[Admin]

Has anyone seen news of Florida's "Model" 403(b) plan? Quite frankly the term "model plan" does not spring to mind when you think of most of the vendors mentioned. However, vendors are lowering fees and making other "concessions" in order to win 403(b) business as the plan evolves and employees increasingly eye the plan more critically. I am curious if this truly is a "model" plan or more rhetoric from entities (unions, insurance companies, school boards) who have often been bad actors in the 403(b) market. Their goal "to eliminate the inequity in fees and level the playing field for school system employees" is a worthy one. Their idea to leverage economies of scale to achieve fee reduction is a wise one. And finally, making advisors/agents available to those who want them, and making low-cost direct purchase mutual funds available would seem to satisfy the varying needs of participants. So, is their claim to be a "model" plan fact, fiction or somewhere in between?
- Dan Otter

Florida Group Creates 403(b) Model Plan
A coalition of Florida education associations introduced a model plan for 403(b) plans in the state that it claims would give participants 33% more in retirement assets over a 30-year career than with existing plans. The group, Independent Benefits Council, recommended five companies as “best in class” providers: AIG Retirement, AXA Equitable Life Insurance, PlanMember Financial, American Century and Waddell & Reed, which all agreed to follow specific stipulations to keep fees low and meet IRS regulations. [from Pensions & Investments]

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Independent Benefits Council has a website dedicated to the plan and the process.

According to the site, "IBC is a not-for-profit organization formed in 2007 by four of Florida’s leading education groups—the Florida Education Association, the Florida Association of School Administrators, the Florida School Board Association and the Florida Association of District School Superintendents."

(FASA) Executive Director Jim Warford said that the five companies selected for participation in the Model Plan signed letters of commitment with the IBC agreeing to:

• Certify that the plan proposed for the IBC is the best it currently offers in any Florida K-12 district.
• Offer favorable rates to all districts, regardless of size.
• Automatically upgrade plans when newer, more enhanced products become available.
• Ensure that its representatives will sell only the product bid for the Model Plan (no bait and switch).
• Provide a detailed plan to convert its existing contracts to the Model Plan, thereby creating immediate benefits for their current participants.
• Reduce its fees to all adopting school districts as statewide assets under the Model Plan grow.
• Guarantee rates for three years.

The three investment categories are:

• Annuities (high service, moderately priced)
• Multi-product custodial accounts (mid-level service; lower
  price)
• Mutual funds (low/no service; lowest price).

Website Lacks Specific Fee Information
In checking the website I did not see specific fee information, only talk of "fee reduction" and this: "On average, over a 30-year career, an employee can expect his/her investment account to accumulate 1/3 more assets from the Model Plan than existing contracts. For example, a $450,000 accumulation under an existing plan might be worth $600,000 with the Model Plan. If an employee were to choose the lowest priced plan, the gains could be even larger." Of course a cynic would point out that a reduction in fees from 2.25% to 2% is indeed a reduction. I am not saying that is the fee structure. I am also not saying that isn't one of the fee structures. The site certainly portrays a process that was transparent, and perhaps I missed the fee information, but until that is known it's hard to truly assess this plan.

Why Is A Not-For-Profit Organization Driving This Endeavor?
This entity may have nothing but the best interests of plan participants in mind, but it is reasonable given the myriad of past abuses in the 403(b) market, to ask why these players are involved in this process. What if anything do they have to gain from this process? In contrast, the state pension plan of California (CalSTRS), which is accountable to the public, and its members, selected TIAA-CREF for its 457(b) plan and operates a website that allows participants to get fee information for all 403(b) products available in the state. Again, to truly judge this plan it is important to learn the motivation of this consortium.

Words Have Meaning
Finally, it may be nothing, or it may be something, but in putting out the RFP for vendors on Oct. 18, 2007, IBC invited investment companies to submit their tax sheltered annuity plans for consideration. "Model" plans wouldn't use such language. Instead, they would ask vendors for their 403(b) products. The plan is named after IRS code [403(b)] which governs it not three letters of the alphabet. Old habits die hard and this wording may be completely harmless. You know like the free cookies agents give out in the lunchroom. Sorry, had to inject a little Wise Cracks sensibility in this post!

[intruder]

1. Low fees are one thing but are there any additional costs to administer the plan that will be separately billed either to participants or their employers?

2. Since rates are ony guaranteed for 3yrs how much can they change after that? Remember sub prime mortgages started out with low interest rates for the first 3 yrs and then increase after that to above market rates. What if the interest rates fall after the end of the 3 year guarantee period? see question 3.

3. Will participants be allowed to switch funds or vendors without surrender charges?

[fredalan]

The first thing that many of the "losing firms" questioned - after they lost - was the motives of the organizations.
FACT - THIS WAS ENTIRELY SELF FUNDED BY THEM AND NONE OF THE ASSOCIATIONS HAD ANY FINANCIAL INTEREST IN THE OUTCOME.
This was actually the third project the four associations came together on on the last 8 years (1) reform of the Florida Retirement System (2) an effort to resolve healthcare.

[Admin]

Fredalan,

Thanks for your post (and of course, those of others). I am willing to look at this plan with an open mind. As I mentioned, some vendors who have been bad actors in the past have changed their fee structures and sales practices, especially when they are the sole provider or part of only a handful of vendors. We are very supportive of the RFP process (if done fairly) and perhaps these companies truly offered the best in terms of fees and services.

However, given the past history of some of these firms, it is entirely reasonable to view this plan with a bit of skepticism. And to have an organization pronounce a plan they created a "Model Plan" is bold, and may be true. However, more information is needed before others bestow the same moniker.

Finally, do you have more information on the plan in terms of fees? Also, do you know who the other firms were who were not selected? Thanks.

Dan Otter

[fredalan]

the IBC was faced with a reality .. post a member survey conducted by Mason Dixon ... create another great 457 LAUSD type plan that never addressed the 35k+ people enrolled in the LAUSD 403(b) plans that range from pedestrian to dreadful.
Except for the most sophisticated (or lucky) that enrolled in the 457 (700 people have enrolled?) no one enrolled in the LA plan for totally predictable reasons.
Or the IBC could create a balanced plan that has a decent chance of freeing Florida educators from the awful awful 403b plans they are in now. Therefore picking at the edges of whether the costs might have been lowered (and all the accepted plans have further guaranteed price reductions) are sidebars which do not live on today's K-12 planet.
focus on the benefit to the 130k and 50-60k dormant Florida teacher programs and the potential remedial effects to their retirement lives. remember all the exisiting plans of the winners convert to the new plan.
this was an easy choice but, realistically, the Model Plan is a important migration in Florida toward a better world. everyone involved understood what a real "Model Plan" will look like in 3-4 years.

lot more info on the website within the week.

[BenefitsGeek]

Is anyone aware of any low cost offerings from the five vendors involved? My experience (albeit limited) wiht these vendors is that they are among the most expensive in the industry, but I know that vendors are always providing new offerings, so i certianly have an open mind about this.

If these products are indeed high cost, I would woner why the IBC, which its presumed purchasing power, could not have obtained a true low-cost offering

[intruder]

Maybe its because the IBC cannot guarantee sufficient premium volume to the vendors for lower fee products or the fees are needed to pay for plan administration.

[danc]

BenefitsGeek;

I am not a fan of AIG. That said, their products are getting better. A Plan Sponsor I work with has them and the average OER for funds offered in the lineup is 0.75%. Low cost? - Not too bad when all plan services are built into participant-borne expenses. The investment options are all non-annuity choices (mutual funds) so there is no M&E. The Plan's lowest expense offerings are Vanguard Target Date Funds upon which AIG levies a 0.35% expense surcharge.

BTW, this Plan selected to go with Wells Fargo Stable Value instrument & not the AIG Guaranteed Account. Again, an expense surcharge was levied by AIG. In light of AIG's recent recent write-down related to the mortgage-backed segment, we are somewhat insulated against deteriorating credit ratings.

DC

[Admin]

Hey Fredalan,

I appreciate your posting. A couple of things... I was referencing the CalSTRS 457(b) plan and not the LAUSD 457(b) plan. The big difference between these two entities is that the CalSTRS plan is available to more than 800,000 Californians and 1,400 school districts (see below). Your comment that, "IBC was faced with a reality" is probably completely accurate. However, being "faced with a reality" is hardy sentiment that should be connected with a "Model Plan," nor is the notion that in 3-4 years the plan will be a "Model Plan." I look forward to learning more information about this Florida plan, particularly in regard to fees. The reality is that many, many participants have been burned by unions, high-fee vendors, school boards and their like so we have every right to view this plan critically. I appreciate much about your plan (see previous comments). However, with no fee disclosure and these caveats, deeming this a "Model Plan" kind of reminds of that famous baseball call: "This ball is over the fence... and... caught for a fly out."

SACRAMENTO, CA and New York – The California State Teachers' Retirement System (CalSTRS) and TIAA-CREF, the national financial services organization and the leading provider of retirement services in the academic, medical, research and cultural fields, today announced they have joined forces to expand CalSTRS’ supplemental retirement savings program, which is open to about 800,000 Californians. Through this relationship, CalSTRS, the second-largest public pension fund in the United States and TIAA-CREF will provide low-expense retirement savings vehicles for public school employees in more than 1,400 school districts and community college districts across California... read more

[fredalan]

Joel,
The PEORP plan was driven 8 years ago by the same coalition of Florida Associations (IBC) that just did the Florida Model Plan. Jeb Bush, one of the final three decision makers, said he never saw a piece of legislation that had more lobbying. The IBC prevailed and drove a superb plan that now has over 140k participants in the DC option. Reality on the 403b / 457 Model Plan is that many preferred options would not bid unless they got special circumstances e.g. statewide exclusive. IBC nor its' consultants knew they could not sell that today.

Dan,
Right, just as I suggested when the LA 457 plan was being devised:
1. fees are not the first question you ask
2. if the School Administration and Unions are not willing to belly up to the bar on committing serious dollars to educate people, the plan will flop. If you ask the vendors to do it, they will charge you

BenefitsGeek,
How do you know what the actual pricing was?

[Admin]

Fredalan,

I don't understand your latest reference to the LA 457(b) plan. My point was that a state agency (CalSTRS), which is fully accountable to the public, was able to negotiate a very competitive 457(b) plan from TIAA-CREF that is available to all school districts in California. We'll be posting information soon on another plan that is a lot closer to the term model, though they certainly do not use that term nor would I. This plan has both low-cost, direct purchase mutual funds from mutual fund companies widely known and lauded, and advisor/agent sold products in which loads have been eliminated and fees dropped. One of these vendors is also available in the Florida plan. But the real key to this plan, I believe, is the education component which favors no product but provides clear, concise plan information. Stay tuned.

Dan Otter

[Scottyd]

My opinion about this press release is one of shock. These five providers would never make it onto my top five provider lists - ever.

Having said that, we have absolutely no way of evaluating the success of this venture until we see three things:

1. The actual products and fees that these companies will be charging and what the breakpoints are for lowering fees
2. A thorough, independent review of all of the providers that submitted and exactly what their fee proposals were.
3. Specifically what these companies are agreeing to do - the actual agreement they signed.

I think that the press release was premature, the website should have been ready to go with all the information that people need in order to evaluate this "model" plan. To not post this information breeds unneeded skepticism and doubt.

I'll withhold my opinion until I have enough information to make a good evaluation, so far I am a little skeptical, but you never know.

What I think is very interesting and I applaud the IBC for is that I don't see any Equity Indexed Annuities on the list. This is a big slap in the face by the IBC and one that should have been made - they are horrible products.

So....my opinion is that I will withhold my opinion until the IBC releases the documents that should have been released at the announcement.

ScottyD