[Admin]

There they go again....

Tom Herndon, former executive director of the Florida State Board of Administration (FSBA), has penned a piece called 'Model Retirement Plan' deserves praise that provides lots of kudos for Florida's so-called "Model" 403(b) plan, but absolutely no details on pricing.

Here's what we do know: the coalition of Florida education groups — the Florida Education Association, the Florida Association of School Administrators, the Florida School Boards Association and the Florida Association of District School Superintendents — that negotiated the plan, selected the following companies: AIG Retirement, AXA Equitable Life Insurance, PlanMember Financial, American Century and Waddell & Reed. The consortium deemed these firms "best in class." 403(b) advocates would be hard pressed to agree with this assessment based on the past track record of many of these companies. As I have said before, 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. But until we get details on this plan, specifically in regard to pricing, the only thing this is a model of, is secrecy.

Dan Otter

[apteacher]

"Educators would still have a choice, and that's important, since a recent poll of educators found that three out of four say they would be willing to pay a little more in fees to get a higher level of service. Under the Model Plan, educators will have a choice of plans with varying levels of fees and service offered by five companies..."

This was the most important part of the article because it looks like the justification that was used to keep high cost companies. It's the usual load of BS: "Teachers want 'service' and they are willing to pay a 'little' more for it." The argument collapses on two fronts:

1) The service is questionable, at best, because it is typically delivered by salespeople whose interests are not aligned with the client's.

2) A "little" more for service? A little more than what? Vanguard? Fidelity? T. Rowe Price? Nope, I don't think so. Of course, I suppose it is possible that the five companies in this model plan will match the expenses charged by V, F, and TRP, but I doubt it. And why can't I be sure? Well, la de da, the details of the plan have not been released. So here we have this "model" plan being touted, and we don't have any idea of its costs. Now why might that be?

I smell a rat here.

[apteacher]

Dan,

I checked the plan's web site and discovered that 24 companies submitted a bid. Most of them were of the "Great Americans" variety, e.g., Franklin, Mann, Lincoln. None of the companies favored by many of the posters on this forum - Vanguard, Fidelity, TRP, TC - apparently submitted a bid. With the size of the Florida market, I find that surprising. What do you think of the following possible reasons that they did not submit a bid:

1) The 403b market is not profitable enough, i.e., it's simply not worth their while.
2) The criteria that the IBC established in effect screened out these companies, so that they did not bother submitting a bid.

[Admin]

Hey apteacher,

Of your suggested reasons (below) for these firms not bidding I think (2) is the most likely. My reason is based on the fact that companies, especially Fidelity, want to be a player with this kind of economies of scale (potentially all Florida K-12 entities). We just designed a custom retirement information portal (details on this coming soon) for a large K-12 school district in the East Coast that has the following vendors: Fidelity, TIAA-CREF and T. Rowe Price. If these companies are interested in one East Coast district, surely they would be interested in potential access to all Florida K-12 entities.

For the sake of argument, lets say it is reason (1). Of course, I would again ask: Why would Fidelity, TIAA-CREF and T. Rowe be interested in one East Coast school district but not an entire state? Anyway, if (1) was indeed the case, don't call it a model plan, stopping self-praising, or praising through a person (Tom Herndon) and an organization — Florida State Board of Administration (FSBA) — that clearly has a relationship/knowledge of the players who put this together. Call it the Best We Could Do. Or the Plan We Think is Best But We Aren't Going to Tell You Anything About Pricing But Just Take Our Word.

Now it may still come out that these companies have drastically changed their fee structure. But if that was the case, wouldn't we know that now? Wouldn't they want to promote that? Plus, I have been in contact with a reporter investigating this plan and this person hasn't gotten answers either. Sorry, but this just doesn't pass the smell test.

Dan Otter

1) The 403b market is not profitable enough, i.e., it's simply not worth their while.
2) The criteria that the IBC established in effect screened out these companies, so that they did not bother submitting a bid.

[danc]

The "Independent Consultant" for the Model Plan is Gallagher Benefit Services. The "Independent Consultant" is either a Broker or has an affiliation with a Broker & therefore - the search was of no interest to entities that do not pay brokers. Compensation & revenue sharing (that is 100% paid out of the fees participants are assessed on the investment options) resulted in a skewed set of candidates. Nothing noteworthy or attractive about this.

DC

[Admin]

Skeptical,

This thing is so bizarre. I wonder if they would deem Florida's 2000 presidential ballots "best in class" also?

[Scottyd]

What is really bothersome is that all of these newspapers are just allowing the press releases to be printed and are not doing any independent research.

Perhaps its because they are so in shock that all of these entities would actually work together on something. Does this prove that bi-partisanship doesn't work?

I am certainly glad that none of the major fixed annuity companies, like Americo and LSW were chosen - this does show some foresight. I am also impressed that these entities did recognize the problem and attempt to do something - they deserve credit. However, it appears that there was a financial benefit, not huge, but there is one. If compliance is truly only going to cost $12 per participant (which is extremely low by the way) the benefit to the districts for the whole state is about $1.25 mm annually. $1.25 million may sound like a lot, but its not that much when spread over the entire state. It makes one wonder why its even an issue - its got to be .000001% of the budget - they probably spend more on cream cheese. So why deep-six the model plan by requiring what amounts to revenue sharing payments?

Why be so secretive? What are they trying to hide? Other than fees.....come clean.

Why didn't they visit www.403basp.com (they knew about them) and ask them to bid - they only charge 10bps and $40 per year for any fund and their platform works with any and all advisors as well.

It continues to boggle my mind that they still have not released any real information.

Dan and I will be in Florida next week speaking at a conference - if the IBC is reading this.......we'd love to hear your thinking.

ScottyD

[apteacher]

Scotty,

I was reading a series of Morningstar articles on 403b plans, and one of the articles included the following:

"School district officials and the consultant they retain must select the menu of investment
options (i.e., low cost and broadly diversified mutual funds that have no commissions, 12b-
1 fees or any form of revenue-sharing) for the model 403(b) plan before starting the
process to select the winning retirement plan services provider. (This obviously means that
such winner will have no say in selecting the menu.) If school district officials were to throw
the field wide open to bidding retirement plan services providers (each with their own
menu), the officials would quickly find it nearly impossible to compare all the apples-and-oranges
bids in a rational way."

This approach makes all the sense in the world. Do you know if Florida did it this way? Looking at what they got, I can't imagine that they did. Waddell and Reed?! American Century?! These are the low cost providers?! Give me a break. All the purchasing power that Florida has, and it comes up with these guys?!

[Scottyd]

AP,

They did not do that. They appear to not have had any pre-conceived ideas about structure as they've left all of that to the providers and have only attempted to regulate product level fees, not the underlying (which has not been disclosed as of yet).

I think it was rather arrogant to call what they did - The Model Plan. Its like the old saying, if you have to tell people what you are, you probably aren't. Kind of like the insurance company - Great American......they are anything but.

I'm disappointed that this was has been such a disaster as they really could have done something special.

ScottyD

[intruder]

AP,

They did not do that. They appear to not have had any pre-conceived ideas about structure as they've left all of that to the providers and have only attempted to regulate product level fees, not the underlying (which has not been disclosed as of yet).

I think it was rather arrogant to call what they did - The Model Plan. Its like the old saying, if you have to tell people what you are, you probably aren't. Kind of like the insurance company - Great American......they are anything but.

I'm disappointed that this was has been such a disaster as they really could have done something special.

ScottyD

OK so now that we know your opinions on the model retirement plan what would you 403b "experts" propose in its place and what would be your business model?

[apteacher]

OK so now that we know your opinions on the model retirement plan what would you 403b "experts" propose in its place and what would be your business model?

I'm not an expert, but it does not take an expert to determine that the CalStrs 403b plan is pretty good. It charges a .33% administrative fee and has access to Vanguard institutional funds that are as low as .05%. The Connecticut plan charges only a .12% fee and offers low cost Vanguard index funds, as well.

When I look at the offerings of these two plans and compare them with Waddell & Reed, for gosh sakes, I am left scratching my head. Florida is a large state and has economies of scale. The best it can do for its low cost offerings is Waddell & Reed and American Century?! You've got to be kidding me.

[intruder]

OK so now that we know your opinions on the model retirement plan what would you 403b "experts" propose in its place and what would be your business model?

I'm not an expert, but it does not take an expert to determine that the CalStrs 403b plan is pretty good. It charges a .33% administrative fee and has access to Vanguard institutional funds that are as low as .05%. The Connecticut plan charges only a .12% fee and offers low cost Vanguard index funds, as well.

When I look at the offerings of these two plans and compare them with Waddell & Reed, for gosh sakes, I am left scratching my head. Florida is a large state and has economies of scale. The best it can do for its low cost offerings is Waddell & Reed and American Century?! You've got to be kidding me.

But isnt a major difference that CA and CT both have a state gov. agency to administer the 403b plan, perhaps because they both impose a state income tax whereas FL has no state income tax and therefore isnt able to afford the admin costs of such a plan.