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Dan Otter

Time To Stop Blaming Agents?

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I really want to thank all who have participated to date on this topic. Believe it or not this board is actively seeking all perspectives. I think we have had a nice mix of opinons here so far. I am wondering if it might be time to address the other 800 pound gorilla--lack of fiduciary oversight by the employer. I fully realize some will post that school districts want nothing to do with such responsibility and will drop the plan if such oversight is required. Anectodal evidence tells me this will not necessarily be the case. Many have told me it is only a matter of time before the 403(b), 401(k) et al gives way to ERSA (Employor Retirement Savings Account) so it only makes sense to begin getting fiduciary ducks in a row now. Plus, such an argument smacks of fear mongering and reminds me of comments about low achievering students being incapable of learning. Note: I'm not calling school districts low-achieving children ;)

 

I ask: is it better to have the point of sale in the staff lounge or via an RFP administered by an employer with all the ground rules clearly stated? Wouldn't an agent/advisor find a better working environment if his or her firm won out over others?

 

In reviewing some of the posts here there seems to be a lot of dissatisifaction on both sides of the issue (vendor and participant). The argument that an agent can't add value is just as false as the argument that if teachers don't want annuity products then they should simply choose no load products. We know there are good advisors (see posts by French Teacher) and we know from experience that in many cases teachers don't have access to low cost options.

 

If an employer had true control of their plan couldn't they have agent/advisor based companies compete to be the sole provider of agent/adivsor sold products (and get a reduction in fees and surrender periods), and have low-cost companies compete to be the sole low-cost provider? I have seen this work very well at the college level.

 

Dan Otter

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If an employer had true control of their plan couldn't they have agent/advisor based companies compete to be the sole provider of agent/adivsor sold products (and get a reduction in fees and surrender periods), and have low-cost companies compete to be the sole low-cost provider? I have seen this work very well at the college level.

 

 

This sounds good...too good, in fact, to be true. Put another way, I think there are some districts that might balk at fiduciary oversight of a single provider, but I suspect that number would leap exponentially if such oversight were to extend to more than one provider. I'd love to be wrong about that, though.

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Guest TR1982

Dan,

 

I do not speak for my firm and they might disagree with some of what I say.

 

This is what I think:

 

1) Employers should take responsibility and control for the benefit plans they offer to their employees. Anything less is irresponsible.

 

2) I am not opposed to and in some ways favor single vendors. This will result in lower fees and expenses and therefore a better investment program.

 

3) The problem I see in single vendor situations is the same problem that exists today in private sector 401k plans. Vendors are long on talk about employee education and advice and short on substance. My firm currently uses a major no load firm for its 401k plan. You know how much service we receive? Zero. We get web access and statements. In the long run employees lose in this situation. Studies have shown that about 10% of employee populations use no service options. The rest use full service options or nothing at all. I don't believe the current models for employee education and service in these plans would be a step forward.

 

4) Cost: Who will pay for all these services like employee education, etc.? School districts typically have not been to keen on providing for or paying for these programs.

 

5) Single vendor situations would seem to favor no load fund companies from a cost perspective, but employees will ultimately lose out because they will get less advice and service. Even in situations that my firm is in we have to provide fewer services in single vendor situations because of the cost pressures. There is no free lunch.

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Hey TR,

 

I am not necessarily advocating a single vendor approach in that post. In fact what I am saying is a single agent/advisor vendor and a single low cost firm, so in effect a two-vendor, two-approach system.

 

I truly believe that a majority of folks, but not all, would probably want advice. I am also pretty sure participants want to know that their employer is performing some type of fiduciary duty and excercising some control over something as important as a retirement account. Plus I would think they would also want their employer to harness the power of the marketplace and economies of scale to negotiate a reduction of fees and surrender charges.

 

A school district or business would never offer health services in a similar fashion. Can you imagine scores of health care agents selling product in a staff lounge? It's doubtful. A school district negotiates a break on health care service with health care providers because it can promise number of employees. The district is an appealing place of business for health care providers because of their number of employees. In return for being one of a few providers the health care company offers a reduction in fees. There is order. Districts typically offer 2-3 types of health care plans. Some offer more choice but at a higher cost. It's hard to imagine that a similar situation couldn't occur with the 403(b).

 

Think how much easier it would be for an agent/advisor if his or her company is selected? Instead of having to beat out scores of agents/advisors they can now focus on education. Surely a company confident of its services, fees and product wouldn't mind competing.

 

As far as cost goes that would be negotiated in the RFP process. If a winning firm knows it has the chance to win the majority of business in a district it could then afford to shoulder the cost of plan maintenance. My district currently has close to one billion dollars of assets under management. Imagine the windfall for the handful of companies that are selected in such an environment? Conversely, if a firm is going to be just one of many, there is no incentive to shoulder plan costs or reduce costs and surrender charges.

 

I am not for banning one approach because I know each investor is unique with his or her own unique needs. I am for moving the 403(b) from the current sales environment in the lounge approach to an education environment. I will be the first to admit that this probably sounds too good to be true. Kind of like an equity index annuity ;). But seriously, I have seen for myself how it is done in the college arena. And as I mentioned in an earlier post the low cost companies at colleges are offering advisors and increasingly so. I appreciate your participation and views.

 

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

I would like to know if the section 403(b) model/experiment served its clientele so well why wasn't it extended to include the balance of the public employee workforce and the entire private employee workforce? If it worked so well for the employee why the need to enact section 457(b) and 401(k) 20-25 years later?

 

Peace and Hope,

Joel

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Guest TR1982

I'm not sure what this has to do with the subject in the thread.

 

I believe that the writer's assumption about Congress' motives is not credible. What evidence would Congress have had in 1978 that 403b plans were not working? I don't believe that there is substantial difference between the legislative intent of these acts, just differences in the markets they would apply to. That's significant since in 1974 Congress passed ERISA which required fiduciary oversight. All governmentals and tax exempts were excluded from ERISA.

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I read the article in Forbes and I noticed something that was not talked about death benefit. My wife who taught for 10 years and put $45,000 in with VALIC died of cancer at 35. On the day of her death her account was worth $34,500 because of agressive investments (my fault) and a poor market. With large medcal bills that were not paid by insurance. I was shocked when I received $46500. I know that we do not want to think about death but I am very greatful to VALIC and I am greatful that that we did have an annuity option.

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Guest Sierra

<!--QuoteBegin--TR1982+Apr 27 2005, 12:22 PM-->

QUOTE (TR1982 @ Apr 27 2005, 12:22 PM)
<!--QuoteEBegin--> I'm not sure what this has to do with the subject in the thread.

 

I believe that the writer's assumption about Congress' motives is not credible. What evidence would Congress have had in 1978 that 403b plans were not working? I don't believe that there is substantial difference between the legislative intent of these acts, just differences in the markets they would apply to. That's significant since in 1974 Congress passed ERISA which required fiduciary oversight. All governmentals and tax exempts were excluded from ERISA. <!--QuoteEnd-->

<!--QuoteEEnd-->

Decades before ERISA'a enactment in 1974 qualified plans existed under section 401(a). Qualified plans of governmental and tax exempt entities are not exempt from section 401(a). So why in 1958 did Congress enact section 403(b) just for public educational institutions and tax exempts and exempt them both from the rules and regs of a qualifed plan under section 401(a)? The insurance lobby asked for the exemption and got it because only a sole insurance product would be available for sale----the fixed interest rate annuity with principal and interest guaranteed by the full faith and credit of the issuer. If not for the payment of an upfront load this arrangement was akin to buying US Savings Bonds via convenient payroll deduction. So on January 1, 1959 the insurance companies launched section 403(b)1 by selling fixed annuities. The VAs were not marketed until the mid 1960s and were already authorized to be sold under the original 403(b)1 legislation. Even though the VA was available in the 1960s it was a hard sell so most agents sold the fixed product. ERISA changed all that with the addition of section 403(b)7 authorizing the sale of mutual funds. Now insurance companies which had a monopoly were faced with competition and began selling its VA in earnest. So the old line life insurance agent that sold fixed annuities from 1959-1974 suddenly became licensed to sell variable annuities and mutual funds in the mid to late 1970s.

 

If this salary reduction model was working so well why wasn't it extended to the rest of the public employee workforce as well as the private workforce? Surely the financial services industry would have loved to sell an individually owned annuity contract or custodial account to the balance of the nation's workforce. Why didn't they get the Congressional authorization to do so? Because Congress knew of the 403(b) abuses and did not want to extend the abuse to the rest of the nation's workforce. So when the salary reduction concept was finally extended to the private sector the Congress made sure it operated as a qualified plan under section 401. The new section became known as section 401(k).

 

Peace and hope,

Joel L. Frank

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Hi cosmokr,

 

My condolences to you. My wife too died of breast cancer when she was 32 in 2001. I can appreciate what you have gone through. It is one of the most hideous things a family can experience. I am glad that you were able to recoup money that was lost in her 403(b) account. However, I still think the math for the death benefit does not work. Here's how I see it... If the balance of an account is $40,000 and the average M&E is 1.25%, then an investor would be paying about $500 a year to protect roughly $10,000. That is extemely expensive insurance. Someone in their early 30s can get 25 year level term life insurance that pays $500,000 upon death for $30 a month or $360 a year. As I tell people, what happens if a loved one passes away and the market has not gone down? When my wife passed away I was able to roll her balance over to an account under my name. Four years later the account is worth much more than at the time of her death. I understand as well as anyone that these are very difficult issues to discuss. However, I think the benefit of the M&E is not what the industry would have you believe.

 

Dan Otter

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TR & Others,

 

One theme that seems to be popping up is that if teachers are offered lower cost options then there won't be any education or service. I have two comments.

 

First, it is not true that there won't be any education, it will be provided, the problem is that most will never listen to it. This is the current state of the 401(k) world.

 

Second, when did the 403(b) retirement plan become a de facto financial plan conduit? In other words, why does a 403(b) have to come with "services" such as financial planning? The 403(b) is a retirement plan, not a financial plan. The plan should do what it is intended to do, provide a place where money can be deferred at a low cost pre-tax, everything else after that should be the responsibility of the employee. If the employee then wants to go and purchase advice separately then great, but why should "advice" be part of a 403(b)'s services? Especially when for the most part the advice that is given is counterproductive...meaning that the vast majority of planners have no training in investment management and couldn't invest their way out of a paper bag.

 

Teachers don't expect their retirement system to provide a complete financial plan for them, yet for some reason the 403(b) has become a synonym for a financial or retirement plan, when in reality it is a small part of a much larger plan. The advice and planning should be separate from the 403(b), this will lower the costs dramatically if combined with a single vendor program that has a decent education platform and easy or automatic enrollment. Heck, a district could even contract for a financial planning benefit for their educators and subsidize it....

 

The fact is that the 403(b) is a pre-tax salary deferal plan where individuals can invest money through their employers and allow that money to grow until retirement, tax-deferred. There is nothing in the code about providing for financial planning services via the expenses of a 403(b). Why don't we let the 403(b) be what it is?

 

Would love to hear your thoughts.

 

ScottyD

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Guest Sierra

TR: What is your opinion of the Investment Plan of the Florida Retirement System?

 

Peace and Hope,

Joel L. Frank

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If this salary reduction model was working so well why wasn't it extended to the rest of the public employee workforce as well as the private workforce? Surely the financial services industry would have loved to sell an individually owned annuity contract or custodial account to the balance of the nation's workforce. Why didn't they get the Congressional authorization to do so? Because Congress knew of the 403(b) abuses and did not want to extend the abuse to the rest of the nation's workforce. So when the salary reduction concept was finally extended to the private sector the Congress made sure it operated as a qualified plan under section 401. The new section became known as section 401(k).

 

 

So Congress cared enough about the private sector that it spared everyone the "abuses" of which it was clearly aware in the 403(b) system...but of course, did nothing to reform the 403(b) system for educators? What was the official congressional position on that one? "Save the private sector, but screw the teachers"? That makes no sense whatsoever. Nor, frankly, does your arbitrary assumption that the most recent law that Congress passed is the one that speaks most clearly to their overall intent.

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Dan: Would like to discuss education of 403 (b) 's to teachers for a fee. Please e-mail me your phone number. Thank You Chris Keefe (505) 298-5651

seminars@nmia.com

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Guest Sierra
If this salary reduction model was working so well why wasn't it extended to the rest of the public employee workforce as well as the private workforce?  Surely the financial services industry would have loved to sell an individually owned annuity contract or custodial account to the balance of the nation's workforce.  Why didn't they get the Congressional authorization to do so?  Because Congress knew of the 403(b) abuses and did not want to extend the abuse to the rest of the nation's workforce.  So when the salary reduction concept was finally extended to the private sector the Congress made sure it operated as a qualified plan under section 401.  The new section became known as section 401(k).

 

 

So Congress cared enough about the private sector that it spared everyone the "abuses" of which it was clearly aware in the 403(b) system...but of course, did nothing to reform the 403(b) system for educators?

 

THAT IS EXACTLY RIGHT! THAT IS THE RESULT OF A POWERFUL LOBBY!

 

What was the official congressional position on that one? "Save the private sector, but screw the teachers"? That makes no sense whatsoever.

 

SURE IT DOES. IT'S CALLED POLITICS. THE LOBBYISTS RUN THE SHOW!

 

Nor, frankly, does your arbitrary assumption that the most recent law that Congress passed is the one that speaks most clearly to their overall intent.

 

 

CONGRESSIONAL INTENT CAN ONLY BE MEASURED BY THE MOST RECENT LAW ENACTED. IT IS SIMPLE LOGIC THAT THE 403(b) MODEL WAS THE INTENDED MODEL UNTIL THEY ENACTED 457(b)/401(k) WHICH ARE FUNDAMENTALLY DIFFERENT MODELS. MOREOVER, WE ALL AGREE THAT THE NEW REGS REQUIRE THE 403(b) TO OPERATE MORE LIKE A 401(k). THIS IS PROOF POSITIVE THAT THE CURRENT 403(b) MODEL IS NO LONGER THE INTENDED MODEL.

 

 

I will respond in CAPS in the body of your post.

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So Congress cared enough about the private sector that it spared everyone the "abuses" of which it was clearly aware in the 403(b) system...but of course, did nothing to reform the 403(b) system for educators?

 

THAT IS EXACTLY RIGHT! THAT IS THE RESULT OF A POWERFUL LOBBY!

 

What was the official congressional position on that one? "Save the private sector, but screw the teachers"? That makes no sense whatsoever.

 

SURE IT DOES. IT'S CALLED POLITICS. THE LOBBYISTS RUN THE SHOW!

 

 

 

This remains self-contradictory...this "powerful lobby" you suppose is at the root of it all was powerful enough to sustain the 403(b), but NOT powerful enough to influence the formation of 457 and 401(k)? Sorry, it just doesn't make sense. If "the lobbyists run the show," as you assert, then the insurance industry would surely dominate 401(k) plans as well. You seem to be asserting that Congress, in its infinite wisdom, displayed purity of intent and strength of character EXCEPT where it comes to teachers, and that is hard to swallow.

 

 

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