PART 7 (out of 10)

Victory for the Employees

At the next meeting, one of our bright and savvy committee members, Alan, brought a 401k lawsuit that was in the mainstream news. He started talking about the article and how the lack of transparency, especially revenue sharing, had precipitated a lawsuit against the sponsoring company. He warned about a similar fiduciary breach might incur with our district over the hidden revenue sharing costs.

He proposed a motion which AIG-VALIC would reveal all costs to district employees, including revenue sharing to all group and individual presentations. If AIG-VALIC was going to charge higher fees than the 42 bps, then by golly, the committee demanded full transparency of those additional costs.

The AIG-VALIC reps balked. They fought the transparency proposal all the way to the exit. They warned us as they were walking out the door like a gunslinger backing out of the saloon with both guns firing, “we will have to check our legal department about this!” I thought, “oh, please, how pathetic.” Mercer wasn’t present to be their supportive mouthpiece.

LAUSD administration supported the committee’s demand for transparency. How could they not? The publicized lawsuit case was a perfect example which legitimized our motion. It passed unanimously. Nothing scares a school district more than legal responsibility.

Excerpts from Kathy Kristof’s L.A. Times article

Financial columnist, Kathy Kristof, attended our meeting and plansponsor.com republished her Los Angeles Time’s article October 23, 2006. (Click here for the full report). Here are excerpts:

According to the LA Times, in meetings this summer, teachers serving on an advisory committee learned that the funds in the district’s 457 plan would assess an average annual fee of 0.27% on account balances for revenue sharing.    According to the report, AIG VALIC initially opposed explicitly disclosing this fee separately to teachers, preferring instead to leave it as an embedded component of the 0.72% investment management fee charged by each fund.  

“… in response to the criticism from Schullo and others, school district benefits manager David Holmquist pressed AIG VALIC to fully disclose the revenue-sharing fees.   “The committee wants full disclosure,” Holmquist told AIG VALIC Vice President Ron Gatti….   However, Gatti resisted, saying that disclosing general administrative fees of 0.15% and fund management fees, which will average 0.72%, would be sufficient.   “I’m afraid the revenue sharing would just confuse people,” Gatti said, according to the report.

United Teachers Los Angeles, also threatened to withhold its support for the 457b plan unless full disclosure was made.”

Are you “confused?” Confusion, safety and fear are primary tools to scare newbie investors into thinking that they must turn their investments to the high priests of finance.

Finally, a decision to require full transparency we made came to fruition during those dark days when Mercer, AIG-VALIC and the Chair controlled the debate. We were proud of this achievement. We failed to replace the three costliest funds but won the transparency battle and earned media coverage. Our committee’s ruthless attention to the transparency of fees paid off big time by looking out for the employees’ best interests.

Time to Move On

The 457b was in place. The AIG-VALIC reps were sent to the field to enroll and accept employee contributions. The committee began its routine of viewing progress reports. By January, 2007 the process of selecting our next financial consultant started. The Mercer Consultants contract had expired. Our Bylaws required committee members in the “…selection and evaluation of the investment adviser and other consultants to the Committee….” Two committee members volunteered to participate with district procurement staff to select the next consultant.

Selecting an Ethical, Competent and Independent Consultant

Plan consultants are as good as their investment philosophy and knowledge of laws and regulations. I thought we needed a consultant who respected the committee process, shared a goal of reforming the 403b too and confident enough to learn from the committee.

Our ad hoc committee read the returned bids, ranked them on the specifications, discussed and debated our ratings. The five who scored the highest were invited for interviews.

SST Benefit Consultants (SST), especially their lead consultant, Barbara Healey, were endorsed by the esteemed Bob Architect, Senior Tax Law Specialist and 403 (b) guidance author. 403b reformed minded friends wrote additional support letters on SST’s behalf.

With a bitter pill swallowed about Brian Cressey’s accolade of  Mercer Consultants, SST would have to show evidence they’re right for us:

• ethical and independent, looked after the best interests of LAUSD employees
• willingness to listen
• respect for the committee process
• training for committee members on defined contribution plans

As a selection committee member I could see first hand how they interacted with us. I had one concern—SST’s philosophical bias towards active-management.

SST Consultants were selected. They had good “people skills” and they recognized the California 403b was rampant with conflicts of interest. They had a long history of experience with 403bs, 457bs, and large non-profit employer plans. They possessed a broad and detailed knowledge of IRS, pension and California laws. Despite their investment philosophy, they were on the right side in other areas:

• get educators away from high-priced TSAs
• invest in real funds
• keep costs low
• support full transparency
• agreed that the 403b domination by the insurance industry was inappropriate.

SST Consultants started working with us in July, 2007. On day one they smiled from ear-to-ear. LAUSD was a huge opportunity and a challenge for any consulting firm. They earned their place with us. We were happy too. Most of the committee members were elated and looking forward to a better working experience.

Our bylaws state that one of the responsibilities was to educate the committee. SST wasted no time. By September, 2007 they scheduled an all day educational workshop on defined contribution plans. SST updated the Investment Policy Statement (IPS) and began researching replacements of the funds which Mercer strong-armed. First on the list that SST recommended to eliminate, you guessed it—Turner Mid-Cap Growth—one of the three funds which we picked a year earlier to get rid of! Now I knew we had selected the right financial consultant.

To be continued…not everyone was happy….