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The Fees You Don't See Can Hurt You

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High fees, often hidden from view, are still enriching many advisers and financial services companies at the expense of ordinary people who are struggling to salt away savings. The problem has persisted year after year. A new analysis of mutual fund data confirms its severity.

 

 

 

http://www.nytimes.com/2016/04/24/your-money/the-high-fees-you-dont-see-can-hurt-you.html?src=mv&_r=0

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Thanks for posting this, Tony. By 2018 or so, financial advisors will actually have to act in the best interests of their clients. Imagine that. And to think they led us to believe that they were already doing that. We need a law to get that? How sad for us. No wonder this forum is full of people like us, with sad stories that made us 403b wiser.

And of course, we'll see if it really does come to fruition.

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Unfortunately, that new standard doesn't apply to K-12 403(b) plans. Many districts throughout the country are going with a single recordkeeper/vendor with a brokerage option, which lowers the fees for all, gets rid of the surrender charges, gets rid of annuities and focuses on education for the participants. For those participants that want to put in the time to manage their own money, the brokerage option gives them access to Vanguard, Fidelity and many other fund families, in addition to ETF's for a fraction of the cost they are paying through other vendors.

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Many districts throughout the country are going with a single recordkeeper/vendor with a brokerage option, which lowers the fees for all, gets rid of the surrender charges, gets rid of annuities and focuses on education for the participants.

 

 

debbyk,

 

Thanks for your comments and participation. I do hope that what you said is the trend but I am not sure its happening often enough or fast enough. I am seeing many school districts with a plethora of insurance choices that crowd out the good choices with more insurances products added to the list constantly and pedaled vigorously by commissioned salespeople. Teachers post their lists here all the time because it gets difficult sorting out the good from the bad.

 

Here in my school system we have a solid 457b plan now with a brokerage account but with low cost index funds available in a wide array of investment areas with expenses that meet or beat Vanguard's expenses, why is a brokerage needed unless you wish to buy managed funds which are a bad idea in most cases.

 

I do think every school system needs to limit choices like you suggest to avoid all the confusion teachers are exposed to when making a retirement choice. Unfortunately the problem is one of knowledge and leadership. Knowledge because school officials often lack it as do teachers when it comes to investments, and leadership because it takes a stand-up individual to enlighten them- usually a frustrated teacher who ends up on this site asking questions.

 

 

I

 

Tony

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debbyk and Tony,

I still don't understand what you are referring to as the "single record keeper/vendor" and "brokerage account". Are you referring to a TPA as a single vendor? And is a brokerage account something like GWN, an aggregator who charges fees on top of the expenses?

My district, like many, washed their hands of trying to run the plans, so they gave the responsibility to OMNI, the TPA. What role would a "single record keeper" have and WHY would a district choose this over a TPA, where the vendors pay for the administering of it?

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MoeMoney,

 

A single record keeper/vendor means that the district will only have ABC vendor. That vendor has a diversified fund lineup (usually much less expensive than the vendors previously offered). The funds are mutual funds, not annuities and there are no deposit commissions, wrap fees or surrender charges, so if the vendor the district hires isn't meeting the quality standards established by the district, they can easily be replaced. The new vendor should offer a brokerage option, as part of the plan, so employees who want to manage their money on their own have access to low cost funds and ETF's. What my experience has been with this transition, is that the district either puts out an RFP for a single record keeper or joins an existing coop of districts that have already made this change. There is an education process that goes on with the current participants, so they can see how this changes benefits them and helps improve the chances of a better retirement. A single vendor/record-keeper is able to educate employees on the importance of saving and the differences between a 403(b) and 457(b) and help them make the decision about pre-tax contributions or Roth, instead of the status quo, where sales people can't educate because they are too busy trying to get people to sign up with them. After a district transitions to a single vendor participation increases and the overall quality of the plan offered to employees improves. In most cases, the new vendor acts as the TPA, so the district gets rid of that expense too. I hope this helped.

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Debby K

 

Can you possibly supply a link to a school district that uses the single provider 403b option so we see how its being set up and how they have steamlined choices?

 

 

Tony

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MoeMoney and Tony, check out Dan and Scott's podcast #13. I thinks it's Baltimore, MD where Fidelity become the sole providor, for a big improvement in the scene. It involved Fidelity having to deal with all the legacy providor's accounts, which teachers either wanted to continue (??) or transfer to Fidelity. Fidelity became the administrator for a big mess that will gradually become the district's rational 403b plan.

Episode #13: Scott Senseney of Fidelity's Tax Exempt Market Business (released 11/4/15)

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If Fidelity and Vanguard didn't make the cut to be on OMNI's P3 list, why would my district choose to drop OMNI (or any TPA, for that matter) in favor of a single vendor?

I ask this from the perspective of the devil's advocate (i.e., my district business office). Seriously, they do nothing to have OMNI administer the 403b "perk" and don't even pay them. What's the incentive to switch to a single vendor/record keeper?

Can it be due to pressure from teacher advocates, or the union, or a finance committee - for those districts lucky enough to have one of them?

 

I have listened to the Fidelity interview/podcast and basically ruled it out, considering those circumstances.

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Assuming the single vendor is one who offers low cost index funds and possibly some low cost managed funds, there are lots of advantages to the investor. If the school district is offering a 403b that is in the best interest of the investors (that is, acting as a fiduciary), then it makes perfect sense. There is no TPA, there's just Fidelity, which cuts out the middleman and reduces costs. The school district (especially a small district) needs help administering the 403b. There's loans, catch-up contributions, hardship distributions, etc. and the districts want to farm this stuff out. The TPA's and aggregators take over these duties for the district. Where there's no TPA, the insurance companies are willing to deal with it because they make so much on their expensive annuity 403b's.

 

The school district should not tolerate a flock of sales people, invading the schools, and selling very poor retirement accounts to teachers and others. If Fidelity charges the district to be the single vendor and handle all administrative costs, the district should be willing to foot the bill. A business with a good 401k (that includes low cost index funds) has to pay a single 401k providor. They don't invite a bunch of providors to invade the workplace and sell 401k plans to their employees.

 

To get a single providor for a school district's 403b, I suspect you need a very enlightened district administration. Getting rid of the greedy crowd must be really tough. They are politically strong because they have a lot of money, and the masses are uninformed. Maybe getting 403b's included in ERISA, so they become more like 401k's, would result in single vendors for school districts?

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To get a single providor for a school district's 403b, I suspect you need a very enlightened district administration. Getting rid of the greedy crowd must be really tough. They are politically strong because they have a lot of money, and the masses are uninformed. Maybe getting 403b's included in ERISA, so they become more like 401k's, would result in single vendors for school districts?

 

Yes and no. Our state's insurance code is ruthless, in the eyes of all California K-12 districts. In 2012 We had a top annuity industry lobbyist come to our committee to lecture us about transparency and argue for choice! He was so threatened by the mere discussion by committee to perhaps send out an TPA RFP application for a single 403b vendor. Our district already as a single vendor on the 457b side, but in my opinion, a single vendor on the 403b side will not happen in California for another generation of teachers for three reasons, teachers still are unaware of the politics, district staff and boards are politically spineless, and the unions have their own agenda. And the large insurance carriers are laughing all the way to the bank. Heck, we had a bill that would make it easier to auto enroll into public employers DC plans WAS DEFEATED. Every body else in the country knows how great auto enroll is for employees, but not here in California because the insurance industry rules this state when it comes to DC plans.

 

I doubt if ERISA would have much of an impact. Perhaps, there would have to be some sort of lawsuit using ERISA as support. But 770.3 rules the K-12 school districts and the nearly 1 million California teachers DC plans.

 

But we press on and on.

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Our district already has a single vendor on the 457b side,

 

 

So do we in our 457b state plan and it is wonderful. Our 403b outside of having Aspire is loaded with annuity products. Sad. I too don't see much happening on the 403b side either. Things seem to be getting worse.

 

Tony

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Excellent article. It led me to this comprehensive pdf. And it references an actual district (in IL) that we have been asking debbyk to provide for us.

 

http://www.ippfabenefits.org/downloads/Wise-Choice-for-Educators.pdf

 

In search for the primary source, a quick search then led me here: http://www.nppfa.org/wc-education.html

"The Wise Choice for Educators 403(b) Plan makes available a program that is less expensive than 99% of all Tax Sheltered Annuities, has no wrap fees and, provides access to an investment option with nearly 5,000 mutual funds that include Fidelity, Vanguard and American Funds while still maintaining the personal, individual service employees require.

The bottom line: why your district should join NPPFA’s Wise Choice for Educators 403(b)/457(b) Plan"

There’s a good reason to pay attention to the fees you are paying in your 403(b)/457(b) plan.

Simply put:

  • You have a right to quality low-cost investment choices. After all, it’s your money that’s being invested.
  • You have a right to meet individually with a person who will provide advice on asset allocation.
  • It’s not necessary to have more than one vendor associated with the plan – and it is less expensive to have only one.
  • School business officials should use the Request for Proposal (RFP) to ensure that their employer-sponsored 403(b) plan is getting the best plan design at the lowest cost for their employees.
  • It is incumbent upon business officials to ensure a clear, transparent explanation of all fees, including M&E charges, deposit fees, surrender charges, operating costs, maintenance fees, and 12b-1 fees.

If your school official is not following these basic, prudent principles, you and your colleagues have the right to ask “Why not?”

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Thanks Dan for posting the NB 27 case study. Sorry I didn't respond sooner. If you live in any state other than CA or TX, a single vendor 403(b) plan is possible. The best practice would be to couple it with a the same vendor's 457(b) plan, so the district can pool the buying power of the district and have the employees be educated as to which is the best plan for them (either the 403(b) or the 457(b)) and not be concerned that the sales person is only providing information so the money goes into their plan. The website you may want to check out is www.ippfabenefits.org. If you want to contact me directly at dkarton@ippfabenefits.org, I'm happy to provide you with more results from school districts.

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