying the freight, there is NO free lunch. Maybe the fees are higher for another plan sponsor. Maybe we don't care. But the fundamental flaw remains.

 

How can we say that requiring vendors to pay for admin (compliance) at $12 a head, plus $20,000 a year does not create a flawed RFP system? Did not many of us criticize the Florida situation for this specific practice? I know that I did.

 

I'm not attempting to just be disagreeable. I truly believe that this practice should be banned. I do not question Dan's intent or integrity, or all the good things he's done and will continue to do. I think this is a simple, minor miss step that can be resolved easily. If an employer wishes to pay directly, then fine. If they wish to deduct the cost from participant accounts, while showing the actual expense on a participant statement, that's tolerable. Cash payments made to plan sponsors simply cannot be a participation requirement for vendors. We can do better than that.

 

Best regards,

 

Jim

 

 

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Guest TR1982

"I'll throw out another scenario: Lets say a low-cost vendor comes to us and says: we offer great, low-cost products and services. You offer great objective information. Lets team and try to sell our services to an employer. We would totally look at doing that. Why wouldn't we do that? Conversely, if a high-fee vendor came to us and made the same offer, we wouldn't do it. As an aside we would never tie payment for our services to vendor success. It will always be a straight up payment for site creation. It's the same with this website. We are thrilled to have had Fidelity, T. Rowe Price and TIAA-CREF provide sponsorship."

 

It's the fact that some of those providers also are offered through MCPS in their plan. Whether it's true or not, you have the appearance of bias. Why not allow all of those sponsors to advertise on your site? I think MCPS leaves it up to the employees to decide who they want to invest with. If they think some of the firms charge to much then they should address that. You are implying that you get to render an opinion on that when they don't pay you for that.

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Guest Sierra

 

In a similar manner all charges---no matter how small or insignificant should be fully disclosed to the investor if such charge represents a reduction in the value of the individual's investment.

 

However, if I understand this correctly, there has been ZERO reduction of value in the individual's investment. The fees for Fidelity are exactly what they normally are. Fidelity Spartan fees, for example, are .10, not a penny more.

 

Again, I could be reading this incorrectly, but I do not see any financial harm - zero - that has been done to investors. I am able and willing to be corrected.

 

 

Apteacher;

 

My remarks were specifically designed to be general/###### in nature.

 

Having said that, the Spartan expense ratio of 10 bp is simply designed to attract no-load customers. I wouldn't be surprised, if you did some digging, you would find addtional fees. Check the Prospectus.

 

The point is the average investor, just like the average telephone service customer, is not trained in: "how do I find all of the fees levied against my account"? I don't think anyone has written a manual that tells us how to do it. The investment managment company is keeping the books---why not just disclose it all in a transparent way?

 

My point, which you did not address, remains: The IRS would send your Statement of Income back to you marked: INCOMPLETE---PLEASE RESUBMIT WITHIN 30 DAYS!

 

Joel

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I'm having a little trouble following along here...

 

So we can love the job Dan is doing for the education marketplace on a national level, but not cut him any slack when he attempts to make a little income doing it?

 

It's not like he's hawking a 10yr index annuity with a withdrawal rider. Its a solution for the school districts that the TPA's haven't cornered the market in..yet.

 

This must be so frustrating for you Dan.

 

 

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Hey Groundswell,

 

I was not surprised at all at the reaction from the lunchroom crowd. I get that any objective information available to employees is problematic for reps who have long prospered on an atmosphere of ignorance. I was initially surprised that some advocates lost focus of the big picture (a mechanism is in place to provide objective information and all necessary forms in one easy-to-use place that costs the employee and the employer nothing). However, I've received so many more emails and PMs (and of course your posts and those of others) from people who totally get what we are doing. The Portal is an amazing tool that we are very proud of. I only wish every employee had access to something like it.

 

Dan Otter

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Guest TR1982

Dan,

Nice try. I NEVER objected to you providing any information on this or any other website. I guess that's the tactic, when you get smarmy you change the subject and go after others.

 

I'm also confused about what is objective about providing forms. It's nice that people can get those things in one place but the school division could have posted those things on their website at no cost to the school division and employees. I don't think vendors charge for their forms.

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Jim,

 

Whew! OK, let's see if I understand. You are saying that:

 

1) Somewhere or other, there are costs associated with the service that Dan is providing.

2) Ultimately -- even if the fund expense ratios do not reflect these costs -- the participants are paying these costs, and therefore,

3) Dan should therefore disclose them.

 

Right?

 

Even if I have this correct, I'm not quite sure what to make of it! I need to think about it!

 

 

 

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It's the fact that some of those providers also are offered through MCPS in their plan. Whether it's true or not, you have the appearance of bias. Why not allow all of those sponsors to advertise on your site? I think MCPS leaves it up to the employees to decide who they want to invest with. If they think some of the firms charge to much then they should address that. You are implying that you get to render an opinion on that when they don't pay you for that.

 

TR,

 

I'm really trying to figure this all out. I don't understand your argument against Dan determining who gets to advertise on his site. Are you saying that he somehow benefits from this? This seems to be counter-intuitive because screening out advertisers would only seem to reduce his revenue.

 

Or is the problem that, by accepting only advertising from some funds, he is giving tacit disapproval of others, thus leading participants to avoid those funds, and potentially harming the sales forces of those funds? This seems to be quite a stretch to me.

 

The only solution would be to either accept advertising from all comers -- which would require him to compromise his principles -- or accept advertising from no one -- which would harm him financially.

 

I'm not trying to be argumentative; I just don't understand the argument you are making.

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Guest TR1982

AP,

Let's say you are an employee of MCPS and want to participate in the 403b plan. You go to this "portal" where you can obtain objective information about the plan. You then go to this website and find that some of the firms in MCPS advertise here and some don't. Would that raise questions in your mind about the relationship between the firm running the portal and the vendors? It would to me. Maybe it doesn't to you, I don't know. I am not saying that Dan is doing anything wrong. I do think that this website values transparency and openess in the investment world and these connections do not seem transparent to me.

 

I also have said all I want to say about this. I'm moving on.

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AP,

Let's say you are an employee of MCPS and want to participate in the 403b plan. You go to this "portal" where you can obtain objective information about the plan. You then go to this website and find that some of the firms in MCPS advertise here and some don't. Would that raise questions in your mind about the relationship between the firm running the portal and the vendors? It would to me. Maybe it doesn't to you, I don't know. I am not saying that Dan is doing anything wrong. I do think that this website values transparency and openess in the investment world and these connections do not seem transparent to me.

 

I also have said all I want to say about this. I'm moving on.

 

TR,

 

Thank you for the explanation. Honestly, I don't see the conflicts that you do. They seem like quite a stretch to me.

 

On the other hand, I do appreciate your concern for transparency.

 

Let's compare this situation to NEA Valuebuilder. NEA does in fact disclose the relationship that it has with Security Benefit, which pays NEA >$500,000 per quarter. That payment is disclosed. Security Benefit then charges some pretty high fees to participants for the Valuebuilder program. I would argue that teachers who have participated in this program have suffered financially as a result of the high fees.

 

Dan, on the other hand, has developed a web site for MCPS employees. Dan has not disclosed what he has received from MCPS for providing this web site. However, through this web site, MCPS employees can invest in some very low cost plans. I would argue that teachers who use this web site can financially benefit by investing in companies such as Fidelity and T. Rowe Price.

 

In the first instance, we have disclosure, but (I would argue) poor financial outcomes. In the second instance, we have lack of disclosure, but (again, I would argue) better financial outcomes.

 

That is, so far, how I see it, but I'm just figuring this stuff out on the run! As I have said, I am able and willing to be corrected.

 

 

 

 

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