AIG went Bankrupt

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In the wee hours of Monday morning September 15, 2008, Lehman Brothers, the fourth largest investment bank, declared bankruptcy. Lehman’s event was reported to have triggered the 2008-2009 financial meltdown. In the ensuing months the entire country and the world experienced the greatest economic collapse since the Great Depression as a series of financial institutions declared bankruptcy. AIG caught our committee’s attention for good reasons.

AIG, the parent company of VALIC also declared bankruptcy and was on the news every day. For the record VALIC was not in financial trouble. The UTLA Treasurer reported several anxious teachers called him about the AIG. He verified with me that AIG-VALIC was only the TPA. He was relieved. But its ownership by AIG posed significant and damaging image problems in the minds of the 1250 LAUSD’s employees enrolled in the new 457b.

Even VALIC agreed their relationship to AIG threatened their professional reputation. At the beginning of VALIC’s contract with LAUSD, VALIC renamed itself to “AIG-Retirement.” They may have done this to polish their tarnished veneer by disavowing the word “annuity” from their name. But the new “marriage” to AIG had to end. AIG-Retirement was out and their original name VALIC in.  Someday they may get it right.  

AIG-VALIC Breach of Contract?

The final incident pushed the committee into a nuclear reaction. AIG-VALIC rep reported to the committee that he had 5-7 reps out in the field for over a year. The contract states: “The service provider [AIG-VALIC] shall provide fifteen (15) representatives dedicated solely to provide group meetings, educational sessions, and one-on-one retirement and asset allocation counseling for LAUSD employees….” In my opinion this was a breach of the agreement.

Putting all of the above allegations together resulted in contractual and public image implications that were too transparent to ignore. The committee passed a motion recommending to the CFO that VALIC’s contract be terminated.  It passed but not unanimous. George and the district staff voted against the motion for termination. They said this move would disrupt the 1250 employees enrolled. To let this go by would breach our oversight duties.

Our motion was sent to the CFO for a response and to the general counsel, contracts and ethics departments for direction. We never got a response and we didn’t press for one. As far as the committee was concerned the termination matter was closed. AIG-VALIC contract was in its final two years anyway. The termination motion was recorded and official. Let future auditors deal with any consequences.

Other Measures Passed

After an extensive study by UTLA’s legal staff and in anticipation of the new IRS 403b regs, on April 20, 2008 the teacher’s union terminated the “union approved” 403b vendor policy. In a memo UTLA’s David Goldberg wrote for members:

“UTLA has in the past endorsed various companies that provide 403(b) accounts for members.  With these dramatic new changes affecting teacher retirement investment options, UTLA Board of Directors has decided to cease the endorsement of any 403(b) vendors. Effective immediately, no TSA or 403(b) vendor is endorsed or supported by UTLA.”  

Our committee took up this issue by revising the district bulletin, BUL-6178.0 that bars agents and their solicitation of 403b products on all LAUSD campuses and district administrative offices.   

Partially quoting the Bulletin: “No agent may solicit employees, advertise or distribute promotional materials for the purpose of insurance policies, solicitation of contracts for tax-sheltered annuities, 403(b) voluntary retirement savings…Presentations on retirement, personal finance, or insurance are not permitted on LAUSD property other than by official representatives of the LAUSD 457(b) plan, CalSTRS and CalPERS.”

Lessons Learned and Looking Forward

We are a seasoned committee with five years of service meeting about ten times per year. LAUSD asked committee members to participate in the next RFP process. We’re never in control of what happens outside our district, but we will recommend to the CFO to hire the next TPAs. Our five powerful weapons:

1. George Tischler, who created the vision, the plan and the policy of employee oversight.

2. An independent financial consultant in SST. SST recommended the replacing some of the active managed funds with index funds and understands and respects the committee process as outlined by author Russell Olsen’s quote above.

3. Committee members who know about fees and low-cost indexing and will continue to press for the lowest cost, best-in-class investments.

4. Benefits administration, SST Consultants and committee members are united in one vision to reform school districts’ defined contribution plans, both 403b and 457b. 

5. Due to UTLA’s leadership terminating their “union approved” policy, campus access limited to district sponsored 457b plan reps.

6. The vision of the entire committee was to have an “open architecture.” The platform has a TPA, record keeper and a list of mutual funds. That’s it. The 457b plan discussed throughout this chapter is an open architecture plan. No need for numerous insurance companies that were out of control. The committee and SST wanted the 403b to mirror our 457b platform, so that committee recommendations rested with LAUSD, not to obscure insurance codes that demanded districts to allow “all willing vendors.”

7. A closer look at the Stable Value fees. This was one area that the committee needs more information. Because of the 2008 Stock Market crash this fund had a large amount of inflows. Employees were afraid to invest in the equities offered. The committees knew about the “spread” but we never knew how much the TPA was earning.

7. Lastly the committee needs a closer follow-up on its motions.

New RFPs for the next Five Years (2012-2017)

SST and LAUSD contracts wrote two RFPs to select two new TPAs with the committee’s five-year experience to draw from. Two changes: 1. a fixed cost replaced the controversial revenue sharing so all employees pay an equal fee and, 2. two independent TPAs, one each for 403b and 457b plans replaced the problematic “common-remitter.”  The next Chapter will chronicle the next phase when the committee recommended and the CFO accepted two new TPAs.  

 Summary

Employee Oversight: The Best Initiative LAUSD Implemented

Mr. Tischler got everything he wanted and then some when he masterminded and delivered his vision to undo the “Knot.” His reward was a committee which implemented his vision and more by demanding full and unrelenting transparency. The Los Angeles Unified School District must be commended for their exceptional demonstration of 457b transparency. George Tischler and his staff circumnavigated the tyrannical 403b regulations which benefit a few financial industry cronies and their decades-old sense of entitlement, hypocrisy and corruption by simply offering a low cost plan.

What visionaries. It takes guts to invite non professionals who ultimately pay for the program into the decision-making process. The best transparency advocates are employees, those people who ultimately pay for the decisions. The open process led directly to fiduciary responsibility which reduced liability. That’s good for everybody.

There are many financial consultants and TPAs out there. They are like the mass producers of American automobiles, who whip out employer sponsored retirement plans off-the-shelf and recommend them to employers. In spite of our employer selecting an insurance company and the financial consultant ignoring the value of the committee process, we prevailed with transparency. VALIC was forced to shut down expensive 403b sales and required to disclose 457b costs to employees. Furthermore our committee recommended an ethical and independent financial consultant leading to swapping out the expensive funds and replacing it with two lower cost options.

If you are a benefits plan administrator, the employees deserve to know the full extent of the costs. If you are an employee on your employers’ oversight committee, the author hopes this chapter will inspire you to finish the job and make significant improvements to what your TPA and the financial consultant recommends to your employer-sponsored plan.

End of Chapter 9

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