Part 3 (out of 10)

School Districts’ Love Affair with Insurance                                            Companies                                                   

PreK-12 school districts are rampant with insurance companies’ 403b products. So, choosing an insurance company should not be a surprise. We experienced this dance before—this decision to select AIG-VALIC was contradictory to Mr. Tischler’s vision. The American Federation of Teachers’ (AFT) also produced an empty promise with their brilliant article (AFT_Special_Report Shark ATTACK) and then stabbed everybody in the back with another insurance company. Was this a new form of bait and switch? —singing on-key at the audition but choking at the Met. The full Board of Education approved the 457b plan in June, 2006.

The History of 457b

            Our 403baware group knew little about Mr. Tischler’s plan. We had a lot to learn in a few weeks. Inaugurated in 1978, the 457b was the third and last deferred compensation retirement plan. The tax-deferred feature was the same as the 403b and 401k. There are two differences: (1) assets are held by the employer, and (2) the participant can transfer funds to an IRA without federal penalty only upon separation from service. For instance, if you are 55 and retire you can transfer 457b money to an IRA (with a 403b you have to wait until 59.5). Likewise, you cannot transfer a 457b to an IRA at any age if you are still working. There are pros and cons of each plan. Simultaneous contributions to both plans are allowed. Depending on employees’ eligibility older workers can save up to 40,000 dollars or more using the catch-up features. The best part of the 457b plan was next.

Insurance Regulations are MOOT

Mr. Tischler’s plan included mutual funds (the funds selected will be discussed). The hideous insurance code which regulates the 403b will not affect the 457b. So, LAUSD was free to do what is right. While we thought LAUSD selected the wrong TPA the selection process was by competitive bid, forbidden in 403b plans by the state insurance code. George and his colleague David (another benefits administrator) and the Mercer rep said the committee will select the investments, not AIG-VALIC.

An independent financial consultant would be hired to interface between the district and employee groups, provide training and recommend funds for inclusion. Okay, we know AIG-VALIC was the TPA and Mercer would be the financial consultant. But wait a second, what were “employee groups?”

When George spoke about “oversight of services,” he meant what he said—employees. To everybody’s surprise benefits invited all eight of the district’s unions to staff this new oversight committee: teachers, administrators, school site support personnel, buildings and trade, school police etc. The reps would meet every month with benefits administrators, the Chief Financial Officer’s (CFO) rep and a Board of Education representative. I was invited to be a Member-at-Large and Sandy was asked to represent United Teachers Los Angeles (UTLA).

How often does a large school district include this range of personnel on the same team with the mission to plan and implement a new low-cost, best-in-class retirement plan? This was the first inkling that behind-the-scene decisions were history. The 403b/TSA sales force faced a new era of low-cost competition and oversight for the first time. What a novel idea and great opportunity to improve the quality of all voluntary retirement plans. What could go wrong?

The 457b’s Potential for Greatness–Transparency

Our oversight committee began meeting in July, 2006 at LAUSD headquarters–the “Beaudry.” This 29-story building contains about 3,000 employees who meander through the halls every week. The 928,000-square-foot triangular shaped leviathan is located on Beaudry Street downtown Los Angeles, due west of the famous multisilo hotel, the Bonaventure. The Beaudry is infamous for its warped floors.

Our meeting room occupied the northeast corner on the 28^th floor offering a spectacular view. We can see downtown Los Angeles to the east above the busy Pasadena/Harbor Freeway and north beyond the hills of Dodger stadium. Looking down we can see the former Belmont High School, the most expensive school built in the country. The meeting room has the obligatory long and spacious mahogany corporate table surrounded by cushy, oversized swivel chairs. The business and power symbolism was a long way from my farm-boy, small-town Wisconsin roots.

The same Mercer lead consultant was assigned to our committee. Mercer’s contractual obligation was to advise our committee for the purpose of launching the new plan by January 1^st, 2007.

The following administrative tasks were completed first.

• The committee mission statement

• Committee bylaws

• The Investment Policy Statement (IPS)

This involved legal staff and union perusal to ensure we followed the Employment Retirement Income Security Act (ERISA) requirements for a diversified portfolio. ERISA requires an IPS for 401ks, but not 457b nor 403b plans. Our committee followed the ERISA guidelines so the 457b investments’ financial data such as past performance, industry ratings and risk are systematically monitored. Investment changes had to be justified by similar procedures used by many plan consultants and TPAs. These procedures were detailed in the Investment Policy Statement.

UTLA’s Treasurer, David Goldberg, attended meetings, sent the unions’ legal counsel and hired a financial consultant to study the arrangements. This attorney ensured the volunteer collective bargaining members were not liable for committee recommendations. The union’s financial adviser oversaw the proceedings and answered our questions.

After establishing the bylaws for committee membership we appointed alternates and created ad hoc committees. The legal fiduciary was the district’s CFO as directed by the Board of Education. The IPS was signed by the CFO and the committee was ready to make specific fund recommendations.

To be continued…in 2 days