Part 1 (of 10)
Genuine Financial Transparency Demonstrated
2006-2011
Alexander the Great untied the Gordian Knot with his sword. Previous attempts to solve the impossible entanglement were unsuccessful by conventional thinking. Whoever unraveled the maze would become King of ancient Phrygia. Zeus was so pleased with Alexander’s shrewdness he granted royal status and a lifetime of great victories.
The 403b was our “Knot.” The previous eight chapters showed commendable attempts to solve the monopolized 403b, lost to the ethers, rife with vast complications and conflicts of interests. The relentless cartel of TSA sales to PreK-12 school districts could be attributed to minuscule political will by school boards and unions, liability-phobic benefits staff and powerful insurance interests. Our conventional approach by appealing to those in power did not work: the press, unions, districts and state legislators. Where was our Alexander?
George Tischler cut through the entrenched inertia following Alexander’s example. This witty and genteel Los Angeles Unified School District (LAUSD) benefits administrator challenged the status quo with raw guile. Rather than a sword he wielded a new plan sidestepping the decades-old obstacles, complete with transparency so deep it scared the elephants from the room.
What? A School District Benefits Official Cares?
Mr. Tischler had help. The Economic Growth and Tax Relief Reconciliation Act allowed school districts to offer 457b plans. IRS regulations required districts to assume increased 403b responsibility and allowed them to hire a Third-Party Administrator (TPA). Hence, Mr. Tischler pulled a coup-fourré around the corrupted 403b world by taking advantage of these two laws. Brilliant. With George’s leadership LAUSD hired a TPA for assistance while offering a lower cost 457b plan. A perfect fit, right?
A great experiment with the country’s second largest school district was born. The 403b Aware group and I had many questions:
- Who was Mr. Tischler? What was the 457b plan?
- Which vendor will be the TPA?
- Will the Board of Education approve this new program?
- What kind of investments will be included and what are the costs?
- Will the 457b succeed in leading colleagues away from TSAs into investments which grow with the economy?
Board of Education Approval
George presented the new plan to a subcommittee of LAUSD’s Board of Education on April 23, 2006. He detailed the differences and advantages of the 457b plan over the established 403b. Quoting from the minutes (edited):
The 457(b) Plan, upon approval by the Board, will be offered to District employees later in the year. He stated that the 403(b) Plan offers many products, including mutual funds; 80% of the sales are annuities offered by insurance companies. Insurance companies that offer lower growth with annuities and may charge higher fees and may have early withdrawal penalties. He noted that high fees over time result in a significant decrease in savings for employees…. The [457b] money is held in trust by LAUSD, which allows institutional pricing at lower fees. Finally, employees get oversight of services from the District, a financial consultant and an investment committee….
His assessment of the 403b mess was spot-on. He understood that insurance products charge excessive fees and explained why the district needed a lower cost plan. Lower costs and increased performance with mutual funds render more money into educators’ nest egg. Previous benefit staff, unions and the Board of Education never understood that simple concept. George got it.
LAUSD Hired a TPA
Sandy Keaton, David Goldberg (United Teachers Los Angeles’ Treasurer) and I were at the board meeting. We were shocked and disappointed when George announced that American Insurance Group-Variable Annuity Life Insurance Company (AIG-VALIC) won the bid. George introduced AIG-VALIC’s Senior Vice President to address the board.
The VP pulled no punches, “We can do this for .15% because of the institutional pricing and the size of LAUSD alone demands a low rate!” (fifteen basis points, bsp, each basis point is one hundredth of one percent). He kept repeating the infamous word in the Tax Shelter Annuity world: “Guarantees!”
How can they charge a price which competes with Vanguard’s index funds? George just stated that he wanted a new lower cost plan for the district. But another insurance company? This offer was suspect right out of the gate.
In my opinion LAUSD’s Request for Proposal (RFP) worked right into AIG-VALIC’s sales pitch. Districts want to know the plan costs nothing—no hit on the general fund. The suspiciously low bid handily beats the competition and the TPA cost was a major factor. TIAA CREF applied but the higher fifty-five bps gave them little chance. Was it possible AIG-VALIC’s fifteen bps was just a shill figure for gullible board members to be followed by higher costs? It didn’t take long to find out. Mercer Consultants showed us the next step in this now familiar dance.