Jump to content
Sign in to follow this  
scubachisteve

Why Not Vanguard?

Recommended Posts

Okay, I've been reading this board for a few weeks now and I think it's time to ask for some clarification on why the new regs. have caused Vanguard to drop from so many 403(b)'s (or did the plans drop them?) ...yeah, I'm confused.

 

For some background: I'm a plan administrator and I've been really dissatisfied with the annuity product we have with Valic. After doing my homework over the past few months (and reading this board) I'm thoroughly convinced and eager to offer some low-fee investment options for my employees; hopefully through Vanguard or Fidelity.

 

I've finally got the green-light to put a proposal together, and lots of employees are eager for other options.

 

As I understand the new regulations, there's not much of a hurdle to doing this, aside from some additional administration for my company as the plan administrator. We don't work with a TPA (yet).

 

So a few questions:

 

1. What am I missing? Why does it seem like so many plans are dropping vanguard? Is it issues with TPA's that don't necessarily effect us?

 

2. Am I overlooking some huge regulations or administrative burdens that would make adding Vanguard as a 403(b)7 provider less than attractive? (All of the forms on Vanguards website are pre-signed so it seems like they're eager for 403(b) business)

 

3. I understand that the responsibility will be on us as plan administrator to manage contribution limits, etc. What am I missing? Should we be using a TPA when adding this layer of 'complexity' to the plan?

 

Thanks, gang.

 

Steve

Share this post


Link to post
Share on other sites

I'm not sure if this link will come through, but if you can go to it, it does reveal why some administrators won't go with low cost providers. Mainly it has to do with wanting someone else to take responsibility for the plan (at a cost to participants, not the organization). Low cost providers like Vanguard and T-Cref will not enter into the same kind of relationship with the organization as will those who stand to profit more, like Valic.

Bill

 

Again, search for Valic or wmccall on this forum and you'll find information that will at least get you started on this topic

 

http://bwise.ibforums.com/index.php?showto...&hl=wmccall

Share this post


Link to post
Share on other sites

So a few questions:

 

1. What am I missing? Why does it seem like so many plans are dropping vanguard? Is it issues with TPA's that don't necessarily effect us?

 

2. Am I overlooking some huge regulations or administrative burdens that would make adding Vanguard as a 403(b)7 provider less than attractive? (All of the forms on Vanguards website are pre-signed so it seems like they're eager for 403(b) business)

 

3. I understand that the responsibility will be on us as plan administrator to manage contribution limits, etc. What am I missing? Should we be using a TPA when adding this layer of 'complexity' to the plan?

 

Thanks, gang.

 

Steve

 

 

 

1. Vanguard is getting dropped because they will not sign info sharing agreements with the TPA's.

 

2. The less than attractive portion of it all comes back to the fact they are not signing the ISA.

 

3. The cheapest way for you to "add" vanguard(and other funds) through 403b ASP. It does add some cost but can be weighed against the benefits.

Share this post


Link to post
Share on other sites

Steve --

In your shoes I would visit the 403basp site and look it over, formulate a few questions, and then give them a call. I have talked to them a couple of times and they were very knowledgeable and helpful. AND they appear to take the high ground ethically.

 

Oh, your lucky employees!!!

 

JudyS

Share this post


Link to post
Share on other sites

Steve,

 

Based on my research here is what I found. I am not a plan administrator; just an employee but I do have my degree in business and read quite a bit on the subject.

 

Vanguard does have an ISA (information sharing agreement) and it was written in cooperation with other low cost investment companies. Each of the low cost providers then made slight, very slight, modifications to the ISA to meet the individual investment companies’ needs. Fidelity was one of the other low cost providers involved.

 

However it’s a standard issue ISA. This means everyone gets the same ISA. The Vanguard lawyers make one agreement one time and it’s done. So as a new agreement is put into place Vanguard does not need to have a lawyer review each and every individual custom ISA.

 

The individual school districts have individual lawyers that are motivated by self-greed. These individual lawyers want to make a custom, one of a kind ISA and get paid for it, then have the company sign the lawyers ISA. They also often include a ‘hold harmless’ agreement. Of course this means the investment company must read each individual ISA at a cost to the investment company.

 

Low cost providers such as Vanguard have low fee structures so they don’t have a bunch of lawyers to review all these on of a kind custom ISA’s.

 

Other companies such as Janus have simply said ‘we give up’ and will not make their own ISA and will not sign a school districts custom ISA meaning they are exiting the 403b market.

 

In my opinion, Bob Architect’s changes of the IRS rules is resulting in school districts to move from offering low cost index type investing to a “brokers commission dream world” of insurance annuities and high fee investment alternatives.

 

If course these brokers will use examples that will compare their fee structure to ultra high expense A share load mutual funds and with small account balances to make it look like their platforms are less expensive. They will not give you examples comparing their fee structure to investing in something like the Vanguard total stock market fund or target retirement date funds.

Share this post


Link to post
Share on other sites

Steve,

 

Based on my research here is what I found. I am not a plan administrator; just an employee but I do have my degree in business and read quite a bit on the subject.

 

Vanguard does have an ISA (information sharing agreement) and it was written in cooperation with other low cost investment companies. Each of the low cost providers then made slight, very slight, modifications to the ISA to meet the individual investment companies’ needs. Fidelity was one of the other low cost providers involved.

 

However it’s a standard issue ISA. This means everyone gets the same ISA. The Vanguard lawyers make one agreement one time and it’s done. So as a new agreement is put into place Vanguard does not need to have a lawyer review each and every individual custom ISA.

 

The individual school districts have individual lawyers that are motivated by self-greed. These individual lawyers want to make a custom, one of a kind ISA and get paid for it, then have the company sign the lawyers ISA. They also often include a ‘hold harmless’ agreement. Of course this means the investment company must read each individual ISA at a cost to the investment company.

 

Low cost providers such as Vanguard have low fee structures so they don’t have a bunch of lawyers to review all these on of a kind custom ISA’s.

 

Other companies such as Janus have simply said ‘we give up’ and will not make their own ISA and will not sign a school districts custom ISA meaning they are exiting the 403b market.

 

In my opinion, Bob Architect’s changes of the IRS rules is resulting in school districts to move from offering low cost index type investing to a “brokers commission dream world” of insurance annuities and high fee investment alternatives.

 

If course these brokers will use examples that will compare their fee structure to ultra high expense A share load mutual funds and with small account balances to make it look like their platforms are less expensive. They will not give you examples comparing their fee structure to investing in something like the Vanguard total stock market fund or target retirement date funds.

 

 

 

Hi presentation,

I too have studied this area for a number of years and just an employee, now retired. It seems to me that the new regs via the ISA smacks the identical language of the old hold harmless agreements.

The results are very similar, except that this time the new regs are more rejecting of vendors ISAs, specifically of low fee vendors. School districts personnel are not necessarily "greedy" but just lazy, taking the easy way out because so few employees are aware of these plans, impact of costs, investment knowledge and the unions are useless.

 

What I don't understand in yester year and today, is why Vanguard signs on with some districts and not others. There are posters reporting here that they have low fee companies on their list under the NEW REGS. There must be very different language in the ISAs that VG will sign vs. majority of SD where VG will not sign. This also smacks of the old hold harmless agreement, VG did sign some hold harmless agreements over the years.

 

Because of the confidentially, I have never been able to find out those differences and yet I think that might be an answer to this problem.

 

My last question is why has the educational systems of the country seems to feel that they are in more risk of liabity than private sector companies with there plans. Yes, I have heard the argument that SD have taxpayer money and need have more protections, which means higher cost vendors than private company plans. But that’s an over simplification. No institution wants to be liable, whether private or public. School board members would be thrown out of office and the private company would be at risk for going out of business. For some reason, at the end of the day, SD want and demand more protections than private sector plans, IMHO.

 

Just my 2 cents worth,

Steve

 

Share this post


Link to post
Share on other sites

Excellent replies, guys! Thanks!

 

This is great because it generally confirms my initial suspicions. I can understand Vanguard's position on signing and reviewing myriad custom ISA's. I can't imagine that the sample service provider agreement on this site looks very attractive either-- obligating the provider to supply advisers (salesmen) and investment advise to individuals. NOT doing these things is exactly why Vanguard can offer cheap products, and exactly why it's attractive to self-sufficient investors.

 

Liability-wise, it seems more likely that an organization would be more susceptible to employee lawsuits by NOT providing decently priced investment options (something 403(b) regs already required- due diligence, interest of the employee etc. etc.), and is one of the reasons I'm working on this project; even if that means taking on more 'risk' by not having the protection of your own customized ISA. In the long-run, if you can show you've given an employee the opportunity to make good decisions its worth being liable for any technicality that may arise over mistakes in plan administration. Which risk is greater? Anyone have statistics :)!?

 

Additional note: Vanguard doesn't allow vesting. That might kill the whole thing, as we match our employees contributions and have a stepped vesting schedule. I'd love to find a way around that one.

 

 

Thanks again for all the comments. I feel your pain in the public sector.

 

(quick story: Many moons ago in a different life I was a green financial (sales) advisor who sold a 403(b) annuity to his MOM who is a teacher. My mentor at the company I worked for encouraged it, sales-support told me it was the best option and I didn't question it. I made a good commission and thought I had done a great service to my mother. Guess I have some apologizing to do over Christmas)

Share this post


Link to post
Share on other sites

 

Steve,

 

Based on my research here is what I found. I am not a plan administrator; just an employee but I do have my degree in business and read quite a bit on the subject.

 

Vanguard does have an ISA (information sharing agreement) and it was written in cooperation with other low cost investment companies. Each of the low cost providers then made slight, very slight, modifications to the ISA to meet the individual investment companies’ needs. Fidelity was one of the other low cost providers involved.

 

However it’s a standard issue ISA. This means everyone gets the same ISA. The Vanguard lawyers make one agreement one time and it’s done. So as a new agreement is put into place Vanguard does not need to have a lawyer review each and every individual custom ISA.

 

The individual school districts have individual lawyers that are motivated by self-greed. These individual lawyers want to make a custom, one of a kind ISA and get paid for it, then have the company sign the lawyers ISA. They also often include a ‘hold harmless’ agreement. Of course this means the investment company must read each individual ISA at a cost to the investment company.

 

Low cost providers such as Vanguard have low fee structures so they don’t have a bunch of lawyers to review all these on of a kind custom ISA’s.

 

Other companies such as Janus have simply said ‘we give up’ and will not make their own ISA and will not sign a school districts custom ISA meaning they are exiting the 403b market.

 

In my opinion, Bob Architect’s changes of the IRS rules is resulting in school districts to move from offering low cost index type investing to a “brokers commission dream world” of insurance annuities and high fee investment alternatives.

 

If course these brokers will use examples that will compare their fee structure to ultra high expense A share load mutual funds and with small account balances to make it look like their platforms are less expensive. They will not give you examples comparing their fee structure to investing in something like the Vanguard total stock market fund or target retirement date funds.

 

 

 

Hi presentation,

I too have studied this area for a number of years and just an employee, now retired. It seems to me that the new regs via the ISA smacks the identical language of the old hold harmless agreements.

The results are very similar, except that this time the new regs are more rejecting of vendors ISAs, specifically of low fee vendors. School districts personnel are not necessarily "greedy" but just lazy, taking the easy way out because so few employees are aware of these plans, impact of costs, investment knowledge and the unions are useless.

 

What I don't understand in yester year and today, is why Vanguard signs on with some districts and not others. There are posters reporting here that they have low fee companies on their list under the NEW REGS. There must be very different language in the ISAs that VG will sign vs. majority of SD where VG will not sign. This also smacks of the old hold harmless agreement, VG did sign some hold harmless agreements over the years.

 

Because of the confidentially, I have never been able to find out those differences and yet I think that might be an answer to this problem.

 

My last question is why has the educational systems of the country seems to feel that they are in more risk of liabity than private sector companies with there plans. Yes, I have heard the argument that SD have taxpayer money and need have more protections, which means higher cost vendors than private company plans. But that’s an over simplification. No institution wants to be liable, whether private or public. School board members would be thrown out of office and the private company would be at risk for going out of business. For some reason, at the end of the day, SD want and demand more protections than private sector plans, IMHO.

 

Just my 2 cents worth,

Steve

 

 

SD are risk adverse for liabilities imposed under the regs or state law because it is the taxpayers who ultimately have to pay any fines or penaities. SDs do not budget reserves to pay such expenses and may be forced to borrow to pay the penalities. In private corporations it is the employer who bears the cost of liability for plan errors which reduces profits and some costs can be claimed as a tax deduction.

 

Many sponsors purchase fiduciary or E & O insurance to provide funds in the event of liability for plan operation. SD do not purchase such insurance because of the cost or because state law may prohibit public employers from purchasing such coverage.

Share this post


Link to post
Share on other sites

Why not have TPA sign the sharing agreements provided by Vanguard or Fidelity? I have looked at this and still do not understand the problem with signing their agreements. I have heard general things, but nothing specific. What types of specific problems can occur if a TPA signs vanguards agreement? What "liability" issues are there - and how could they come about?

Share this post


Link to post
Share on other sites

Excellent replies, guys! Thanks!

 

This is great because it generally confirms my initial suspicions. I can understand Vanguard's position on signing and reviewing myriad custom ISA's. I can't imagine that the sample service provider agreement on this site looks very attractive either-- obligating the provider to supply advisers (salesmen) and investment advise to individuals. NOT doing these things is exactly why Vanguard can offer cheap products, and exactly why it's attractive to self-sufficient investors.

 

Liability-wise, it seems more likely that an organization would be more susceptible to employee lawsuits by NOT providing decently priced investment options (something 403(b) regs already required- due diligence, interest of the employee etc. etc.), and is one of the reasons I'm working on this project; even if that means taking on more 'risk' by not having the protection of your own customized ISA. In the long-run, if you can show you've given an employee the opportunity to make good decisions its worth being liable for any technicality that may arise over mistakes in plan administration. Which risk is greater? Anyone have statistics :)!?

 

Additional note: Vanguard doesn't allow vesting. That might kill the whole thing, as we match our employees contributions and have a stepped vesting schedule. I'd love to find a way around that one.

 

 

Thanks again for all the comments. I feel your pain in the public sector.

 

(quick story: Many moons ago in a different life I was a green financial (sales) advisor who sold a 403(b) annuity to his MOM who is a teacher. My mentor at the company I worked for encouraged it, sales-support told me it was the best option and I didn't question it. I made a good commission and thought I had done a great service to my mother. Guess I have some apologizing to do over Christmas)

 

 

Disclaimer (just in case I'm not anonymous enough): I won't be using the sole advise of an online discussion board to make a binding decision for my organization. This is simply part of my research and due diligence as an administrator in determining what potential courses of action are feasible and worth presenting to our attorney for review and official opinion. Cheers!

Share this post


Link to post
Share on other sites

Why not have TPA sign the sharing agreements provided by Vanguard or Fidelity? I have looked at this and still do not understand the problem with signing their agreements. I have heard general things, but nothing specific. What types of specific problems can occur if a TPA signs vanguards agreement? What "liability" issues are there - and how could they come about?

 

 

Why dont you ask the TPAs?

 

One issue that has been discussed is how VG will share information with the TPA. Cost sharing may be another issue. One poster recently wrote that Fidelity was not going to participate in the LAUSD 403b plan because of the cost that will be imposed by the TPA on all contributions remitted to the plan. Fidelity will not absorb them and will not pass them on to participants.

 

Steve:

 

Liability risk in public 403b plan investmernt choices is non existant because there are no known state laws that govern employer responsibility to provide low cost investments. Some states such as CA, OH and TX require SD to accept all providers who offer their products regardless of the cost. In other states the SD cannot be sued because it is immune to lawsuits.

Share this post


Link to post
Share on other sites

In my opinion, Bob Architect’s changes of the IRS rules is resulting in school districts to move from offering low cost index type investing to a “brokers commission dream world” of insurance annuities and high fee investment alternatives.

 

Pres,

 

You hit the nail on the head. Perhaps you could drive a nail into Bob Architect's head, too.

Share this post


Link to post
Share on other sites

 

 

Why dont you ask the TPAs?

 

 

 

 

 

Our's did sign vanguards - and fidelity's.

 

 

Then you are one of the lucky few, judging by the the responses from other posters.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

×
×
  • Create New...