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403(b) Summit Last Week

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These comments are in response to the discussion thread regarding the Montgomery County Public Schools (MCPS) educational web site designed and maintained by Bwise Guys. First, my name is John Kevin, I am the investment officer and plan administrator for the MCPS 403(b) and 457(b) plans. My phone number is 301.517.5822, if anyone would like to discuss my comments please feel free to call me.

 

MCPS, a k-12 employer, located in Maryland realizes that employer provided education regarding its two dc plans, while comparable with other k-12 employers, has historically been very limited. MCPS has always published a brief Q&A regarding the plans and listed vendor contact information. In evaluating its dc plans during the past few years and recognizing that the IRS is placing an increased burden on employers regarding these plans going forward MCPS has been looking for ways to provide a clear, consistent message regarding these plans which is available to all employees. MCPS has almost 30,000 employees eligible to participate in these plan, we have over 200 work sites through out the counties 495 square miles. Our employees work 24 hours a day at multiple sites and for a fair number English is not their native language. The demographics of this employee population present a challenge when it comes to educating them on what I refer to as a “costless benefit.” This costless benefit is because the employer is not contributing to participant accounts. MCPS merely acts as a conduit for payroll contributions. MCPS currently has nine approved dc plan vendors whose service models include both on-site representatives and direct-to-consumer model. To date, MCPS has relied on vendors to provide education regarding these plans to our employees. The majority of that education is via a one-on-one session with a financial advisor and MCPS has no idea what is being communicated to the employee. Firms that market direct to the consumer typically provide no education to our employees.

 

MCPS, as part of its most recent vendor RFP, required companies to contribute on a pro-rata basis (assets under management) to pay for the development and maintenance of an educational web site dedicated to our dc plans. Why did MCPS choose to pass this cost back to the vendors? A number of reasons, first, MCPS does not have the resources (staff or money) for this type of endeavor. Second, the pricing structure of dc plan investments allows for such funding. Let me explain using Fidelity as an example, MCPS has $164 million in participant assets with Fidelity Investments across 1,900 accounts. The average account balance is $86,000. Fidelity, and every other company, applies an expense ratio to its mutual fund assets. The expense ratio pays for fund management, custodian services, auditors, shareholder reporting and “administrative services.” When Fidelity reviews a dc account they look at average account balance, when the average account balance is say, above $50,000, the account is profitable for Fidelity. Fidelity, when it bids for a dc plan knows that it will incur some cost to educate the participants regarding plan. In the 401(k) world this is done via group meetings in which a participant education consultant from Fidelity flies in stays in a ######el and reviews the plan, investment options and how to enroll for groups of employees. Plan size and profitability dictate to Fidelity if they will offer 10 hours or 100 hours of employee education as part of their bid. MCPS knows that Fidelity does not provide group meetings to our employees, however they have an “education budget” built into their proposal. MCPS, by asking Fidelity to pay for part of the web site, is merely capturing these education dollars which would otherwise be lost and merely additional profit to Fidelity. Now consider the same scenario for companies that offer annuities, the costs are typically higher due to the M&E fee so the average account balance profit threshold can be lower. The fact that MCPS is requiring vendors to reimburse part of the education budget in dollars versus in-kind service is irrelevant. The vendors are not adding hidden fees to our participant accounts because the only fees that apply are the underlying fund expense ratios and the stated M&E fees. Only one vendor still charges a custodial fee of $25 per year, all other companies dropped the fees knowing full well they were going to be sending MCPS a check for the web site. Third, who stands to profit from a successful web site? MCPS? No, the vendors are going to profit if participation increases. The vendors view the cost as a small price to pay for additional, unbiased, promotion of the plans, the promotion of which never before existed.

 

MCPS issued an RFP last fall searching for a vendor to develop and maintain the web site. One dozen companies requested the RFP and based on responses MCPS choose to work with Bwise Guys for an initial two year period. MCPS controls ALL content on the site and Bwise Guys cannot take any direction from vendors regarding the content. Not one vendor has complained about the content on the site because it is unbiased to vendor and products. MCPS is promoting the web site internally which again helps raise the profile of these plans. There is no link from the MCPS web site to 403(b) Wise for which traffic is driven. The only link is from the MCPS employee web site.

 

This web site is an experiment, MCPS is trying to increase its participation rate, which is currently at 51% for full time employees, and this is one tool we are using. MCPS does mail out universal availability notices to 30,000 each year and this cost is borne solely by MCPS.

 

This discussion board seems to be an untapped resource of experts. I challenge anyone reading this to call me with a solution to our education dilemma. The answer is not financial advisors; do the math, 30,000 employees’ and nine vendors. Three of the vendors are direct-to-participant, the other six offer representatives. If the six try to provide one-on-one education to our employees that results in 5,000 meeting each year and that doesn’t include the meetings advisors should be having with existing clients. Financial advisors attempting to educate large employee populations are one major flaw I see in these plans. The employer must be involved and that is what should begin to occur with the new regulations and via sites like the one we use.

 

As employers realize these plans are going to cost them money to administer they will be reviewing all aspects of the plans. Everything should be on the table, # of vendors, products offered, group instead of individual contracts, and importantly what education solutions are being offered and suggested by the vendors. My experience is that the vendors prefer the status quo on all of these issues. Reducing the number of vendors increases the leverage of the employer to demand pricing concessions and service improvements. Product offerings are already shifting, a number of company that historically offered annuity contracts have changed, without being prompted, to a mutual fund program. Group contracts again change the leverage from vendors to employers and will ultimately make these plans more attractive in the future. Attractive in the sense that employers may control the assets and be able to move them to another company if there are no surrender costs involved. These plans will look more like 401(k)’s but it will take 5 – 10 years. Group contracts with no surrender charges or restrictions are what employers should be demanding now.

 

Let’s not forget that most k-12 employees are covered by a pension plan (DB) and our also receive social security. These dc plans are truly supplemental and play a very different role than a 401(k) plan for for-profit sponsors with no other retirement plans. Our employees only need to save enough to replace between 20-30% of the final income since the other two sources already exist.

 

MCPS’s experience is that you don’t need to reduce vendors to improve the plans for employees. Product concession are available to an educated consumer, it is incumbent on k-12 plan sponsors to become that consumer. Ultimately everyone needs to remember these plans are for the benefit of employees and nothing else.

 

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Nobody here is offering anything but praise for Dan Otter & the Portal he has provided. Clearly it offers a great advantage over Vendor Offerings. And I appreciate the information furnished about the reasons why MCPS has engaged the BWise Team.

 

The difficulty I have is HOW the Portal is paid for.

 

I present the following scanario for consideration. MCPS has a choice to offer Vanguard Institutional Index Funds at 3 BPS or Fidelity Spartan at 10 BPS. Vanguard will NOT agree to Fund the Portal but Fidelity will. The Portal costs only 2 BPS, so with a bit of arithmetic, Vanguard with explicit Portal fees is 5 BPS and Fidelity with implicit Portal subsidies, nets 8 BPS, but still costs participants 10BPS. Net, net Fidelity costs participants 5 BPS more - for the same service. What is the best solution for participants? (I know - who should squabble over a measily 5BPS) Thoughts?

 

Cheers,

 

Danc

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....by asking Fidelity to pay for part of the web site, is merely capturing these education dollars which would otherwise be lost and merely additional profit to Fidelity.....

 

What percentage of these education dollars go to pay for the portal? 100% ? less than 100% ?

 

Fidelity and T. Rowe were vendors before the portal was developed, so where did the education dollars go before this year?

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danc,

 

I will have to respectfully disagree with your scenario.

 

MCPS does not have the choice of offering Vanguard index funds at 3 bps. First, Vanguard only offers the 403(b) community a 403(b) plan that has a $15 per fund charge and they do not offer their institutional fund within it, it is the normal S & P Index at about 18 bps. I will tell you that Vanguard WOULD pay MCPS money to stay on their platform if they had enough assets to justify, my proof is that they have paid money in California to be available (to 403bCompare) and costs have not gone up at Vanguard.

 

The only way for the institutional index to be made available is through a third party administrator platform and those come with additional fees. If MCPS went to a single vendor system and issued an RFP for an Open Arch TPA and somehow managed to get the nine vendors in its district to transfer all the assets onto it (this is impossible by the way, but for our purposes we'll assume it isn't), there would still be a fee to run the plan. Thus even if the 3 bps index fund is available, there would be additional fees on top of it (at a minimum probably 10 bps).

 

The portal in this case doesn't cost 2 bps to the employees, it doesn't cost anything to the employees, there is not an alternative scenario that would be lower in cost simply because the portal was adopted. This might be different in a district that had a smaller asset base, but it is certainly not true in MCPS.

 

ScottyD

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Guest Skeptical
Skeptical,

I am not wrong, you made my point. If a TPA offered the site for free and they are a TPA that sells products - then the site will be inherently biased.

 

What exactly are you referring too?

ScottyD

 

Scotty,

To be clear, the TPA entity never actually sells a financial product either. Although an affiliated broker-dealer may well. I'm talking about a TPA who accepts revenue sharing payments from the investment provider, who then provides the education portal for "free". It's not free and they do not sell products.

 

What's the difference in the Florida IBC, a (non-profit) corporate entity, charging $250K and then $100K. They are NOT selling products either, but it doesn't mean that participant assets are not being used to pay that required fee. What if they(the IBC) offered the education portal? Is that OK with you?

Jim

 

 

Scotty,

 

Why are you silent on my question? Please address the post I made above.

 

Would it be OK for the Florida IBC to use payments from vendors for an education web portal? If not, then why would it be OK for the MCPS to do so? If so, then how can you square your statement that required payments fundamentally change the RFP process?

 

I'm listening with an open mind. I just cannot balance what to me appears to be a contradiction.

 

Regards,

 

Jim

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I would LOVE if Florida adopted the portal.

 

My problem with Florida is less with the fact that the vendors have to pay a fee (I do not agree with a fee being charged too bid - however, if the fee was refundable, even partially if the bidder didn't get it....I could go for that) and more with the secrecy of the process, the secrecy of the fees and the fact that after a similar process that John Kevin and MCPS went through - they came out with worse products. There is no Fidelity or Price or TIAA in the plan and we really can't evaluate it in terms of fees because they haven't been fully disclosed. We can't even evaluate the investments as they haven't been disclosed.

 

I do think the fees are high enough to affect product pricing in the products chosen and that is a major difference.

 

I've also been a critic of the compliance fee that the vendors have to pay, however not because the vendors have to pay (they could, as VALIC is doing, pass it on directly to the participants), my problem is that the IBC stated they had nothing to gain....yet clearly saving on compliance fees for hundreds of thousands of potential participants represents savings. I'm looking for honesty and integrity in the process and don't see it.

 

You are comparing apples and oranges here - our problem with Florida is that they've boasted about this "model plan" and not given any information as to what is really in it. There are no true low-cost vendors as far as we can tell and it didn't have to be that way. Can anyone tell me why AIG is offering a variable annuity in this "model plan"? Why not a mutual fund platform?

 

Apples and Oranges, Apples and Oranges.

 

ScottyD

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Scott,

 

If Florida "Model" Plan participants had access to the Portal they would have two important pieces of information available to them. The first would be the FAQ below. The second would be access to an online calculator which would allow them to clearly see the impact of fees.

 

What should I know before opening a 403(b)?

Fees, operating rules, and investment objectives can vary greatly among vendors and across investments. Therefore, it is important to understand all of these before you begin contributing to any investment. Additionally, some investments impose surrender charges or restrictions on withdrawals. Find out if there are surrender charges or restrictions on withdrawals before investing.

 

All mutual funds and variable annuities are required to produce a document called a prospectus, which details specific information about investment cost, objective, risk, performance, and operating rules. Ask to see the prospectus before contributing to a variable annuity or a mutual fund. Fixed-annuity products do not have a prospectus. Instead, they have a contract that details operation of the annuity. Ask to see the contract before investing in a fixed annuity.

 

For more information on general investing principles and terms, see the Investment Reference section. For more information on the impact of investment fees on return, estimation of future savings growth, and exploration of various distribution scenarios see the Calculators section.

 

Portal Calculator Results

Scenario: Two investors contribute $5,000 per year from age 25 until age 65. Both investors earn a conservative 8 percent return. Each investor pays a different cost (obviously, these figures are for illustrative purposes only and do not reflect actual performance, or predict future results of any investment account).

 

Participant one, an MCPS employees, invests in a Fidelity Spartan Fund with MCPS that charges 0.10 percent. After 40 years, under the described assumptions, this investor has accumulated $1.3 million.

 

Participant two, a "Model" Plan participant has access to... we just don't know at this point. We do know that operators of that plan have declared the following companies "best in class": AIG Retirement (VALIC) (annuity products); AXA (annuity products); PlanMember Financial Corporation; American Century; and Waddell & Reed. Numerous critics have pointed out that based on past actions, most of these companies could hardly be described as "best in class," unless the moniker was applied to commissions for sales reps. However, it has also been stated that companies are adapting to the pressure to reduce fees. They may very well have fees as attractive as the ones in the MCPS plan which makes, in addition to Fidelity, T. Rowe Price and TIAA-CREF available. Hopefully, we'll find out soon. In the meantime, here are several potential fee scenarios for a "Model" Plan participant using the described assumptions:

1 percent in fees would yield $1.04 million

1.5 percent in fees would yield $908,000

2 percent in fees would yield $799,000

2.5 percent in fees would yield $703,000

 

Florida might have great weather, but for what the MCPS investor saves in fees in this hypothetical example, he/she could buy a condo in FLA and still be ahead.

 

Scott, your apples to oranges analogy is right on. Florida has oranges (some might say their plan is a lemon); while we designed the Portal using an Apple.

 

Dan Otter

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Guest Skeptical

ScottyD,

 

If you believe that the payments made by the vendors to the SD (and then to Dan it seems) are FREE and at no cost to the participants, what did you mean when you said: (Link to previous thread)

 

"I agree that all fees are passed on to the participants - unless of course the district pays them."

 

You seem to have felt pretty strong about the IBC pay-to-play requirement when you said:

 

"One additional question that needs to be answered (perhaps it was and I missed it), was one of the criteria that the vendor be required to pay the school districts money"

 

Why would that be important? You seem to argue in the MCPS case that the practice is acceptable & irrelevant. Which is it, important or not? For the record, some of the funds in the MCPS plan have 50 bps trails (American R3) which could have easily been subsituted with a share class like the R4, saving 25bps.

 

Or perhaps the alleged FREE money might be recaptured by the winners as you suggested:

 

"... the(y) (W&R) will probably rely on cross-selling to subsidize the plan - I assume they'll be relying on rollover business to help them overcome the lower costs."

YOUR OWN WORDS prove there is no free lunch. Are you saying that NONE of these statements you previously made are true in the MCPS case? It seems you have a completely different perspective when Dan is involved. I'd appreciate you taking time to help me understand your view. After reading your previous posts you might understand why I'm confused.

 

Regards,

 

Jim

 

 

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Skeptical,

 

In my first quote I was responding to Fredalan in regards to the $12 per participant fee, this is a significant fee to the vendor and is passed through to the participant through higher basis points or through a direct debit of $12 (which I believe VALIC is doing). If MCPS decided to charge $12 per participant, the fee structure of the nine vendors would not be the same. However, if in my previous examples MCPS paid a hefty fee for the website and passed it to the vendors, they wouldn't need to raise their fees at all - and in fact they didn't - it was small enough that in comparison to their assets, they absorbed it.

 

In my second quote, you also take me out of context - this was in relation to us wanting to know whether or not it was a requirement to pay the school district. I think knowing the answer to that question was important as well as knowing the amount - this information helps us make a wise decision. In the MCPS case, they and Dan were upfront - It was part of the RFP. I didn't know at that time whether or not it was a requirement and the IBC wasn't and still hasn't been very forthcoming with information. In addition, the amount of the fee is significant because depending on the amount - the pricing might be different.

 

You've taken me out of context and still not proven how Dan's portal has made MCPS plan more expensive, yet it is a fact that the model plan in Florida is more expensive. Whether that is because of ineptitude on behalf of the IBC and Gallagher or because of additional fees that must be paid - I don't know.

 

I do know that $50,000 per year, per vendor and $12 per participant is a significant enough fee to warrant a change in pricing (someone correct me if I'm wrong....it may be $50,000 spread across all five after year one.......). I am willing to bet that if the only requirement was that the 5 vendors pay for Dan's portal and not pay for compliance costs - the pricing would be much different.

 

At the end of the day we are also comparing to very, very different items - one is a financial product, the other is website that serves an administrative and plan related purpose.

 

What if the portal only cost $5,000 to MCPS (Dan would of course be taking a bath on this, but play along), do you really think the vendors would balk? Do you think they would raise their costs? Does it matter what size the assets are in the plan?

 

You are making a mountain out of a mole hill and the only thing you are accomplishing is the tarnishment of an idea that is great and has been executed flawlessly. I'm wondering if this is more about a pissing contest than the actual issue.

 

Either way, I've got better ways to spend my time.

 

ScottyD

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As a teacher in Montgomery County, I only wish that the portal had been around when I first enrolled in a 403(b). I had the misfortune of walking into the staff lounge – these were the days when I actually ate during my lunchbreak instead of working through it – where a very nice gentleman called me over to talk to me about my retirement. Long story short, I was sold a high fee product in the range of 1.75 – 2.15 % if I remember correctly. When I bailed out years later (with a hefty surrender charge, naturally), every fund that the salesperson had recommended was posting below average returns when compared with all funds in the given fund categories.

 

I never asked the salesperson the questions that I should have, mainly because the words for these questions were not in my vocabulary. I was persuaded by the fancy graphs, the insurance aspect, and by the notion of having a financial “advisor.” I wasn’t totally naïve. I called MCPS to get more information, but they could do nothing to help me except give me a list of vendors. I asked around, and the vast majority of teachers who were actually investing were with this company. Plus, MCPS allowed the salesperson into my building, so the product must have been pretty good. At the time, I was an elementary teacher working 10 or more hours every day. I just didn’t have the time to do major research. (I know: This was stupid, stupid, stupid.) But this guy was so friendly and sincere that I didn’t feel that I HAD to do much research.

 

If the portal had been around, and MCPS would have directed me toward it when I had called them for information, I would have received a clear and concise education on 403(b)s. I would have noted the information on fees. I would have used the calculators, and I would have been shocked with the result. I would have asked the salesperson some serious questions, and I would have walked away.

 

Sure, the information from the portal can be found elsewhere if you have the time. But we must remember the mindset of newbies: They don’t know what they don’t know. Even with the wealth of information found on the web nowadays, a newbie may not know what to look for. And the salespeople roaming our staff lounges are probably not going to raise issues like fees in a way that truly educates the newbie: “Hi, I’m from company ######. The fund I’m recommending has a fee of 1.94%, while the average fund of this type has a fee of 1.40%. This may sound like a small difference, but over the course of the next 30 years, this difference will cost you $ 47,000 in retirement money assuming my fund equalled the return of the average fund. Over time, my fund, which is run by a cadre of expert managers, actually does no better than the index for this type of fund.”

 

I want to thank MCPS for now having a source of unbiased information for the new investor. (At the very least, it compiles all of the information into one place, with all of the necessary links and phone numbers.) These new investors will now have the proper words in their vocabulary when they forge ahead to start their 403(b).

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Guest Skeptical

Dan, Scotty, & All:

 

For the record, I've said nothing to date to discount the value of the education portal. This has never been a question. I agree that in a (politically entrenched) multi-vendor situation, with wide disparity in pricing, this type of tool can be very helpful to the participant. I wish only the best for the participants, Dan, and the plan sponsor (in that order). Dan has every right to market, sell, & service this unique web-based tool to willing SDs. I hope he is very successful. So, to be very clear:

 

--We agree- The education portal is valuable

--We agree- MCPS improved their plan

--We agree- Participant's are likely to have improved outcomes

--I am IN FAVOR of and support the education portal

 

 

We simply disagree as to the payment method.

 

 

--I stand firm that any bid process which requires a vendor to make payments to the plan sponsor, regardless of the amount, fundamentally flaws the process.

 

--Participants have a fundamental right to know the details of any vendor payments made to the plan sponsor for the privilege of 1) selling retirement plan investment products or 2) selling supplemental financial products

 

Transparency, Transparency, Transparency. We may well see some incremental improvements in the next few years. But we will not see a dramatic change unless forward-thinking advocates like many here stand firm. There is still so much hidden from participants. This should not be acceptable. As advocates we should set a higher standard.

 

Dan, thanks again for the discussion.

 

Best regards,

 

Jim

 

 

 

 

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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

 

 

Apteacher: I was wondering if you still remain under the illusion that 10 bp represents all the fees the investor in the Spartan Fund pays?

 

Joel

 

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Apteacher: I was wondering if you still remain under the illusion that 10 bp represents all the fees the investor in the Spartan Fund pays?

 

Joel

 

Well, let's see, Fidelity does charge an annual admin. fee of (I think) $24 for 403b accounts.

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