ATTENTION Readers: This chapter is an early version of my new book just released, March, 2015. For an update of all the Chapters including this Chapter 1, go to the home page and scroll down. On the right are directions to get the full story in 11 Chapters and 17 appendices, resources, letters, books, podcasts all in the free pdf book, “Fighting Powerful Interests: Educators Challenge Tax-sheltered Annuities and WIN!” (Click here for home page).

 CHAPTER 1

 “Not available”

A PreK-12 School District: Where a Simple List and Employee Assistance with Retirement Planning Doesn’t Exist.

(1993)

 In our book, “Late Bloomer Millionaires,” Dan and I share our disillusionment with financial advisers’ low performing and expensive Tax Shelter Annuities (TSAs). We said good-bye to the useless insurance, front and back-end loads (commissions) and chronic illiquidity (locked up for years). In the early 1990s we discovered investing in low-cost mutual funds which provided built-in diversification with higher returns over time, learned from some big mistakes and now enjoy a comfortable retirement.

Dan had no problem changing from TSAs to investing in low-cost mutual funds with his employer. My attempts ran into petty obstacles due to employer intransigence and union indifference. In 1993 I applied to save future 403b money in Vanguard Wellington, a no-load mutual fund with solid performance over many years. District staff returned my paperwork, wrinkled with a hastily scribbled “not available”  over my application.No explanation, no letterhead, name nor office phone number accompanied the notice.

It wouldn’t have been so bad if staff offered a phone number or even a name. No. After several tries to locate the department which handles 403bs, I found the “Deduction Unit.” Huh? Was misanthropic intent the norm?

I called them for the district’s list of no-load companies. The clerk did not know which companies were no-loads, but she provided all 25 mutual fund companies. Not expecting to write 25 names and phone numbers, I volunteered to pick up this list at their office. The clerk confidently told me, “providing any written 403b information is against district policy.” What? I am calling to find out what is available to cooperate with their policy. Only a bureaucratic employer would be so inept as to require employees to copy such a list. I learned quickly that the cleverly titled unit was difficult to locate for a reason and staff were instructed not to help when found.

Why was staff literally hiding from employees? What is wrong with these people when they are found? When I became a new teacher ten years previous, LAUSD needed teachers and was graciously welcomed. Ten years later a different attitude immerged with the 403b—playing a tedious hide and seeks with an unexplained “not available”  application, searching for the hidden deduction unit and finally requiring the list to be hand copied.

My exposure to district 403b psychosis was in remission upon discovering INVESCO, an alternative to nasty annuities. I began contributing to this genuine stock market investment in February, 1994. Unfortunately INVESCO charged a 12b(1) fee. This extra .25% is a legal add-on for marketing. I wanted a no-load investment and compromised with this extra fee.

Not So Fast

My 403b advocacy was reactivated when Dan came home announcing he had a two-page agreement from Fidelity Investments with his employer, a small community-based drug and alcohol recovery house. Six of the twelve employees started contributing to the largest no-load mutual fund company at the time. Dan’s fortune impressed me so much my desire for Vanguard was rekindled. I wondered why the other low-cost giants, TIAA-CREF, Fidelity Investments and T. Row Price were not available to my fellow educators. My thought always came back to this fact—this is our money. Districts match our pension plan contributions and but not our 403bs, so what is their motivation to be cryptic and reluctant to support our desires?

I spoke to a deduction unit staffer, Roger, who was forthcoming. Roger said Vanguard and Fidelity would not sign the district’s hold-harmless agreement.

“What’s that?” I asked. He said all businesses with LAUSD must sign this agreement so the district is not liable for unforeseen events affecting that business which could potentially tap into the district’s general fund.

“But why does Invesco sign on and not Vanguard?” I asked.

Reverting to his bureaucrat’s role he dismissed my question by suggesting, “you will have to ask Vanguard.” With that shot, our lengthy conversation ended. Before we hung up, Roger surprised me with this out-of-left-field comment: “You know Steve, you’re right, LAUSD should have a contract with Vanguard, TIAA CREF and Fidelity.” His tone suggested a temporary acquiescence from his confident and effusive wonky role.

This admission was a conscious-raising statement. The retirement plan world was changing in the 1990s and the Internet craze was beginning. Roger’s comment was monumental—this lone 403b staffer demonstrated that large bureaucracies employ decent people who want to help—after all, we are educators. Combining Dan’s experience with his employer and with the staffer’s parting shot were crucial to continue my investigation—LAUSD internal obstacles set by forces and decisions beyond the deduction unit may explain why Fidelity and Vanguard were not available.

A Bigger Picture Emerges

The district obstacles became clearer after talking with Fidelity, Vanguard and Invesco. Fidelity and Vanguard confirmed what the deduction unit staff said.  These companies will take responsibility for their own accounting, payroll and fiscal mistakes, but not for the district’s own mistakes. Shaking my head and thinking, “The district’s fiscal mistakes?” I repeated in my head as Roger never mentioned this.

Fidelity and Vanguard said there is one huge distinction which separates this agreement from common sense legal and practical application. In a few states, including California, the common sense indemnity clause, when each party takes responsibility for their own mistakes goes out the window. These specialized 403b hold-harmless agreements require unrestrained liability. Districts demand, and they get, what the experts call, “gross negligence.” Gross negligence demands the 403b vendor must cover all school district payroll and accounting mistakes. In other words, the 403b vendor will be liable for their own accounting errors (common sense indemnity) and also be responsible for the school district’s fiscal errors in any transaction connected to the 403b plan.

Why would any company agree with this demand? It’s not just LAUSD, it’s the vast majority of districts in California and many across the nation. Where else is this insane practice demanded? On closer examination we learned how “hold-harmless” and “gross negligence” might be straw dogs.

The insurance industry has no problem with these demands, heck, they automatically sign them by the hundreds. LAUSD had 125 insurance companies and 25 loaded mutual fund companies who were delighted to access the educational market. A few no-load mutual funds signed on, but those charged 12b(1) fees. Unlike Invesco, Vanguard, TIAA CREF and Fidelity did not charge 12b(1) fees. Insurance companies’ are in the liability business with their annuities as the lucrative money making machine. They could easily take on the risk of the hold-harmless agreement because the excessive fees will take care of potential errors.

The IRS holds any employer responsible for proper payroll contributions. LAUSD requires vendors to correct potential fiscal errors. Okay I get it. If the district messed up my contribution they would bill INVESCO right? Let’s find out.

Not One Error

Did INVESCO experience LAUSD 403b related IRS compliance problems or accounting errors? The INVESCO 403b specialist told me they never had one single problem with LAUSD—no accounting, no lawsuits, nor an IRS out-of-compliance issue with my account or any other problem with 2000 LAUSD employees (I was shocked at the number). If each employee contributed an estimated $3000 per year, $6 million in transactions were filed without a single error!

The more I learn about the district’s restrictive policies, the more questions surround the ridiculousness of the protections offered by the hold-harmless. This was an initial inkling that liability fears were illusionary. Somehow the insurance industry tapped into district fears of liability and coincidently stepped in to solve that made-up problem. The industry fooled the districts to permanently keep lucrative contributions from its 30,000+ educators’ wages flowing to TSAs, while only 2,000+ employees were contributing to no loads.

Annuities outsell mutual funds by great margins. Since the district never advertised any of the 403b plan choices, the low-cost vendors were hidden behind an obfuscating (and demeaning) process to minimize assistance and discourage valid inquires. How many employees got the same run around to get the list and gave up? The no-load funds charge lower fees which benefit the investors, but reduce their advertising budgets with no advisers on school sites. Thus, the no-loads cannot compete with the boots-on-the-ground insurance agents sitting in school-site cafeterias like lounge lizards or barging-in classrooms and union halls, at will, while enjoying the union’s approval process and providing free dinners and pastry, soft drinks, door prizes and letterhead notepads to anybody who attends a sales pitch.

Letter to LAUSD Board Members and Union President

I wrote a letter to my union President, Day Higuichi, the Board of Education, the Superintendent and Chief Financial Officer (CFO) questioning the over restrictive hold-harmless requirement. I asked Mr. Higuichi about putting the 403b on the negotiating table. He wrote back stating: “UTLA does not have the authority to require different legal protections and guidelines so whoever is interested will need to comply with District regulations.” Several board members, the Superintendent and the CFO replied: “The District’s Hold-harmless Agreement has been modified and reads the same as the Los Angeles County Office of Education’s Hold-harmless Agreement which is now in effect for all school districts’ 403(b) programs in the county.”

The union and district were so shortsighted they neglected to consider the implications of the county agreement. Vanguard had an agreement with the L. A. County Office of Education! County employees enjoyed low cost mutual funds, unfettered by the stranglehold of the annuity industry on LAUSD. If LAUSD used the same agreement, why didn’t Vanguard sign on to LAUSD too? Fidelity and Vanguard already declined the new version. What gives? The culture of utter ignorance and silence was about to be challenged.

Good News!

Neither the district nor the union were going to publicize the no load mutual fund companies availability. Consequently, I wrote an investing article to support the few available low cost funds in the district’s 403b plan to the union’s newspaper editor, Steve Blazek. He wrote to me, “Our 32,000 teachers would be very interested in what you have to say.” And thanked me for making “the newspaper a more interesting read for our members.”  He was my first union ally. He understood what I was trying to do and supported two basic principles:

1. LAUSD employees should know all their 403b options.

2. LAUSD employees should know the fees they are paying.

Summary

The first thing Dan and I did was to say no to TSAs, never pay commissions and ignore the insurance agents. Neither district policy nor illusorybased hold-harmless agreements would stop us from learning to invest and find the lowest cost retirement plan possible. Dan experienced no problems with his tiny community-based social service employer to get his chosen no-load funds. Hold-harmless agreements had no impact on his choice. On the other hand, the author got so pissed at this huge charade I began a twenty-year mission to understand how this rip-off of teachers came to be. And, more importantly, what could be done to improve educator’s retirement options.

Tax-Sheltered Annuities were introduced to California educators in 1961 by the insurance industry. From 1961 to 1998, insurance companies and commissioned agents had open season on district personnel. Not one piece of district real estate was overlooked. Every cafeteria had a pile of cookies and brochures placed there to begin a process of trust—bilking billions of dollars from teachers with guarantees which were contractually modified at the industry’ whim. No benefits administrator, union official or state politician took notice.  To my knowledge, no one questioned the 700 California school district’s indolent policy and their sacred cow, the hold-harmless agreement. The insurance products’ high costs and low performance resulting in diminished nest eggs weaved permanently into the heart and soul of California’s (and the nation’s) PreK-12 education culture.

I attempted to take responsibility for my retirement plan and cooperate with LAUSD’s policy. But to get what I needed the district demanded that I “tiptoed through the tulips” while trying to accommodate their minefield of outdated policies. If the district had sent the list of the available companies attached instead of the dismissive not available response, this effort might not be. I would have returned my application with Invesco as my choice and went about my business. But that’s not what happened. A demeaning culture of ignoring a teacher’s reasonable request—their not available conduct, followed by my gumshoe effort just to find the right department, embedded in payroll under the ludicrous name. Upon finding the deduction unit asking for information, inquiring employees were treated like six-graders, getting lectured and demanding we handwrite no-load names in order to comply with their rules?

Anyone would know in an eye blink that this behavior implies something else is going on beyond the lack of cooperation and unchallenged policies. This bizarre episode reflects how higher-ups may forego attention to exploitation by purveyors of high priced products limited by unread fine print. Educators are easily schmoozed into trusting these salespeople when TSAs are aggressively pretensed as the only 403b option.

It’s difficult to imagine no effective challenge to the school district’s restrictive policies or the preponderance of high cost 403b insurance-based retirement plans was undertaken for three decades. How did this come about? Take heart. The decades-old 403b silence would be broken.