NOTICE TO READERS! This chapter 7 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!).

For­ward

2002. In this chapter we head for Sacramento to modify the source of the California and many other states’ 403b problem: Each state’s insurance code that regulates how 403bs are marketed and sold to unsuspecting teachers. We dared to challenge the status quo. It was predictable the insurance industry fought tooth and nail against our bill, but wait till you read the reaction from some of the United Teachers-Los Angeles’ (UTLA) officers after the bill was passed. 

Chapter 7

California Assembly Bill 2506

2002

          The setbacks TIAA CREF (T/C) endured with United Teachers Los Angeles and American Federation of Teachers (AFT) were meager turbulences on the flight plan to helping California educators. Brian Cressey now eyed on the primary obstacle for low-cost 403b vendors—the outdated Insurance Code 770.3 (California’s 403b regulations discussed in Chapter 1). This was huge—fortunately for California educators he was tenacious.

Personally, he remains a hero. Why? No other California leader had challenged the status quo of this mysterious retirement savings plan. Mr. Cressey was the exception. He and his supervisor, Regional T/C Vice President, Richard Shafer, proposed updating the code by introducing legislation. To obtain need and a rationale for the new bill, they spearheaded focus groups with California public educators, administrators and community college facul

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ty.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

His specific concerns were discussed in Chapter 1. All relate to:

·       School districts’ and unions’ interpretation of 770.3 to insurance industry’s advantage

·       Over-the-top hold-harmless agreements

·       Delivery of hundreds of similar costly insurance products to California educators.

Sound familiar? The results of the focus groups’ data were no surprise either:

 

·       Teachers, etc. are interested in supplemental retirement savings programs;

•  There are so many providers that credible, unbiased information is difficult to obtain, thus employees are forced into important investment decisions with little or no genuine guidance;
• ·       There is a growing discomfort with the lack of an objective approval process for  providers;
• ·       The use of onerous hold harmless agreements to control the number of providers often precludes the inclusion of low-cost providers;
• ·       Insurance code 770.3, as it currently stands, does not reflect the changes in federal pension law, such as the inclusion of mutual funds under Code 403(b) and tax-free transfers (TIAA CREF, 2001).

AB2506 was proposed to address these issues by clearing up the legal landscape to clarify interpretation, provide objective information, disclose costs and create a “reasonable choice” of companies. This reform effort was spot-on and unprecedented.

 

The momentum for 403b reform from the print media encouraged our side. This was no longer a one person experience. Many articles included interviews from educators around the country were published, including the best, American Federation of Teacher’s Shark Attack. My favorite quote was from financial author Bill Bernstein. He said, “The 403(b) system traps teachers in one of the dankest, foulest-smelling cellars of the financial world.”

 

Bernstein’s eloquent quote came at the wake of eleven 403b mainstream news articles, stories and a Securities and Exchange Commission’s (SEC) warning about the high fees of annuities (2000, click here). From 1997-2002 these articles repeated—403b was riddled with high fees, illiquid and poor performing TSAs. “Employees need to act if their 403(b) options are turning them into shark bait”(AFT’s Shark Attack). The New York Times chimed in, “As more teachers learn more about investing, many have become fed up with their tax-deferred retirement plans” (Richard Oppel, For Teachers, Object Lessons from the 401k, 1999). AFT’s John Abraham said, “The problem with 403bs is that no one—not the employer or the unions—has taken any responsibility for them (Paul Lim, U.S. News & World Report, July 10, 2000). AFT failed to follow through in a manner explained so clearly in Shark Attack. After AFT’s vendor selection debacle this new bill would be a giant leap forward and help gain a positive finish.  

 

Competitive Bidding—Reasonable Cho

ice

Instead of hundreds of i

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

nsurance products a reasonable choice might consist of five or six venders. A reasonable choice was possible by allowing school districts to put a 403b Request for Proposal (RFP) out to competitive bid. The RFP could require full disclosure of fees and which types of retirement products were allowed. Districts and collective bargaining units would organically decide what was best for their employees rather than the mechanical and heavy-handed Insurance Commissioner’s Office and 770.3.

 

School districts use RFPs to buy everything else: computers, books, contractors to build new schools and educational consultants. Can you imagine districts hiring 100 contractors to build new schools or 25 book publishers selling twenty-five different reading programs because the districts were mandated by law and the state education department to allow “any willing book publisher?” Pandemonium would result. Yet districts must retain hundreds of insurance companies with thousands of choices of TSA products demanded by one law. This insurance code was the de facto 403b plan for all educators in the state. This was nuts. Our side wanted local control.

 

The support team consisted of:

 

United Teachers of Los Angeles (UTLA)
California Teachers Association (CTA)

·       California School Employees Association

·       Faculty Association of California Community Colleges (FACCC)

·       College Faculty Guild, AFT Local 1521 (Los Angeles Community Colleges)

·       Small School Districts’ Association

·       TIAA-CREF

·       Association of California School Administrator

·       California School Boards Association

·       Meridian Wealth Management

·       403bwise.com

 

 

 

Assembly member Darrell Steinberg (D. Sacramento) sponsored the bill. He was young, smart and thought this bill was a shoe-in. What could go wrong with helping teachers? AB2506 began to move through the California legislative process.

 

Mr. Steinberg introduced the measure at the first subcommittee hearing. I testified in support of the bill with my prepared one minute pitch as a teacher advocate representing UTLA’s 45,000 members. With an introduction as a “doctor,” to bolster an authoritarian image, the impeccably dressed dark-suited individual seated next to me argued against the bill. Clearly this self-serving parasite spoke for the industry. The tension was high. Lucrative careers were threatened.

 

Meeting at Steinberg’s Office

 

Mr. Steinberg sought to compromise and brought all the stakeholders into his office. Both proponents and opponents filled the room. I handed out Table 1.

 

 

Mr. Steinberg said, “I like this, I understand this.” He saw that the listed insurance companies offered the same product, annuities. He also understood mutual funds and what loaded and no load meant. In less than a minute Mr. Steinberg understood how the bill’s principles would be revealed, without confusion, using the state’s largest school district as an example. Imagine the positive effect on California educators if a similar table were replicated by each of the state’s 700 districts. AB 2506 embodied an idea and a mission with masterful simplicity. Mr. Steinberg was the first test pilot.

 

The four dark-suited insurance lobbyists were stone-cold-quiet listening to his comments. Mind you, most lobbyists represent powerful vested interests. They articulate with a calm demeanor and can manipulate proposed bills at will. That’s their job. Nowhere in the history of this state had any leader questioned their annuity products, considered disclosing costs or the legitimacy of insurance products.

 

The lobbyists tried to explain, “it’s more complicated than that.” The differences between loads and no-loads would be “too confusing” for people to understand, they pleaded. They were like squawking parrots, replicating the same insulting talking points of the insurance industry rhetoric which we’d heard before and again. I said: “It’s worse. Teachers believe your products are FREE. And that’s a lie. You know it and we know it, but they don’t.”

 

The lobbyists appeared to be blindsided by the simple illustration—they knew it was accurate. This bill would expose the fee schedule and delineate the different products so simply a 12-year old could understand. How? By unmasking “complications” with a table. A simple basic table, created by an obscure elementary teacher, stopped their rap.

 

The Vitriol Begins

 

Meanwhile the insurance companies ratcheted up their rhetoric and lies. Their campaign against AB2506 turned nasty. After experiencing my union’s opposition to T/C (Chapter 4), this was not surprising.

 

The opponents created a website dubbed ROPE, Retirement Options for Professional Educators. They wrote scary letters to their clients, California teachers, and passed out flyers. One was created for LAUSD employees because UTLA supported the bill. The anonymous flyers contained misstatements directed to teachers. Quote: “YOUR FREEDOM OF CHOICE IS ABOUT TO BE GONE FOREVER.”

 

Actually, it’s the insurance agents’ freedom to raid teachers’ wages would “be gone forever.” The agent’s company would have to wind its way through the school districts’ RFP procurement process, if the bill passed. Agents can sell products, but under the new proposal their one-size-fits-all TSA would require vetting and competitive bidding just like all district contractors.  

 

The vile hatred by the opponents could not be overstated. The San Diego Union reported in Teachers’ 403(b) plan nonvirtues ‘extolled,’  “Because the legislation would have crimped insurers’ free rein at the schools, the insurance industry blew a gasket. At one point, the bill’s opponents were circulating anonymous fliers at schools which compared the legislation to Hitler and the Holocaust. Not surprisingly, the teachers lost the battle” (Lynn O’Shaughnessy, September 4, 2004).

 

They threatened to put a stop to the bill and Mr. Steinberg blinked. Mr. Steinberg had to compromise with the insurance industry. I don’t blame him. He told David Washburn of San Diego Union-Tribune after the bill passed, “I took it because it was a worthy cause. I had no idea it would be this controversial.” Steinberg continued, “it was one of the most difficult bills to negotiate during his six years in the legislature” (01/30, 2005).

 

AB2506 passed and was signed by Governor Davis with significant denuding. The original bill requiring, (a) a reasonable vendor list for districts, (b) competitive bidding, (c) reforming hold-harmless agreements and (d) transparency of costs were all deleted faster than Chuck Yeager’s plane breaking the sound barrier. It was astonishing. It was a step in the right direction, but it failed to improve teachers’ 403b plan to the degree we had hoped.   

 

The only feature was the ability to compare different products. Sounds good, but the information given would be from the industry. It’s not objective as much as what we wanted. California State Teachers Retirement System (CalSTRS) would maintain a website of vendors for each school district with basic investing information: http://www.403bcompare.com. Everybody has access. It’s worth your time to compare companies which might in your plan, whether 403b or 401k.

 

Celebration

 

Despite the disappointments, T/C celebrated this landmark legislation by purchasing two half-page ads in the Los Angeles Times and the Sacramento Bee, announcing 403b reform. They asked two teachers and their respective unions to be featured in the ad. One teacher came from the Faculty Association of California Community Colleges (FACCC) and the other was this author who represented PreK-12 teachers. The ad acknowledged and thanked supporters for their hard work.

 

403b Aware was looking forward to working with a new slate of UTLA officers recently elected. When the ad was published a disheartening and unnecessary response came from my union (Appendix 1). It was sad—showing how unions sometimes shoot themselves in the foot and lose loyal members in the process.  

 

  My Union’s Over Reaction—Again L

 

The day the Los Angeles Times published the half page announcement my union’s vice president called. He said the UTLA treasurer was “livid and was seeking legal advice about suing T/C.” “Why?” I asked. He said, “T/C did not ask permission to use UTLA’s name in the ad.” I said, “What are you talking about? It’s a celebration ad for a bill UTLAsupported.” He also asked me how much I was paid. Taken aback by his accusations of impropriety, I said, “$1.00 and it was donated to Politi Elementary.”

 

I said the Treasurer needed to talk to the union’s lobbyist who was in Sacramento supporting this bill on UTLA’s behalf before pursuing his lawsuit. I reminded him the California Teachers Association and the Los Angeles Community College Guild also supported this bill.

 

He complained the treasurer’s secretary was “flooded with 50 calls today.”

 

Okay, so his secretary got fifty calls. I thought it was great the ad spurred interest.

 

Horse’s Behind

 

Instead of a small-minded legal threat and an unsubstantiated accusation, the Faculty Association of California Community Colleges, their local Los Angeles Guild, and 403bwise.com and everybody else in the state were celebrating. In my opinion, UTLA’s reaction, in direct comparison to the Los Angeles Community College Guild, made UTLA look like a horse’s ass. This was the second time I observed the massive cultural differences between UTLA and the Community College Union.

 

UTLA never sued T/C. None of this recently elected leadership wanted to know about the bill. Instead, they indulged in a twisted intrigue about my motivation. What a tragic and a predicable ploy to discredit change and a mission—make it personal to distract from the bill’s purpose.

 

For the rest of their term the accusations intensified into a feud. Apparently, several of the officers were not convinced my multiyear 403b advocacy was in the best interests of union members. These officers forgot they witnessed my acceptance of UTLA’s “Unsung Hero” award the previous year for my “dedicated and unheralded service” to union colleagues (Award presented during the annual 2001 UTLA Leadership Conference).   

 

This was bizarre. Both the Treasurer and the Vice President knew me for years. After repeated attempts to talk to the treasurer about the bill, the ad, and TIAA CREF, he brushed me off. The treasurer remained angry at T/C for the rest of his term.

 

Another UTLA Election

 

Power changes people for better or for worse. This leadership’s transformation from teachers to union leaders sometimes makes them arrogant and incompetent, seeing threats instead of opportunities to serve members, in my opinion. At the next election cycle three years later, the 403b Aware group supported a new treasurer. Let the election results speak for themselves—thousands of members were unhappy over numerous issues. The incumbents lost their reelection bids for the first time in the 40-year history of UTLA.

 

Desperate Challenge to the Election Results

 

The defeated officers challenged the election results. In one desperate effort they now were convinced I had a financial connection for supporting the incoming treasurer-elect. They now accused me of being a paidTIAA CREF representative, claiming I would personally benefit from getting my “client” T/C “union-approved” by the new treasurer. I kid you not! When the final arbitration report was released, their inflammatory and delusional allegations about my so-called impropriety were thrown out. The newly elected officers were officially seated including the new Tresurer that 403b Aware supported.

 

I was gratified by the publicity. Not the manner that I would have planned to begin a union-led discussion of the 403b, but at least the stir might have motivated some members to look at their statements and take notice of their 403b adviser.  

 

403b Investment Articles in UTLA’s Newsletter

 

For three years my articles had been censored by the defeated incumbents. When I visited the newsletter’s editor, Kim Turner, she gave me a hug. She said “welcome back.” I knew exactly what she meant. My 403b investment articles began reappearing in our union’s newsletter.

 

UTLA’s gloomy and sinister 403b period was over. The election corrected a negative environment. We had a new treasurer 403b Aware supported. What a difference. After seven years and two treasurers the 403b Aware self-help group finally found a competent treasurer.  

 

Summary

 

One-way of extending fiduciary responsibility throughout California was to modify 770.3 so companies offering high standards of fiduciary responsibility such as Vanguard and TIAA CREF would be available to all California educators.

 

 AB 2506 had excellent intentions in that direction: Objective information, transparency of fees and reducing the number of vendors to a reasonable choice through competitive bidding. The industry ripped out the bill’s spirit. Not all was lost, however. The law required CalSTRS to maintain a database of financial information about each vendor’s product sold to California educators. Participants and the public could now compare products and funds.

 

While the college union celebrated the bills passage, my union committed two blunders. The union bosses neglected to understand the bill and accused a loyal member of improper behavior. Someday the 403b will be discussed on the same table as the medical, dental and pension benefits with the highest professional standards of behavior we expect from our union leaders.