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Dan Otter

Time To Stop Blaming Agents?

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Hey folks,

 

I think the time has come to look at the entire 403(b) picture when assigning blame for the mess that is the 403(b). It's easy to blame agents and reps for pushing what many consider to be high fee products, but agents and reps are simply operating by the current rules of the 403(b) game. It's not the fault of the agent that 403(b) rules don't require more employer fiduciary oversight. It's not the fault of the agent that school districts by and large don't strive to make low-cost options and unbiased education available. It's not the fault of the agent that employers don't use market forces (the request for proposal) to negotiate reduction in fees for agent services. Certainly, there are bad agents just as there are bad teachers, but I think those that advocate a reduction in 403(b) investment costs and an increase in 403(b) education and participation, which includes this site, begin directing their attention at the rules that govern the 403(b), and the proposed rules that will govern the 403(b) in the future. If we want to improve the 403(b) then I think we need to improve the rules that govern the 403(b). New rules that would require more employer participation can only serve to improve the 403(b) for the participant. Pushing for such change may well be more productive than bashing those that are merely playing by the rules we don't like.

 

Dan Otter

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There is plenty of blame to go around.

 

In the words of Thomas Sowell, writing in his book "Inside American Education:"

 

"No discussion of American education can be realistic without considering the calibre of people who teach in the nation's schools. By all indicators-- whether objective data or first-hand observations-- the intellectual calibre of the public school teachers in the United States is shockingly low. [...] There are well over 2 million school teachers in the United States-- more than all the doctors, lawyers, and engineers combined. Their sheer numbers alone mean that there will inevitably be many exceptions to any generalizations made about teachers. However, a number of important generalizations do apply to the great majority of these teachers. For example, public school teaching [...] is an occupation whose lack of substantive intellectual qualifications is painfully demonstrable."

 

In other words, as the recent Forbes piece concluded, and as other similar pieces before (Newsweek) have concluded, teachers are responsible to educate themselves regarding the terrain of the 403(b) landscape, and many do not even bother to try, yet complain when they find out they'e getting screwed.

 

It is also the fault of teachers that when ream-ola schemes like the NEA valuebuilder thing come to light, that they stand by and basically do nothing. Is it any surprise the NEA doesn't change its MO? When teachers do nothing about a situation like this, the message the NEA gets is: "We're your sheep. Treat us accordingly."

 

The bottom line: if teachers don't respect themselves enough to look out for their own interests, how can they expect anyone else to respect them and look out for their interests?

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Hey Zippy,

 

Thanks for your comments. I do think it is fair to say that at the end of the day the individual is ultimately responsible for securing his or her own financial future. My experience with the 403(b) and one I hear often is that a teacher's first introduction to the 403(b) is typically from a sales pitch. Despite what many visitors think we are not against agents. We are against an investor's first exposure to the 403(b) being from a sales environment, and we are against employers who fail to harness the power of market forces by not engaging in a request for proposal to negotiate a reduction in fees be it from an agent-sold product or a direct purchase investment. If an employer (and the employees) decides they want products offered via an agent then have 3-5 companies that offer such services compete to be the provider. This is how fees and surrender charges can be reduced. Surely the agent for the winning company would much rather work in such an environment. I would add that in such a situation an employer should offer at least one low cost choice for those who want to invest on their own. This would truly be a win-win: low cost products for the self-directed investor and advisor-sold products with more reasonable pricing and surrender charges.

 

Dan Otter

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Dan,

 

It's hard to disagree with your sentiments ... but meanwhile, we have to live in the real world with the present rules. One of the things that I like about this forum is that people can come to it and get some non-sales exposure to the 403b world (although, thanks to Joes, my own secret identification as a paid representative of the no load companies has been compromised. Darn him!). And this exposure should, in fact, include some of the abuses committed by 403b salespeople. Disclosure is an effective disinfectant.

 

 

 

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Dan,

 

I believe that this board has made me a better investment advisor for my clients.

 

I drop by and see what you all are saying and then look in the mirror to see if I'm doing the right thing for my clients. On the scale of reps it starts at your basic two-tier snake oil salesman and works all the way up to Scottyd. This site made me realize that, while I still earn a living "selling" investments (which means I should burn in hell) I am closer to the Scottyd side of the scale.

 

I think we all know where this is heading...the end of the 403(b). Many school employees will be left with no TSA at all. Others will be left with fewer choices.

 

Whose going to win the school districts business? None of us know...but there's a chance that it could be someone other than TC or Vanguard. Whose been winning the 457 business? Many of those went out for quote. Has it been TC or Vanguard? No.

 

One small victory for us reps is the recent "outing" westerndad's connection with Vanguard...I knew there was something going on there...we have pics of him driving his Bently with a "I Love Vanguard" bumper sticker.

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Hey JustMurph,

 

Thanks for your comments. We appreciate your participation and sincere beliefs. I think the 403(b), 457(b) and 401(k) will eventually give way to the proposed Employer Retirement Savings Account or something similar which will operate much like the 401(k). When this happens though is anyone's guess.

 

Dan Otter

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Guest Sierra

The 403(b) is the first of the popular salary reduction plans and the only one that does not require fiduciary oversight on the part of the employer. It has never expanded its sphere of influence beyond public educational, hospital and 501©3 employers. If such a scheme worked to the benefit of the employee section 403(b) would have been extended to other public employees in 1978 when Congress decided to extend salary reduction plans to those groups and in the early 1980s when it decided to extend such plans to the private sector. But Congress clearly saw the shortcomings of the 403(b) and adopted the 457(b) and 401(k) for the balance of the nation's workforce. The reason the 403(b) has survived so long in its present state is due, in no small measure, to the insurance and financial services lobby.

 

Peace and hope,

Joel

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I think we all know where this is heading...the end of the 403(b). Many school employees will be left with no TSA at all. Others will be left with fewer choices.

 

Whose going to win the school districts business? None of us know...but there's a chance that it could be someone other than TC or Vanguard. Whose been winning the 457 business? Many of those went out for quote. Has it been TC or Vanguard? No.

 

This is an excellent point which is too often glossed over, ESPECIALLY on this board. There's a common assumption that as soon as the 403(b) is dead, no-loads will dominate the landscape of retirement funds thereafter, and the simple conclusion is that this would HAVE to be the case, because employers would now have a fiduciary responsibility. The implication is obvious: that no-load investing is the only "responsible" decision that could possibly be made.

 

I beg to differ. There is ample anecdotal evidence to suggest that a majority of teachers need financial guidance. If we accept that as a truth, then it's a very, very short journey to a district or a state selecting a full-service provider with a potentially abusive fee structure under the premise of its ability to provide financial guidance. And it's quite conceivable that whatever retirement plan replaces the 403(b) will be of the "single provider" variety, much like the 401(k) and 457 are now.

 

In short, picture the whole of New York State with ING as its sole provider, and no possibility of recourse to no-load options. (Feel free to substitute "New York State" with the state of your choice, and "ING" with the insurance boogeyman of your choice as well.) Now you'll REALLY have something to scream about. And as much as you say it couldn't happen, it's painfully obvious that it could. "Fiduciary responsibility" does NOT necessarily mean "lowest possible cost."

 

 

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***********************************************************

"One small victory for us reps is the recent "outing" westerndad's connection with Vanguard...I knew there was something going on there...we have pics of him driving his Bently with a "I Love Vanguard" bumper sticker."

***********************************************************

 

Murph,

 

I resent the heck out of that. I'll have you know that I drive a Ferrari, and I wouldn't dream of being so tacky as to put a bumper sticker on it.

 

The "full service provider" who sold me my first TSA, by the way, is also doing quite nicely, thank you. But he is driving a mere BMW. Peasant.

 

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Guest Sierra

There is ample anecdotal evidence to suggest that a majority of teachers need financial guidance.

================================================

So why wasn't the agent driven section 403(b) extended to the balance of the public employee workforce? (Cops, firefighters, administrative and clerical employees). Aren't these employees entitled to a "full service provider"?

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So why wasn't the agent driven section 403(b) extended to the balance of the public employee workforce? (Cops, firefighters, administrative and clerical employees). Aren't these employees entitled to a "full service provider"?

 

They certainly are.

 

I happen to think that the freedom of choice represents the 403(b) plan's single greatest strength. A number of my colleagues agree and disagree with my views on the issue of what constitutes a good provider, and we are all able to accomodate our preferences within our available options. Where the train has jumped the tracks, in my view, is in states where such freedom of choice doesn't exist, or exists in the context of a "choice" between 35 different but equally bad options.

 

This inequity will NOT be sufficiently addressed by turning the 403(b) plan into a single-provider plan similar to the others (see my earlier post on the subject).

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The issue of a single provider can be sticky. If the provider you like is picked you are thrilled; if not you have very little recourse. But if the employer is required to act as a fiduciary then cost of fees and quality of service will be considered in a manner that is just not happenign today. I think it may be wrong to assume that all will automatically go to a single provider. It is also wrong to assume that low-cost providers don't provide advisors. Many of the big low cost provides who service colleges make scores of advisors available to employees. I know this first-hand having worked at a college that offered two low-cost providers. It was a pretty much a win-win situation as advice was provided and low-cost options were availabe. I am not here to say that this is the only way to go but it is important for those who are only familiar with the K-12 environment to know that the 403(b) works much better at the college level. Of course colleges also often provide matching contributions.

 

Dan Otter

 

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FT,

 

How would you feel about Fidelity as a single provider in your 403b plan if most of Fidelity's choices -- actively managed funds and index funds -- were available AND professional advice were available as well, as Dan has suggested? Would that provide sufficient choice? It sure would for me.

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Guest TR1982

I would like to respectfully suggest that this discussion is pointing out the basic problems that exist in administering employee retirement savings plans. The 403b market is an interesting market in that it is the only market in the tax code where individual employees can "own" and control the their retirement savings. The employer has no real fiduciary obligation and the plan is not governed by ERISA. In 401k plans the employer has a fiduciary obligation and the plan is governed by ERISA. This changes everything. Now the employer has to be involved in the administration of the plan because it is a fiduciary and can be sued. If the employer who maintains a current 403b plan gets involved in the administration of the plan, it could be construed as acting in the capacity of a fiduciary. Do you honestly think a public school system wants more opportunities to be sued? Therein lies most of the problem for public entities.

 

I have no doubt that a public entity could negotiate a more favorable benefit plan for its employees if it wanted to. The issue is: do they want to?

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FT,

 

How would you feel about Fidelity as a single provider in your 403b plan if most of Fidelity's choices -- actively managed funds and index funds -- were available AND professional advice were available as well, as Dan has suggested? Would that provide sufficient choice? It sure would for me.

 

I think I would resent having to change the source of my professional advice, truth be told, since I'm happy with what I'm getting now. But moving past that issue, if the premise is that we are bound for a single-provider system, then the Fidelity system you describe (WITH professional advice available) sounds as good as any, I suppose.

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