Below is the summary of my new proposed book: The 403b Jungle: How one group of LAUSD educators changed the corrupted 403b, in my opinion, into a best-in-class 457b. The entire book is on this blog, click here for Table of Contents.
Have a great day,
Successes, Challenges and the Future
After 20 years my 403b reformed-minded friends and I learned four strategies:
1. Learn Investment Basics—Start with costs:
a. commissions (aka trading costs)
b. revenue sharing
c. advisory fees
d. transfer fees
e. M&E insurance
g. mutual fund annual expense ratios
h. share classes.
2. Employ Competitive Bidding.
3. Use the 457b.
4. Demand Transparency!
Low-cost, best-of-class genuine investments are now available to employees of the 2nd largest PreK-12 school district in the country. One of those investments is my original choice Vanguard Wellington at .56% annual expense—a momentous achievement. Our committee was proud when the Los Angeles Unified School District’s (LAUSD) Chief Financial Officer signed our motion to include Wellington and other low-cost funds in our plan for teachers.
We had not predicted that the 457b would lead to success. The 457b achievement was initiated by one fearless LAUSD benefit’s administrator, George Tischler. We did not know either the 457b or Mr. Tischler until he introduced his brilliant strategy. He led our district around the ghastly 403b and into a glasnost era which our district looks after all employees’ best interests. What a visionary.
Table 1 and 2 illustrate the differences in the number and quality of investments between what LAUSD offered in 2002 and 2014. Table 1 shows a partial list of 155 vendors available in 2002 (space limitations prevent a listing of all vendors). The 150 insurance companies listed in the left and the expensive mutual fund companies in middle columns were annuities and loaded mutual funds respectively. Only five no-load mutual fund companies were available. Even then the no-load label can be misleading. TIAA CREF is the lowest cost vendor of all three categories.
Table 2 shows the 2014 list of vendors. The left two columns list the annuities and loaded mutual funds, decreased from 150 to 23 vendors. The number of low-cost, no-load funds in both the 403b and the new 457b (two right columns) increased to 21, plus a brokerage account.
Why Reform Continues
Keith and Margaret Reed teach in a small district in rural San Bernardino County in California. After watching PBS Frontline, The Retirement Gamble and other T.V. shows about hidden investment fees, they got suspicious of their longtime financial adviser. This peaked when their adviser (and friend) evaded direct questions about his fees and the investment costs. Keith attended a California Teachers Association’s 403b/457b workshop. Keith learned how to find the costs in their investments using 403b compare.com and CTA’s investing website (CTAinvest.org). CTA’s presenter showed Keith how to locate a fee-only, genuine fiduciary financial adviser from the National Association of Personal Financial Advisers (NAPFA). After looking at the 403bcompare.com website, Keith was shocked at the high fees both he and his wife were paying.
Keith serves as his local union’s Vice President. He asked the district’s Third Party Administrator (TPA) for more information about his district plan and was ignored. He asked his district superintendent about forming an oversight committee. “No! Too much liability!” shot back this spineless fool. Keith was relentless on behalf of all the teachers and staff. He wrote his story in the union’s newsletter (Information Overload, see references) to appeal to a wider audience. He asked the California Teachers Association (CTA) to conduct an analysis of his district’s plan. The TPA, once again, refused to cooperate with CTA’s benefits specialist and could not get the information necessary to conduct a thorough review. The hide-and-seek shenanigans are still with us. Keith got the same round-around I got twenty years ago. Why are these professionals so afraid to answer our questions? And they wonder why we don’t trust them.
Withholding information and selling inappropriate, high-cost plans by non fiduciary agents are the quintessential topics of friends and colleagues’ 403b horror stories, chronicled in over two dozen news reports. Without oversight, there’s no transparency of costs, no objective information about all options and no fiduciary responsibility. I shudder to think what the 400 teachers in Keith and Margaret’s tiny district are paying.(1) Multiply their superintendent’s primitive thinking by 700 other school districts in our state and you can see the great opportunity for gouging teachers by non fiduciary financial consultants.
Let the 403b Go
In my opinion, our advisory committee would be happy to let the 403b to wither and rot in its perverted and permanent high costs.(²) We prefer the 457b 100%–it’s our plan, it’s low cost and offers genuine growing investments. Ethical financial experts don’t sell a fixed annuity to twenty-something, year-old teachers (some committee members, myself included, gasp out loud, when we read the 403b reports showing ten million a month of our teachers’ hard working dollars contributed to indexed annuities, month after month, year after year).
Putting the 457b in Place
Just setting up a 457b and making it available is not enough to reform the defined contribution programs with PreK-12 school districts. A 457b solution requires four primary support systems, each different and with unique challenges:
1. Oversight/Advisory committee
2. Public Relations
3. Enrollment Presentations
4. Financial Education
Oversight/Advisory Committee. As mentioned, our oversight/advisory committee is made up of representatives of employees who pay the plan costs. Our working dynamics are a prime example of LAUSD’s employee collective bargaining units working collaboratively with management. We took full advantage of the most powerful and unpredictable weapon imaginable—transparency of the industry’s most coveted fee—revenue sharing. Benefits administration is credited for supporting our move to disclose all fees and reduce those costs as shown in Table 2 above. I doubt if Mr. Tischler imagined the depth of transparency demonstrated in Chapter 9 and the drilling down of investment costs by eliminating revenue sharing agreements as explained in Chapter 10. In the final analyses, the success of our advisory committee was a result of good old-fashion compromise and collaboration between employee groups and management.
Public Relations. Since launching the 457b plan in 2006, LAUSD has been passive aggressive in letting the employees know the new plan exists. No major announcement or press release has been circulated and to my knowledge the Board of Education never announced it either. Upper management and the Board may not know our committee or the 457b plan exits either, in my opinion. Once a year an email with a PDF file of all the health, dental and life insurance benefits are sent to employees. There is two links, one for the 403b and the other for the 457b, to more information on the district’s website—that’s it.
It should be no surprise then that far too many of our 75,000 employees are clueless about our terrific plan or don’t know how the 457b plan works. LAUSD benefits’ web presence is difficult to find. This foot-dragging is not about money as LAUSD had VALIC’s $500,000 available for “Plan administration expenses” (quoted from the contract), much of that money went to our committee financial consultant’s new five-year contract. In my opinion, we fell short in the public relations front because educational management’s liability hang-up.
Upper management’s old liability fear coupled with a low priority mindset for retirement savings linger over our best committee intentions like excessive CO2 intensifying smog. Just last week LAUSD’s superintendent denied our marketing plan to send out another 457b flyer in an email blast from benefits administration to employees because to do so would burden them unnecessarily. What? My response is narrow-minded Superintendent’s foolishness is that it is not spam, this is about an important LAUSD benefit that the Board and Superintendent should be proud and which many employees would welcome.
Enrollment Presentations. Deploying enough reps for face-to-face presentations and enrolling employees is the next major challenge. Both VALIC and CalSTRS failed to hire and send enough reps to meet our educators’ needs face-to-face and increase the assets in the plan.³ Instead, both TPAs relied heavily on a web presence and regular presentations at LAUSD headquarters for enrollment procedures.
a. How can 2.5 to a max of five reps compete with the hundreds of registered annuity sales people and financial advisers, some are still roaming our campuses at will (Yes, they blatantly ignore the district and union’s new restricted access policy).
b. CalSTRS was worse than VALIC. For the last 2.5 years CalSTRS did not budge one iota to increase the number of reps from the current 2.5.
c. If .37 percent Third Party Administrator (TPA) fee only supports 2.5 reps, what would be a prudent fee to hire more reps?
Financial Education. The major challenge for any public or private sector employer, union or TPA is offering financial education:
• Set a goal to fund retirement
• Learn stocks, the “genuine investment.” Why pension plans, endowments and foundations invest in the stock market and not annuities?
• Mutual funds vs. individual stocks
• How the stock market works
• Stock market history of returns
• Stock market risk
• Diversification. The single most important skill you must learn
• Index vs. managed investment strategies (performance and risk)
• Rebalancing the portfolio
• Insurance vs. investments
• Women’s investing issues
• Annuities vs. mutual funds
• 403b vs. 457b, Roth IRA, 403b Roth, 457b Roth
• How to find a genuine fiduciary financial adviser paid by the hour
This partial list of topics cannot be discussed in depth at lunchtime or an after school enrollment presentation. With 2.5 reps even CalSTRS enrollment effort was disappointing. In my opinion, VALIC and CalSTRS were naive about the number of enrollment presentations and educational workshops they could realistically carry out with their low RFP bid.
Positive Reform Developments
In addition to the beginning of the news reports on 403bs in the late 1990s, the following shows a broad based change:
1. In 2000, Dan Otter, a former elementary teacher, launched his popular 403b website: 403bwise.com. For 14 years Dan has gathered an incredible amount of information for 403b and 457b plans and offers a discussion forum to ask questions.
2. In 2003, CalSTRS launches their website 403bcompare.com.
3. In 2007, CalSTRS created their excellent, low-cost Pension 2. This low-cost plan is available to every school district in California.
4. In 2010, National Association of Governmental Defined Contribution Administrators (NAGDCA) began offering preconference workshops and a separate committee focusing on 403b plans for the first time in its history. Many NAGDCA members are genuine fiduciaries.
Positive Developments from the Teachers’ Unions
The nation’s largest teachers’ unions are moving in the right direction:
5. In 2014, the American Federation of Teachers (AFT) has not yet followed up on its powerful suggestions from their seminal article, Shark Attack! published in 2000.
6. In 2002, California Teachers Association (CTA) stopped endorsing 403b vendors.
7. In 2007 CTA launched an excellent 403b/457b informational website, and occasionally refers members with flyers and mailers. For example, their guidance on evaluating and selecting a fiduciary adviser is well thought out and thorough.(4)
8. In 2008 United Teachers-Los Angeles terminated their decade’s old and useless 403b “Union Approved” policy. Both LAUSD and UTLA collaborated by forbidding on-site 403b sales presentations throughout the district. This united effort reduced the 25,000 403b participants to 20,000 while the 457b plan has increased from zero in 2006 to 4,000 participants in 2014.
9. The AFT New York City local union has an excellent plan with a 73% participation rate. This great plan should be replicated with other AFT locals.
10. The National Education Association (NEA) our country’s largest teacher’s union launched a 401k plan, we, the 403b reformers, dream about. According to Brightscope.com, a national 401k rating firm scored the NEA’s plan a high 85 (out of 100).
NEA put together a top-notch, low-cost plan with three Vanguard funds as the largest holdings. Congratulations to NEA for looking out for their 700 participating employees’ best interest. NEA provides a best-in-class model for all unions and employers to follow-up with their employees. Congratulations to the NEA employees. Consider yourselves lucky to have a caring employer.
The Unions have to Finish the Job
Unfortunately, NEA’s three million members have a higher-cost 403b. No Vanguard fund is available. The outrageous fees prompted an unsuccessful lawsuit by two teachers. The case was dismissed faster than Houdini’s escapes. The fiduciary standard argued by the plaintiff’s attorneys was thoughtfully written, but they neglected one little detail—the fiduciary standard does not apply to 403b plans.(5) Annuities are not regulated by securities laws. The NEA’s plan is still providing expensive annuities and loaded mutual funds to their members while NEA’s employees enjoy a Vanguard plan! Demand that NEA launch a similar Vanguard 401k plan and terminate their horrific, high cost 403b.
A few low-cost plans are in place with unions and districts, but the word has seldom reached educators face-to-face. The unions’ leadership discusses these plans and remains tight-lipped publicly. The secrecy speaks volumes—don’t trust them until the details about costs are transparent. One union didn’t even inform their excellent retirement committee they were launching a 403b product until the “details” were worked out by the bosses and high-level policy wonks (similar to my experience with my local union as described in Chapter 6).
Scared by their financial consultants, the unions defend the expensive “hand-holding” policy, for good reason—unions cannot admit mistakes, lest careers and elections are at stake. Thus, like the districts, unions are comfortable turning to either insurance agents or broker/dealers to handle the presentations and enrollments to teachers (There is little or no education). The unions appear not to know what fiduciary responsibility means when picking consultants. As mentioned, they don’t have to legally, as 403b and 457b plans are not bound by fiduciary standards (401k plans are regulated by ERISA).
Our advisory committee follows the ERISA guidelines and never works in secret with the exception of the RFP bidding process with ad hoc committees. We strongly feel that is the right thing to have our meetings and decisions public and recorded. We are bound by the Brown Act.6 I hope that some unions are beginning to understand that we live in the world of transparency since the 2008 stock market crash, know the members are getting annuity screwed and that making money off members by offering high costs plans are over.
Someday our unions will enthusiastically publicize and be proud of their informational websites, implement their Shark Attack ideas, hire genuine fiduciary consultants to offer financial workshops7 and release a similar NEA 401k type Vanguard 403b plan to their members.
Your Local Union
Unions are complex organizations with hundreds of issues on their plate. They are an important voice for working people. They are made up of people like you and me. Get to know them and have them get to know you by attending meetings. Find other members who share your concern and begin a discussion of this potentially powerful retirement plan. Start with their retirement committee. Be prepared to initiate a discussion with your 403b or 457b ideas. Once they know you, your ideas will be supported at the committee level.
Tell them we need to take control of how this plan is delivered to our co-workers and that by leaving it up to the salespeople is a breach of fiduciary responsibility. If your union has the union approved policy, ask them to terminate it and offer financial workshops led by fiduciaries instead(7). You can start a subcommittee dedicated specifically to 403b/457b plans. Ask the district to create an oversight committee and be prepared to volunteer (In the private sector, many companies have retirement plan committees). Most oversight committees meet four times a year, so it’s not an onerous time commitment away from your busy schedule and no prior financial experience is necessary. And don’t forget to ask your union’s newsletter editor. I got lucky when Steve and his successor, Kim Turner, published my investment articles.
You can see the successes and challenges to financial education and oversight, which bring the onus of retirement planning right back on our lap. With responsibility for our personal plan and district’s plan, we can strive for financial security at each level, where the challenges remain. You have more information now from this or related personal finance books and articles. We can’t wait for school districts and employee groups to get up-to-speed. We cannot depend on somebody else for oversight and offer financial education. The current system works fairly well IF you know what you are looking for. That requires a commitment to learning about your plan and investment basics.
Chances are your employer offers a few low-cost, genuine investment choices. The sales people and your employer are not going to tell you about those choices for obvious reasons. Sales people will not get a commission and your employer fears liability about providing information.
Here are suggestions:
• Log on your employer’s website and search for the list of funds or visit your employer’s benefits office.
• Look for low-cost vendors such as Vanguard, TIAA CREF, USAA mutual funds, or Fidelity Investments.
• If none of these low-cost vendors are available, call their 403b/457b department and ask each of them to sign up with your employer.
• If the second and third bullet points above don’t work out, tell your story to your local financial reporter and don’t forget to write what you want to the school board and your union.
• Use the Roth IRA. You are free to select any low cost mutual fund. Continue to petition your employer, union or district to offer a low-cost vendor, one of those listed above. TIAA CREF might be your best chance.
• Set up a diversified portfolio (Large Cap, Mid-Cap, Small Cap, International and a bond fund. There are several good books about asset allocation and rebalancing in the reference section).
• If you need professional assistance, interview a financial adviser you pay by the hour and will sign fiduciary oaths from these two organizations: National Association of Personal Financial Advisers (NAPFA) or Garrett Planning Network (Garrett). Both organizations require their adviser members to sign oaths with their clients.
The seven bullet points above provide so much information, books and articles have been written about each. But you can identify in a minute whether your employer’s plan is high (over 1.0% total cost) or low-cost (under 1.0%), an annuity or mutual fund. Setting up a diversified portfolio can be straightforward. All you need to know is a little about investment basics.
Remember, there are no villains—everybody involved on the policy side have their self-interests through decades old policies. My story reflects what happens when we speak up. Employer policy heads and the union leadership need to hear our stories, so together we can make the entire retirement system better for all—clients and the professionals, whether 403b, 401k or 457b.
Employers and collective bargaining units probably think we are satisfied because we are busy with taking care of our students and don’t have time or the knowhow to tell our story. The world has changed—reporters want to hear from you. Hopefully this book will help you formulate your 403b story and voice your concerns directly to those personnel who make decisions on your behalf. No matter what anybody else says, you have enough information to tell your story, to begin to take control, ask tough questions and say no to high-cost plans.
Educational and Financial Cultures are Evolving
The glacial movement in the last 20 years leads me to think the educational culture is changing. Investment theory and practice with low-cost index funds are gaining tremendous popularity among investors. These positive developments will connect with teachers (and many more employees nationwide) eventually. As one Buddhist teaching says nothing is permanent. A sizable number of educators are savvy investors and the number is growing. You can be one of them too.
My story involved drama between the stakeholders. The drama was jammed packed with reflections and commentary of conflicts between insiders and outsiders over investment costs in many different organizations, regular participants and policy. Each chapter turns out to be an age-old struggle between the insiders’ status quo and the outsiders demanding transparency of costs and providing low-cost choices. Nothing exists more importantly than knowledge of costs—nothing.
The knowledge of the imminent conflict will help you. Most teachers who ask the tough questions might get immediate push back from their annuity sales person, district personnel, employer, boss or union. Don’t be intimated by their legal jargon, scare tactics and foot-dragging. Understanding this drama as illustrated throughout this book simultaneously helps you understand the financial industry’s interest, outdated policies and their language.
A Huge Precedent to Move Forward
My friends and I came on this massive problem with no precedents for 403b advocacy. The petty conflicts, successes, defeats, mistakes and miscommunication between regular employees, benefits administration, superintendents, legal counsel, union officers, politicians, industry lobbyists and financial consultants ended with a wonderful 457b plan. It all started with our 403bAware camaraderie. It was intoxicating as we planned and conducted informational meetings for our colleagues’ benefit for five long years helping two hundred educators. And later when we became members of the oversight committee, we demanded transparency, selected fiduciary consultants and a low-cost TPA and implemented a low-cost plan—highlights of our successful story, currently helping thousands of teachers.
Begin that discussion by sharing examples of our great 457b plan to all employers and employees, private or public sectors, in the country. It’s a gigantic challenge. The good news is we have a solid precedent from the “troops” and our story with the 2nd largest school district in the country. Over the long run, you will find the knowledge and the courage to start anew with a low-cost plan and meet your retirement goals without needless suffering.
Best of fortunes.
(1.) Keith and Margaret found a genuine fiduciary financial adviser which they pay by the hour through the National Association of Personal Financial Advisers (NAPFA). He helped the Reeds get out of those high–costs funds and into long-term genuine investments.
(2.) Referring back to Table 2, the three low-cost 403b options are appropriate: CalSTRS Pension 2, TIAA CREF and USAA. (Caveat emptor about USAA—USAA mutual fund company is an option in many employers’ approved venders. The do-it-yourselfer can choose their no–loads but if a financial adviser selects USAA for a client, said adviser might use the share class that pays the adviser commissions).
(3.) The plan consists of $70 million in assets at mid-year, 2014. By contrast, the 403b plan took in about $800 million in the same time period. The contributions are massive and yet both of our TPAs missed an opportunity to grow more than $70 million.
(4.) The California Teachers Association might propose a bill for the 2015 California State legislative cycle. This proposal will be the third attempt to reform 770.3. CTA wants to vet vendors through collective bargaining and improve CalSTRS 403bcompare.com to disclose more cost details. The devil is in the details. Watch those costs.
(5)Daniels-Hall vs. NEA. It is highly recommended that you read this opinion. It is a replication of why Mercer Consultants choosing investments with revenue sharing costs over participants’ best interests discussed in Chapter 9. When the fiduciary standard is absent in 403b/457b plans, non fiduciary consultants will invariably choose investments that charge revenue sharing costs. It’s all perfectly legal in 403b plans and the principal reason why the plaintiffs lost their case against the NEA.
(6.) To my knowledge our advisory committee is the only place in California where our voices are heard in an official, ongoing and public forum.
(7.) The California Teachers Association has begun to offer financial workshops about four times a year. One of those workshops Keith Reed attended and got excellent help. Hopefully, the workshops will be more frequent so all of their 330,000 members receive this crucial information.
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