NOTICE TO READERS! This chapter 5 is an early version of my book, “Fighting Powerful Interests.” For the finished and completed published book, go to the home page and obtain the free pdf. (Click here and scroll down. Subscribe to our blog and download the book!).

Foreword to Chapter 5: Read what the American Federation of Teachers says about TIAA CREF’s application to be AFT’s approved national 403b vendor. This 12 year-old story is timely today. The resistance to TIAA CREF entering the PreK-12 educational profession remains strong. Teachers seldom have low cost 403b plans. My story provides clues as to the reasons why the resistance to low cost 403b companies in the PreK-12 market continues to this day.

Chapter 5

American Federation of Teachers (AFT)

Seeks a National 403b Vendor

2001

The AFT is the second largest national teachers’ union with 1.5 million members. Unions protect workers’ rights, providing a shared voice, resembling my assembly-line worker mom and her co-workers at Minnesota Mining & Manufacturing Company. I chose AFT because of its colorful history. AFT improved the classroom teacher’s work environment, created tenure and increased benefits for a century. Beyond these union fundamentals AFT fought against minority oppression two decades before the 1964 Civil Rights Act.  I valued the unique activism under the leadership of its famous and distinguished President—Albert Shanker.

In 1999 AFT was in the process of writing a Request for Proposal (RFP) for a competitive bidding process to select a new “AFT Approved” 403b vendor. Their benefits staff formed a specialized task-force committee—with a mission to provide input to the RFP’s Statement of Work and pick the firm.

The task-force Chair asked local unions around the country to send representatives to meet for a day of training at AFT’s Washington D. C. Headquarters. Usually these committees are filled with high-level union staff, elected board of director members or union bosses. Sam Kresner, the United Teachers-Los Angeles (UTLA) assistant to the president, was unable to attend and asked me to take his place.

I was thrilled Sam trusted me. Honored and humbled to represent 45,000 members of UTLA, I appreciated this extraordinary opportunity to highlight the need for low-cost plans. After sending my financial advocacy bio to the Chair my participation was accepted.

Our training focused on qualified tax-deferred retirement plans (jargon for 403b) and IRS regulations. AFT filled the day with the big guns: its own research center personnel and legal counsel, American Association of Retired Persons (AARP), Segal Finance (committee consultants) and IRS attorneys including the esteemed Robert Architect, Tax Law Specialist who wrote the IRS 403b regulations.  The United Federation of Teachers NYC and New York State United Teachers presented their 403b plans. I was impressed with the knowledge and skill of these AFT New York locals who proactively monitor their 403bs. None of the California unions have the willingness or trained staff at the time to begin a discussion, let alone create a similar monitoring infrastructure.

At the end of the day the Chair asked each of us what we wanted in the final plan. I said, “no matter what type of plan is created, there should be a low-cost mutual fund option.” One committee member glared like an imperious dowager and shouted, “We’re not going to encourage day-traders!” Day-traders? I was floored—I never expected a dim-witted comment from a member of this committee. Apparently she forgot one of the simple facts about investing: low-costs have nothing to do with day-trading.

This first meeting concluded. AFT and Segal consultants would send questionnaires to ten potential firms to respond to queries. Segal would rate their responses and select the top two vendors. Both would be invited to present before our committee. Our job two years hence would be to choose the winning bid.

Shark Attack

A few months later AFT’s trade magazine, American Teacher, asked a repeated and financially useless question: Should students be paid? Oh pleeeease…, here they go again, picking a jaded topic which has been discussed in education circles ad nauseam for years with the usual hackneyed pros and cons.

“How about an article on 403b voluntary retirement plans?” I asked. A 403b article would be published in the next edition. The editor assured me I would like the article.

The editor was right. It was (and still is) the greatest critique of the 403b, how it remained hijacked and was attached like a Siamese twin to TSAs. From the beginning to end this seminal piece said everything. The following excerpts show why it’s a classic for 403b reform.

American Federation of Teachers Publishes:

 Special Report: Shark Attack!

Photo by Fallows,C. & Gallagher, A.J. & Hammerschlag,N.

By Don Kuehn

American Teacher—June, 2000

Investors in 403b Plans, beware: You are especially vulnerable to predators!

Teachers, college professors and other education workers are being threatened by sharks–but not the kind swimming in the sea. These equally dangerous predators are “land sharks” who prey on unsuspecting or uneducated investors and devour their hard-earned retirement money. It’s time we put a stop to them…

More than $422 billion is invested through 403(b) arrangements and, sadly, most of it sits in low-performing fixed annuity contracts, reports Spectrem Group/Access Research, a San Francisco-based consulting and research firm. Some 2 million public schoolteachers have more than $116 billion invested in 403(b) programs (bolds are mine. Data on the year 2000. Citation for article in References).

So Far So Good….

AFT matched its reputation—looking for solutions years ahead of everybody else. The chair and his staff invested an extraordinary amount of preparatory thought and action:

• Identified and addressed problems years ahead of everybody else
• Accepted rank and file members to vote on a major decision
• Organized and trained a special committee
• Conducted a transparent process from the RFP to the final decision
• Published Shark Attack

The article laid out a solid case of what was wrong with the 403b—will talk become AFT’s policy?

The AFT 403b Task-Force Meets Again

As scheduled the task-force reconvened in December, 2001. Segal consultants were ready for our decision between two finalists. Our task was to pick a firm to administer the plan for 1.5 million members.

I was disappointed. The only low-cost vendor which applied, TIAA-CREF (T/C), was not a finalist (Fidelity Investments, T. Row Price and Vanguard Group did not apply). Segal said T/C demonstrated competence but lacked PreK-12 experience. Hmm…serving higher education faculty with their retirement since 1918 was not counted as experience? This was the beginning. As the surreal world of the mystifying 403b get mixed with union decision-making, read how the rationales worsened and the ironies escalated.

From the beginning to the end of this meeting, it was apparent the committee never read Shark Attack.  This omission was pervasive. Referring to Shark Attack slipped my mind too, a huge blunder. The article was never referred to and for good reason—the consultant selected only insurance companies. AFT reneged on its own good assessment and offered the bid to another insurance company—either ING or CitiStreet. My initial suggestion for a low cost mutual fund vendor had dissolved faster than a handful of salt tossed into the Mariana Trench.

T/C came in third. This is the second time I observed a PreK-12 union bias against T/C within a few months. The unions’ partiality to insurance companies remained strong and connected. How could AFT forget what they wrote so precisely: “It’s time we put a stop to them” (stopping high cost “predator” insurance companies, carried out so eloquently in Shark Attack).

Secrecy Backfires

One reason I overlooked Shark Attack was the following bombshell. CitiStreet’s reps confidently announced they received “union approval” by United Teachers-Los Angeles four months previous. What? I sat stunned for a few moments trying to comprehend, much less speak about this disclosure. Finally, I said as calmly as possible, “UTLA is my local union… I didn’t know this.” Both CitiStreet presenters stopped and stared at me. They didn’t know what to say. The silent standoff lasted a few moments while everybody tried to grasp what was disclosed.

I shook my head in disgust, thinking about my union. The contrast was glaring: AFT demonstrated an open 403b selection process, while UTLA used a covert process with the same vendor. It was important for UTLA to fly their representative (me) across the country and be part of a national decision affecting hundreds of thousands of AFT members. Meanwhile, our 403b Aware group and I had no idea what our local was doing right under our noses. It’s incredible. If unions wonder why they are losing members, this is one major reason.

After CitiStreet’s presentation one of the reps apologized. Of the 20 people present some may have wondered how was it possible one of the committee participants did not know what his own local union was doing. Through no-fault of their own CitiStreet probably felt responsible for embarrassing one of the committee members. I was not embarrassed and informed the rep he had no reason to apologize. However, this was an unfortunate distraction.

I was angry at UTLA. They deliberated without asking a single member of 403b Aware self help group what we thought. No, they were hell-bent on selecting another expensive vendor in secret. Now I understood why they never invited T/C to present. UTLA had already selected another vendor.

This incident demonstrates when secret processes are uncovered they reveal duplicity as bright as the recent exploding Russian asteroid. Private decisions disgrace organizations when they are accidentally exposed—and aren’t disclosures almost always unintended? Unions are vulnerable to negative distractions which take energy away from the important work they do. A simple transparent process would eliminate potentially potent conspiracy theories.

The AFT consultants admitted T/C’s fee structure was “by far the lowest” in their written report (fees ranged from .31% to .59% at the time) but they made no mention of this in their verbal presentation. It was also a potential bias as one of the consultants admitted he formerly worked at a large insurance company. Neither T/C’s corporate ethics nor mission statement was mentioned. The consultants inaccurately reported:

(1) T/C products have surrender fees.

Not true: Only two of their products have surrender fees (These products generates a slightly higher return than their other nonsurrender fixed products).

(2) T/C is conservative and only offered a few options.

Not true: Their style mimics index investing: low turnover, broad diversification and low-costs. T/C has enough choices to offer diversification across all major stock and bond asset classes which are ideal for 403b plans. Historically, 403b plans have had way too many cookie-cutter insurance products with too few stock and bond fund options:

”…in Los Angeles, for example, more than 100 vendors create a bewildering array of investments and options to sift through,” Shark Attack.

 (3) T/C’s support services are sparse. They only have two main offices.

Not true: They have three main and twenty-two regional offices around the country.

In my opinion T/C was dead-on arrival. Many Community College Faculty uses T/C and are AFT members, but had no material impact on the selection process here. CitiStreet should not have earned a second place in the rating. They admitted in their presentation they were not ready for a national plan. In this important decision AFT should have had the two best vendors present. How could CitiStreet’s fundamental lack of readiness have been overlooked by the AFT screening by their consultants? A more troubling question is why CitiStreet accepted AFT’s invitation to present?

 Reducing Costs?

Share Attack mentioned some AFT locals had already reduced costs:

“The New York State United Teachers, Education Minnesota and the United Federation of Teachers (New York City) have also used their significant clout to force positive changes in the 403(b) options offered to their members and to reduce administrative expenses” (Shark Attack).

Apparently AFT also “forgot” the presentation about monitoring from the New York delegation at the first committee meeting. AFT would have much more clout to hammer out a lower cost plan than their locals. Why hadn’t AFT made similar requirements to advance those same ideas which New York City and NY State Teachers had already implemented?

Low costs are eschewed by the consultants because in their opinion, “hand-holding” is crucial for PreK-12 teachers. Why do low costs have to be compromised with hand-holding? Or is this another tedious excuse for recommending high-priced 403b options from large insurance carriers?

“Hand-holding”

AFT and their consultant were adamant—PreK-12 teachers need hand-holding. They felt T/C wasn’t ready. As good as the Shark Attack article was, it didn’t address hand-holding thoroughly enough:

“Vanguard and Fidelity won’t send someone to sit across the kitchen table and hold hands like insurance companies do. That makes public school and college employees easy prey for the sharks who feed on these plans” (Shark Attack).

Okay, Shark Attack addressed the cause of the hand-holding problem. But it did not offer a viable solution. For example, where is the evidence educators want “…someone to sit across the kitchen table and hold hands…?” Who has experienced hand holding? During tough times people are simply told “times are tough.” Should someone be paid for those types of dismissive comments? Or the adviser as another expensive product to sell?

Some of us do not need hand-holding at our “kitchen table.” What a broad and cynical generalization about highly-educated 1.5 million AFT members. Not all educators are ignorant nor as stupid as the industry portrays—many want to learn how to increase their personal responsibility for their retirement planning. Contrary to this “popular opinion” thousands of educators are savvy 403b investors? We knew this from the continuous attendance at our 403b Aware self-help meetings. And the fact that Invesco reported 2000 LAUSD employees used Invesco no-load.

AFT and the consultants recommended hand-holding, biased in favor of insurance agents and their companies. Why?

• Is hand-holding an excuse to allow an army of salespeople in the schools to remind teachers they need to save and then sell them a costly product which might not be in their best interests?
• Do you know what the members will be paying for hand-holding? Just about everybody knows hand-holding is not free:

“These include high front-end costs, massive surrender charges, redemption fees, inappropriate investment choices, sub-account fees, two-tier plans, big commissions and hidden charges for unneeded life insurance” (Shark Attack).

• Did it occur to AFT and their consultants that many teachers/support staff and educators do not need expensive hand-holding? What would be their option?

My Blunders

• Not pointing out the disconnect between what AFT wrote in “Shark Attack” while selecting another large insurance company.
• Not asking for an explanation of CitiStreet’s top rating when they were not ready by their own admission.
• Not being prepared for the hand-holding issue.

Theory versus Practice: Did AFT Choke?

Why did AFT’s 100-year colorful history of teacher-focused activism with all of their excellent 403b preparations surrender without hesitation to the consultant’s recommendations? AFT’s brilliant initial assessment in Shark Attack was spot on. In practice, however, their vision of reforming the 403b collapsed faster than a hastily prepared four-layer cake by an amateur baker.

No positive changes from AFT’s preparation came to fruition. This was a once-in-a-generation opportunity to take ownership of the hijacked 403b by selecting T/C. AFT could have also used the two-year lag between our meetings to be more determined to attract a low cost mutual fund vendor. But T/C did apply and its corporate culture and mission statement addressed almost all of 403b “predatory” problems so vigilantly explained in Shark Attack.

What is AFT‘s infamy? Simple. They did not follow their own excellent advice. What a pity.

Summary

Despite the huge blunder AFT is still a good union—their RFP process started transparency and included ordinary members. This chapter would not be possible otherwise. Unions are superb at protecting members on many issues, helping them maintain middle class status, improving conditions and preserving high-quality medical, dental and pension plans. I am a grateful member of both UTLA and AFT during my 24-year teaching career.

Still, the 403b remains an enigma. When confronted with offering a decent 403b plan both AFT and UTLA failed miserably by collapsing in deference to insurance companies whose friendly and entrenched industry skills, expensive products and their conflict-of-interest “hand-holding” were too challenging, even in the wake of brilliant Shark Attack, to resist.