Reform wanted to enhance academics’ retirement provision
Those of us who have been in the defined contribution industry since the 1990s shy away from the sales tactics and fees that were then used. There were redemption fees, hidden fees, claims that the plan was free, and high-priced annuities sold by non-trustee brokers, with some working for the provider.
The 401 (k) system under the Employee Retirement Income Security Act has come a long way in resolving most outrageous practices through competition, litigation, and innovation. Fees have become more reasonable, enrollment and balance continue to improve, and new features like student loan repayment and emergency savings go beyond retirement issues.
But when it comes to defined contribution plans, many teachers are still stuck in the past, in an even worse situation than a Legacy 401 (k). ERISA does not apply to the 403 (b) plans used in K-12 public schools. This means there is no trustee overseeing the retirement plan, so teachers have to fend for themselves.
The pandemic has made the situation worse. According to a Fidelity study, 69% of teachers feel financially stressed, up from 32% before the Covid-19 outbreak and 55% are considering leaving the profession.
Most of us have a soft spot for teachers, but my concern about it is more personal.
My oldest daughter, who is passionate about social justice and helping people, joined Teach for America after college and worked for a charter school in difficult economic areas. When I tried to help her navigate three non-ERISA 403 (b) plans run by insurers known for their annuities, I was appalled.
A broker who worked for the provider told me the plan was free because the school paid the fees. He later admitted this was wrong as the sub-TA and wrap fees my daughter paid were used to subsidize the vendor’s costs. Fortunately, she didn’t have to pay redemption fees as she was on schedule long enough, but she was forced to pay a mandatory 90 basis point wrap fee in addition to fund costs for the provider’s managed account program.
The problem is largely due to the multivendor systems that are common in teachers’ supplementary pension plans. Brokers rely on unsophisticated teachers at work and sometimes at home, who usually offer high-priced pensions.
Dan Otter, founder of 403bwise, recalls being approached after hours in his Southern California classroom by a realtor who asked, “Are you interested in your financial future?” She had already filled out papers for him to sign, including high-priced pensions. Fortunately, he declined and eventually chose Vanguard.
Why does the multivendor system still exist and is there a reason not to work with a single provider? There are states like California and Texas where schools have to offer every willing provider. Some unions support the multivendor system, arguing that teachers have more choice and are more likely to have an ‘advisor’ who gives ‘guidance’.
Mark Luckinbill, executive director of the National Tax-Deferred Savings Association, wrote in an email that “403 (b) and 457 (b) are most often complementary (no employer match, supplement)[ing] a retirement plan, and often offers of social security retirement plans, which are not generally considered to be the primary retirement plan of a public school employee. “
The multivendor system “may result in higher employee participation rates as more financial advisors and product and service providers have relationships with schools and have access to schools to provide planned education,” he wrote.
Others claim that without the current system, which they recognize may be flawed, many teachers would not have additional retirement savings.
All of this may be true. In 2016, the New York Times estimated that teachers who use annuities have 20% to 50% less savings than when they use mutual funds. While access to retirement plans is great, many younger teachers, like my daughter, don’t stay in the system long enough to benefit. Regardless, there is no excuse to continue offering substandard retirement plans when there are viable alternatives. After all, auto-enrollment has proven to be a more effective way to encourage participation than education, and at a significantly lower cost.
While teachers inadvertently assume their 403 (b) plan provider has been vetted by the school for being on an approved list, the pandemic has made matters worse with phishing emails from brokers creating the illusion that they are working for the Otter School District said.
But there is hope and progress is being made.
Bucking the trend, Delaware switched to a single-vendor model in 2016, with records, administration, and fund fees explicitly listed. The note taker hired four certified financial planners who don’t receive commissions and offered mutual funds and a brokerage account for those who wanted more choices. You can’t convert teachers into retail customers.
“Teachers are especially important right now,” said Colleen Davis, treasurer of the state of Delaware. “We wanted to cut out bad actors who take prey [on them]. ”
Many other districts are moving in the same direction, although some are concerned about making more commitments.
It took a lot of work to prepare and launch a call for proposals, said Daniel Kimmel, financial operations program manager at the treasurer’s office in Delaware. But now “there is 80% less work because our TPA manages a lot of the work we were doing,” he said. The treasurer’s office employed an advisor to assist them with the RFP process.
Other advances are being made. A 2009 ordinance mandated that “sponsors” of non-ERISA 403 (b) plans must report on all assets in the multivendor system. Some DC note takers who work with governments and school districts are more than willing to move to a single vendor plan and offer the many benefits of 401 (k) plans.
Most of the NTSA members benefit from the multivendor system, but the organization has helped lower fees and create more transparency. As part of the American Retirement Association, it is hoped that the NTSA, with the help of enlightened members of the National Association of Plan Advisors, will encourage its members to make improvements for the benefit of teachers. Shouldn’t that be the goal, even if, as in the 401 (k) industry, there is some wear and tear on brokers and providers unwilling to make changes?
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Fred Barstein is the founder and CEO of Retirement Advisor University and Plan Sponsor University. He is also editor of InvestmentNews’ RPA Convergence newsletter.