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krow36

403B Problems, Where To Focus Efforts?

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403b problems, Where to focus efforts?

There are so many problems with the K-12 public school 403b world, it’s difficult to know where we advocates-for-change should focus. The recent NYT article discussed some of them and hopefully will cover others in future articles. Here’s a list in no particular order that I cooked up in an hour or two. I’m sure it’s incomplete.

  1. When there are many venders vying for customers, multiple salespeople are pressuring uninformed employees.
  2. Insurance and high fee MF companies take advantage of uninformed district employees.
  3. Insurance and high fee MF companies have strong lobbies and political power to prevent change in the 403b regulations.
  4. District employees don’t make an effort to inform themselves of the basics of investing for retirement.
  5. There is no district-wide education of employees on using a 403b for retirement savings.
  6. School districts don’t have a fiduciary relationship with their employees the way a small business employer has when it comes to defined contribution plans.
  7. Congress has not updated the 403b regulations to be equivalent to 401k regs in protecting employees.
  8. The unions are seldom active in pushing for or sponsoring low-cost 403b plans.
  9. Some States have laws that prohibit the districts from restricting the number of venders.
  10. Because school district employees have pensions, the tax paying public doesn’t see the need to pay for a district 401k or an ERISA 403B.
  11. Third Party Administrators and Aggregators allow the school district to contract out most of their 403b plan fiduciary responsibility.
  12. Third Party Administrators and Aggregators have business plans that are based on dealing with the long list of providers.
  13. School district employees often want to keep their expensive annuity based 403b plans even when low-cost MF based plans are available.
  14. Many employees don’t contribute to a 403b, even a good low-cost one, because they don’t realize their value in retirement.
  15. School districts vary tremendously in size and wealth and it’s difficult to treat them all the same way.

If we could wave a magic wand, what single action would we take? What would you propose, to whom, to start on the road to improved 403b’s?

Should Congress put the 403b plans under the same ERISA regulations that 401k plans are under? Would this force school districts to accept fiduciary responsibility for their plans and select a single provider, and get rid of the long list of insurance company providers? Would this be too expensive for the school districts?

I know many of you have been thinking about this for decades. Is there a magic bullet? If not, what should we push for as a first step? What is our goal?

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There are others here who have done research into this. I haven't, but I'll pitch in my under-informed 2¢ just because I like your post, krow36, and I agree this is a good moment to think about a practical course of action.

 

At the federal level, a law that enforces a fiduciary standard on 403(b) and 457(k) 457(b) providers seems like a good idea. I'm not sure whether that necessarily means lumping them under the ERISA requirements. I would appeal to Elizabeth Warren on this one: has she weighed in on 403(b) accounts?

 

At the state level, I think that there are good state-sponsored retirement programs in place that could be adopted by public school 403(b) plans. In California, for example, there is a simple, low-cost 403(b) plan in place for the University of California system. I'd like to see that in the K-14 system. I'm not sure, though, whom one should pitch about that: the state superintendent of public education?

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There are others here who have done research into this. I haven't, but I'll pitch in my under-informed 2¢ just because I like your post, krow36, and I agree this is a good moment to think about a practical course of action.

 

At the federal level, a law that enforces a fiduciary standard on 403(b) and 457(k) providers seems like a good idea. I'm not sure whether that necessarily means lumping them under the ERISA requirements. I would appeal to Elizabeth Warren on this one: has she weighed in on 403(b) accounts?

 

At the state level, I think that there are good state-sponsored retirement programs in place that could be adopted by public school 403(b) plans. In California, for example, there is a simple, low-cost 403(b) plan in place for the University of California system. I'd like to see that in the K-14 system. I'm not sure, though, whom one should pitch about that: the state superintendent of public education?

 

whyme,

I agree with the UC system and k-14 should have the same plan.

 

CalSTRS Pension2 is a wonderful plan already in place for California educators. Because of the insurance industry's political power in California, not much can be done through the state legislative process.

 

Right now there is a series of articles from NY Times. A sure thing is to get these articles in front of as many teachers as possible and then you might see things change.

 

 

403b problems, Where to focus efforts?

There are so many problems with the K-12 public school 403b world, it’s difficult to know where we advocates-for-change should focus. The recent NYT article discussed some of them and hopefully will cover others in future articles. Here’s a list in no particular order that I cooked up in an hour or two. I’m sure it’s incomplete.

  1. When there are many venders vying for customers, multiple salespeople are pressuring uninformed employees (because of ruthless state insurance codes).
  2. Insurance and high fee MF companies take advantage of uninformed district employees.
  3. Insurance and high fee MF companies have strong lobbies and political power to prevent change in the 403b regulations.
  4. District employees don’t make an effort to inform themselves of the basics of investing for retirement. (there are many investment savvy teachers but remain on the sidelines of reform).
  5. There is no district-wide education of employees on using a 403b for retirement savings. (Its the never ending liability scare that the insurance industry has been saying since 1961)
  6. School districts don’t have a fiduciary relationship with their employees the way a small business employer has when it comes to defined contribution plans. (because insurance products are not securities so are not subjected to security's laws nor fiduciary standards).
  7. Congress has not updated the 403b regulations to be equivalent to 401k regs in protecting employees.
  8. The unions are seldom active in pushing for or sponsoring low-cost 403b plans. (They are active in secrete because they still think they can make money of their members)
  9. Some States have laws that prohibit the districts from restricting the number of venders (Californias hedious 770.3 insurance code).
  10. Because school district employees have pensions, the tax paying public doesn’t see the need to pay for a district 401k or an ERISA 403B.
  11. Third Party Administrators and Aggregators allow the school district to contract out most of their 403b plan fiduciary responsibility.
  12. Third Party Administrators and Aggregators have business plans that are based on dealing with the long list of providers.
  13. School district employees often want to keep their expensive annuity based 403b plans even when low-cost MF based plans are available.
  14. Many employees don’t contribute to a 403b, even a good low-cost one, because they don’t realize their value in retirement.
  15. School districts vary tremendously in size and wealth and it’s difficult to treat them all the same way.

If we could wave a magic wand, what single action would we take? What would you propose, to whom, to start on the road to improved 403b’s?

Options:

1. Replace the 403b with a 457b plan.

2. Change insurance codes to allow competitive bidding.

3. Get the unions to hire fee only fiduciaries to offer workshops and assist member to enroll in their district low cost offerings.

4. Intiate auto enroll but be sure the district has a low cost investment such as TIAA or Vanguard.

5. Each district should create an adviosry committee and ask employees to be on it. Employees should respond.

6. Most difficult: Somehow, someway to get the savvy investing teachers to join in the cause.

How will all of this be paid for?

Currently, 70% of all k-12 educators are not contributing. What if the current 30% increased to 60% via auto enroll and an aggressive educational program? The assets would grow like wildfire and a few basis points could pay for much of the expenses. I think the state pension plans would be another source of financial education. It is in their interest to get teachers off of the 100% pension plan mania and take some financial responsiblity for their own retirement.

Should Congress put the 403b plans under the same ERISA regulations that 401k plans are under? Would this force school districts to accept fiduciary responsibility for their plans and select a single provider, and get rid of the long list of insurance company providers? Would this be too expensive for the school districts?

I know many of you have been thinking about this for decades. Is there a magic bullet? If not, what should we push for as a first step? What is our goal? I said it above.

Good post krow!

 

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Steve, why do you see 457(b) accounts as superior to 403(b)? In my district, the 457(b) option is worse than the best available 403(b) choices (Fidelity and Calstrs Pension 2). In our case, the 457(b) options are mostly fairly expensive funds (many with over 1% ER), and even the few Vanguard options are the higher-price "investor" shares. Then they add a .25% wrap fee on top of the ER. Plus, the 457(b) rules don't allow for the money to be rolled over to an IRA after age 59 1/2, as with the 403(b). I've got a relatively small 457(b) account, from a few years when I was able to go above the max on the 403(b), and I feel stuck in inferior investments, compared to the 403 (b).

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Plus, the 457(b) rules don't allow for the money to be rolled over to an IRA after age 59 1/2, as with the 403(b)

 

 

Really? Than why was I allowed to do it ? I'd check that out.

 

I don't mean to hijack this post since you directed it to Steve but I think you pick a 457b if you have a good one or a 403b if you have a good one. It all comes down to which offers better fund choices and lower costs. They are very similar. You need to compare the two you have access to and go with the better of the two. I do believe a 457B may have less restrictions on withdrawals. My past 457B was with our state 457b plan contracted with Blackrock. Their index funds were just as low as Vanguards. Its the only company choice in the 457b and its outstanding. In your case it sounds like the insurance companies infiltrated your 403b and 457b plans.

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Tony, my understanding (I've asked about this on this board and Bogleheads in the past) is that so long as you remain employed by the district, you can't rollover 457(b) assets until age 70. Have I got that wrong?

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It seems you are right if you are planning to work until 70. You must separate from service to do a rollover. Still how many folks work that long in education?That issue would not present itself as a disadvantage to most folks.

 

here is what investopedia says

 

http://www.investopedia.com/articles/personal-finance/111615/457-plans-and-403b-plans-comparison.asp?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186

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Steve, why do you see 457(b) accounts as superior to 403(b)? In my district, the 457(b) option is worse than the best available 403(b) choices (Fidelity and Calstrs Pension 2). In our case, the 457(b) options are mostly fairly expensive funds (many with over 1% ER), and even the few Vanguard options are the higher-price "investor" shares. Then they add a .25% wrap fee on top of the ER. Plus, the 457(b) rules don't allow for the money to be rolled over to an IRA after age 59 1/2, as with the 403(b). I've got a relatively small 457(b) account, from a few years when I was able to go above the max on the 403(b), and I feel stuck in inferior investments, compared to the 403 (b).

 

Hi whyme,

 

Because state insurance codes do not crush the heart of the 457(b) plan with rip off insurance products.

 

You are correct about one other point is that the 457(b) fees on mutual funds, even Vanguard index funds can be hideous too. At LAUSD we have a brilliant oversight committee that has taken out revenue sharing costs, and went with a fixed price. But if it wasn't for our committee, the 457b costs would be high too. I just think the first order of business to get rid of annuities 100%, and the only way to do that is to terminate the 403b with public k-12 school systems.

 

It is true that you roll over your 457b money out until you terminate from working, on the other hand, you can roll it over if you quit teaching before 59.5.

 

Fidelity is not available to everywhere and Pension 2 is only available to California educators. I agree both are excellent 403bs. The problem is that Pension2, Fidelity (and TIAA) are not aggressively sold as the annuity products are. I think we all agree that annuity products will always be inherently negative and thus will not keep up with the standard of living because of puny returns, high costs and they provide a lucrative commission for those that sell it. IMO, it is inherently unethical and should be outlawed.

 

2 cents,

Steve

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It seems you are right if you are planning to work until 70. You must separate from service to do a rollover. Still how many folks work that long in education?That issue would not present itself as a disadvantage to most folks.

 

Thanks, Tony. While a minority teach until or beyond 70, lots of folks teach into their 60s, and in that scenario—as I have personally experienced—the 403b rules allow for rolling everything into (for example) a Vanguard IRA after age 59 1/2. In almost all cases, such a rollover is preferable to the higher-fee, limited-selection offerings in both 403b and 457b plans.

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Hello Steve and thanks for the response. All of that makes good sense. I guess the question is whether the 403b format is so screwed up that it needs to be eliminated entirely in favor of some other system, or whether it is possible to use the 403b but somehow dump all the inappropropriate insurance and high-cost brokerage products. That UC retirement program is a 403b (and it may be available in 457b form, too, though I'm not sure); as far as I know, that is the one and only UC 403b option--there's no salespeople or list of insurance company "approved providers" anywhere to be seen, if you're in the UC system.

 

My questions are, how did that happen? and, could the same set-up be replicated for California K-14?

 

If we could pull that off in California, I think the dominos would start to fall across the country, given the size of the California system, and the importance of the 403b here, since our teachers don't pay into social security.

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whyme,

 

Don't confuse or compare the higher education and the K-12 programs because they are apples and oranges. If K-12 could pick one we would naturally pick Vanguard, Fidelity, or Tiaa. Steve was part of a team that by-passed the obscene 403 programs and created a premier 457 program for the employees of LAUSD. Because the LAUSD 457 premier program does not have a "guy" giving away "free" sandwiches it is slow to catch on. I have spent hours trying to explain this but, unfortunately, people need a "guy." ...... baffling!!!!!

 

Steve,

 

I just received a letter from the benefits dept. that Voya is taking over the 457. I love TIAA but I guess I will have to learn a new website. Any Idea who will handle the self-directed portfolios? Bob

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Don't confuse or compare the higher education and the K-12 programs because they are apples and oranges.

Why do you say this? What is fundamentally different between K-12 (or in California's case, K-14) and the higher ed plans? They are both 403(b)s.

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Steve,

 

I just received a letter from the benefits dept. that Voya is taking over the 457. I love TIAA but I guess I will have to learn a new website. Any Idea who will handle the self-directed portfolios? Bob

 

No sure what you are asking. VOYA will be handling the self-directed portfolios as far as I know.

I love TIAA too but they did not bid. Voya also manages Pension2, and will be taking over January 1st.

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whyme,

 

Fundamentally, as you pointed out, higher ed uses a single vendor and that eliminates most all of this nonsense. Perhaps this is why there are no university professors crying on the website. I am very familiar with the UC retirement program and find it to be very efficient and easy to navigate....but I am a DIY'er and have spent many years, like you, trying to understand all of this. Bob

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