tale of two cities...er, retirement plans

8/6/2019 Tale of Two Cities...er, Retirement Plans

1/9

A Tale of Two Cities...er, Retirement Plans

Scott Dauenhauer, CFP, MSFP, AIF

Meridian Fiduciary Consulting

_____________________________________________________________________

telephone: 949-916-6238 | www.teachersadvocate.blogspot.com |www.meridianwealth.com
http://www.meridianwealth.com/http://www.meridianwealth.com/http://www.teachersadvocate.blogspot.com/http://www.teachersadvocate.blogspot.com/


2/9

It was the best of times, it was the

worst of times, it was the age of

wisdom, it was the age of foolishness,

it was the epoch of belief, it was the

epoch of incredulity, it was the season

of Light, it was the season ofDarkness, it was the spring of hope, it

was the winter of despair...

Charles Dickens, A Tale of Two CitiesSo what does this classic Dickensopening have to do with retirementplans? Perhaps today we should rewritethe tale and at the end of each phraseinsert defined contribution retirementplans. And so it is today in America thatone retirement plan -- the 401(k) isseeing the best of times and another --the 403(b), the worst of times.

The new laws and regulations affecting401(k) plans allow them to offer QualifiedDefault Investment Alternatives,

Automatic Enrollment and AutomaticContribution Increases while the required

disclosures surrounding these plans areset to increase substantially, shining alight on the fees in these plans. Inaddition, the Department of Labor (DOL)has proposed an expanded definition ofthe Employee Retirement IncomeSecurity Act (ERISA) termFiduciary (flawed as it may be, at leastwe are beginning the conversation).

By no means is the 401 (k) now perfect --

far from it. But the 401 (k) is experiencinga sort of renaissance, making this thebest of times for the widely usedretirement vehicle. All the while, thepublic sector counterparts, the 403(b)and 457(b), are still stuck in the Dark

Ages. Enlightenment has come to only afew plans, and they are quickly

persecuted by angry vendors, brokersand insurance agents; in many ways it isthe worst of times for governmentdefined contribution plans.

Time For A Revolution

It is my contention that public sectordefined contribution plan participants arelosing billions of dollars every year to thefinancial services industry because of alack of co-ordinated laws, rules orregulations that create a consistentfiduciary framework for these programs toadhere to.

I believe its time to bring enlightenmentto the government defined contributionmarket, specifically the one stuck in theage of foolishness - the 403(b). It istime for a revolution.

In October, 2010 I penned a short blog(www.teachersadvocate.blogspot.com)titled Government Employees: ThrownTo The Wolves. Little did I know thispiece would find its way into several

presentations at conferences on publicsector retirement throughout the country.The main point of the blog post was thatgovernment defined contribution plansdont enjoy the same protections thatprivate sector plans do, and that definedbenefit plans are not in and of themselvesbad.

What I am tackling in this piece are thespecific differences between a private

sector plan that is covered by ERISA anda government plan that is not covered byERISA in terms of consumer protections.I realize that many who run governmentplans are happy to NOT be covered byERISA and would fight the idea that theyshould be. My goal is not to promoteERISA coverage for government plans,

http://www.teachersadvocate.blogspot.com/http://www.teachersadvocate.blogspot.com/http://www.teachersadvocate.blogspot.com/


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but to point out the differences and whysome of these differences are harmful toparticipants. At a minimum, there shouldbe a dialogue concerning a structure thatone might term PERISA (a Public

ERISA), whether it is simply a standardfor plans to benchmark to or an actual setof regulations that specifically addressthe differences in public sector definedcontribution plans fiduciary structures.

Private Sector Income Security

Government defined contribution plansare universally spoken of assupplementary. It is my contention that

they are not supplementary butessential to a dignified retirement formost government employees.

While the 403(b) and 457(b) are labeledas supplementary, the 401(k) is oftenreferred to as the the primary retirementplan for the private sector, this is not true.If the 401(k) plan were the primaryretirement plan in this country we wouldbe in big trouble as the median value of

all retirement accounts of individualsaged 55-64 is only $100,0001, whichincludes IRAs and 401(k)s. Read thatsentence again: if the median age persongetting ready to retire has only $100,000,of which some of that is in IRAs, he hasless than $100,000 in 401(k)s - thisamount cannot sustain any type ofdignified retirement. Using the industrylanguage, the 401(k) looks just assupplementary as the 403(b) and 457

(b).

Social Security provides the primaryretirement benefit for the vast majority ofretirees in the United States who dont

have another pension, but Social Securityalso takes the biggest chunk out of acurrent employees paycheck.

My point is that both public and private

sector employees have a defined-benefittype plan that is funded from current orpotential income. This makes the 401(k),403(b) and 457(b) programs allsupplemental in that they are notdesigned to provide the primaryretirement benefit. As I stated earlier,while referred to as supplemental, theyare, in my opinion, essential to adignified retirement for both the publicand private sector.

Given that all defined contribution plansare supplemental and that they areessential to a dignified retirement, why isit that the public sector enjoys few, if anyof the protections the private sectorenjoys? (Note: while the private sector isentitled to protections, many plans arenot receiving the protections theydeserve).

A Few Differences

The following are just a few of thedifferences between a private sector 401(k) and a public sector 403(b):

Department of Labor oversight for 401(k)

New 408(b)2 rules do not apply to thepublic sector

New ERISA 404(a)(5) rules do not applyto the public sector

Prohibited Transaction rules, while theymay exist on the state level, are rarely


1http://www.401kplanning.org/top-401k-planning-questions-and-answers/what-is-a-401k-plan/what-are-average-retirement-savings-for-different-age-groups/
http://www.401kplanning.org/top-401k-planning-questions-and-answers/what-is-a-401k-plan/what-are-average-retirement-savings-for-different-age-groups/http://www.401kplanning.org/top-401k-planning-questions-and-answers/what-is-a-401k-plan/what-are-average-retirement-savings-for-different-age-groups/http://www.401kplanning.org/top-401k-planning-questions-and-answers/what-is-a-401k-plan/what-are-average-retirement-savings-for-different-age-groups/http://www.401kplanning.org/top-401k-planning-questions-and-answers/what-is-a-401k-plan/what-are-average-retirement-savings-for-different-age-groups/http://www.401kplanning.org/top-401k-planning-questions-and-answers/what-is-a-401k-plan/what-are-average-retirement-savings-for-different-age-groups/http://www.401kplanning.org/top-401k-planning-questions-and-answers/what-is-a-401k-plan/what-are-average-retirement-savings-for-different-age-groups/


4/9

enforced and there is rarely a mechanismto blow a whistle

There may not be ANY fiduciary standardcodified in the state law for a government

defined contribution plan

Conflicts of Interest may or may not becovered by state laws

A recent Spectrem Study showed there tobe over $183 billion in public sector k-12school system 403(b) programs. Thevast majority of this money is in retail typeproducts. If a prudent environmentexisted and only saved an average

of .50%, this would equal nearly $1billion a year in savings. In reality, thesavings would be much larger. Havingsaid that, I do realize it is not possible totransition the vast majority of existingcontracts, but having low-cost, prudentlyrun 403(b) plans as an option goingforward will encourage more savings andfor employees to move their old contractsto the new institutionally priced ones.The savings would be massive. Many

employers would welcome such aframework as it would relieve them of theneed to fight the financial servicescompanies, a task for which they lack theexpertise, desire and funding.

DOL Expands Fiduciary Definition -Doesnt Apply to Government DefinedContribution Plans

Recently, the Department of Labor hasannounced an expanded definition of theERISA term Fiduciary and is currently inthe comment period. Their intent:

[T]he[previous definition offiduciary]may inappropriately limit thedepartment's ability to protect plans,

participants and beneficiaries fromconflicts of interest that may arise fromtoday's diverse and complex feepractices in the retirement plan servicesmarket. The proposed rule is designed to

remedy this limitation, and protect planofficials and participants who expectunbiased advice, by giving a broader andclearer understanding of when individualsproviding such advice are subject toERISA's fiduciary standards.

Whether this rule becomes final or not, itonly applies to ERISA plans. This rule isactually flawed in many ways, but at leastthere is an ongoing discussion and

debate about updating the definition. Mypoint here is that there is a lot being donetoday to help protect consumers fromthose that would seek to harm them, justnot for consumers that happen to begovernment employees.

Why is it that government employees donot enjoy the same protections as theirneighbors in the private sector?

The lack of a fiduciary standard and

ERISA-like principles lead to retaildistributed plans, confusion, high feesand high spreads (on general accountproducts). The commissions paid toagents is undisclosed and provideincentives to work against theparticipants best interest.

It is not uncommon for insurance agentsand registered representatives to earnspecial trips, large cash bonuses or other

perks for the sale of financial products toschool employees. Trips to exoticlocales are common rewards for pushingproducts on school employees that arenot in their best interest. In the ERISAworld this would be considered aProhibited Transaction, but not in theland of government defined contribution



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plans. You can pretty much get awaywith anything in this strange land as thereis no oversight, no enforcement andseemingly nobody who really cares.Even when state laws are present, the

lack of oversight and enforcement (due tobudget constraints) essentially continuethe status quo.

Real Disclosure Nearly Impossible(under current regulatory regime)

It was the epoch of belief, it was the

epoch of incredulity...In 2007 the IRS

embarked upon a program to get 403(b)plans into compliance. For years theseplans suffered from lack of any oversightand this led to all sorts of breaches ofrules and regulations. The new ruleshowever were NOT designed to make403(b) plans better for consumers, justeasier for the IRS to audit. In fact, thenew rules are an incredible burden onemployers and in general have notreduced fees or spreads. To be sure,

most providers increased their spreadsand fees in order to cover the additionalcosts of compliance.

The IRS could have approached the rulechanges in a manner that would havebeen participant and employer friendlywhile also making the job of the IRS apiece of cake - instead the industry lobbygot their way and the status quoessentially remains. In fact, the biggest

are getting bigger and low-cost optionsare beginning to get squeezed.

It is time for Congress and the IRS to actto correct the horrible mistakes made in2007. The five items that must be doneto begin the clean up of the 403(b)market in particular are:

1. Grandfather all 403(b) plans andcontracts prior to January 1st, 2012

2. Remove the employer from allinvolvement with prior contracts,

except to the extent of minoremployee information (such as dateof hire, date of termination)

3. Require that 403(b) plans adhere toa Fiduciary Standard

4. Encourage a Single Vendor platformgoing forward (like the 401(k) world)

5. Remove the requirement that 403(b)plans ONLY invest in annuities orcustodial mutual funds

The 403(b) and 457(b) have enoughissues to deal with when there is only onevendor, but when the employer must dealwith multiple vendors, some of whom nolonger even offer products to the plan, itbecomes an absolute nightmare.Employers should get a fresh start,require the vendors to be in complianceas best as possible and require them toregister with the employer in order toobtain needed information, but free the

employer from being so intimatelyinvolved with every detail of thousands ofcontracts issued prior.

ERISA Rules Updated, But NotApplicable

The Department of Labor has been busyissuing new rules and regulations thesepast few years. Specifically, they

updated 408(b)2, 404(a)(5) and a newdefinition of Fiduciary (which wementioned earlier). All of these rulesseek to increase the awareness of feesand make plans more consumer friendlyand transparent. 408(b)2 requires allservice providers who receive direct andindirect compensation to provide a



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disclosure to the plan fiduciaries detailingthe fees received for the servicesprovided and whether they are acting in afiduciary capacity. 404(a)(5) requires thatthe plan provide a disclosure of fees the

participants pay on an annual basis.

Each of these items provide the planfiduciaries or the plan participants withneeded information and allows for fulltransparency. These provisions will likelylead to lower plan expenses over timeand help weed out conflicts of interest. Ifproviders fail to provide the data or do notdisclose it accurately, they could facesevere financial penalties.

It was the season of Light, it was the

season of Darkness.... Alas, none ofthese provisions apply to governmentdefined contribution plans. Not a single403(b) vendor is required to disclosedirect and indirect compensation,employers are not required to send outnotices of fees being paid by participants.Government employees are left out in thecold. Of course complying with these

rules if they were applicable would bedarn near impossible given the ridiculousmulti-vendor schemes that are soprevalent in government plans.

So it comes down to the states. At leasttwo states have done something aboutdisclosure - California and Texas.California requires all 403(b) vendors toregister with the state and disclose fees(similar to 408(b)2)). But in general there

is no multi-state initiative to co-ordinate adisclosure regime for government definedcontribution plans.

Private sector employees who have a401(k) plan will know what they arepaying in fees and the fiduciaries of theirplan will have full disclosure from their

providers; but government employees willsee no such protection or disclosure.

Prohibited Transactions

It was the age of wisdom, it was the ageof foolishness..What would happen if afiduciary to a 401(k) plan used his statureor plan assets to benefit himselfpersonally? There are many ways thiscan be done and it happens in the 401(k)world, as often as not the consequencesare criminal prosecution and potential jailtime. Fiduciaries of 401(k) plans andERISA covered plans think twice (orshould think twice) before taking

kickbacks, trips or using the plan for theirown benefit as the Department of Labormay find out, investigate and refer themto a criminal prosecutor. There is NOmechanism for this in governmentdefined contribution plans.

A plan fiduciary of a 403(b) or 457(b)could use plan assets for his/her ownbenefit, take trips from vendors andfunnel kickbacks to himself and face no

criminal prosecution, in fact it may noteven elicit a reaction from the public. Ifyou think this doesnt happen, you aremistaken - its a common occurrence inthe 403(b) and 457(b) world.

In the 403(b) and 457(b) world it is notuncommon that a plan fiduciary is alsoacting as a registered representative orinsurance agent and actively sellingproducts for a commission or

recommending products that will benefitthat fiduciary. If the broker is a fiduciarybecause he gave investment advice,then the payment of any commission orother compensation to the broker is aprohibited transaction and must bereturned to the plan, states Fred Reish,ERISA guru and partner at Drinker



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Biddle2 It is clear that a broker who alsois a named fiduciary (or functional) has alegal issue if receiving commission orother compensation.

Robert Toth in his Business of Benefitsblog writes ..many do not realize thatthere is a specific anti-kickback ruleapplying to ERISA plans that is NOTfound in ERISA, but instead undercriminal law...this section, by the way,only applies to ERISA plans.3

There is a full body of law, rules andregulations for ERISA plans that act toprotect consumers from fiduciaries who

act in their own best interest, not that ofthe participants. But none of theses laws,rules or regulations apply to governmentdefined contribution plans.

I attended an industry associationmeeting several years back where asenior executive of a major player in the403(b) market -- in my opinion -- wasbragging about bribing public officials inorder to get their business. It was the

first time I heard Hannah Montana and403(b) in the same sentence! Here I amin a room full of sales agents in apresentation that is being recorded andthis corporate executive is bragging aboutbribery - and NOBODY thinks anything ofit. He wasnt even afraid the governmentmight decide to investigate as the IRSwas IN THE ROOM.

This behavior is pervasive in the 403(b)

world and there is no authority to refer toofor investigation. Im not saying that wecan eliminate corruption, but there should

be an outlet that participants andemployers have to refer their concernswho will investigate. Unethical behaviorshould have consequences.

Bullying

Why dont more employers, specificallyschool districts work toward implementingfiduciary reforms and single vendorprograms? Much of the time they live infear of the financial industry bullyingthem. In some instances it is pureignorance, other cases they have otherpriorities (you know, like educatingchildren).

I have personally witnessed schooldistricts both small and large beingbullied by the financial services industry.Yes, I get the irony. In fact, I haveexperienced the same bullying for mywillingness to publicly stand up for therights of participants. The bullying is bothcovert and overt. The threat of a lawsuitfrom a high profile firm will scare even thelargest of school districts from

implementing needed reforms, and whocan blame them? If the choice is tospend money hiring more teachers orhiring more lawyers...its no mysterywhich one school officials will choose.

The financial services industry knows thisand uses it accordingly. Any time statelegislation comes up that is not favorableto them, but is favorable to theparticipant, they work to undermine it and

bully those who support it. The amountinsurance companies spend on lobbyiststo keep their agents selling toxic products


2 Who Are The Investment Fiduciaries for a 401(k) Plan - Part IV, Fred Reish http://www.archetype-advisors.com/Images/Archetype/

Fiduciary%20Responsibility/Who%20are%20the%20Fiduciaries%20Part%20IV.pdf

3http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/
http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/http://www.businessofbenefits.com/2010/06/articles/complex-prohibited-transaction/erisa-plans-ultimateand-criminalprohibited-transaction-rule-of-18-usc-1954/


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to school employees runs into the tens ofmillions of dollars.

Of course it is these same companiesthat then sidle up to the districts once

bidding begins for those districts that endup going with a single vendor (orcompetitive bid multi-vendor).

Public employers need a shield from theindustry so that they can do what is rightfor their employees.

Where Are The Unions?

A refrain I often hear when I explain the

403(b) market is where are the unionson this issue?. The answer is, itdepends. Ten years ago I would havetold you the unions were clearly in thepocket of the industry, but things havechanged. While the NEA still offers in myprofessional opinion a terrible product,the state and local unions in some areashave started to get involved and arepushing for needed reform as opposed topushing a product that theyll receive

income from. This is a welcome change,but we need more of it.

Unions should be working to strengthenthe 403(b) and 457(b) for their members.One issue the unions bring up is that theyfeel that advocating for better definedcontribution plans for their constituents isturning their back on the defined benefitplan. This line of thinking isunderstandable given the attacks

constantly mounted on the definedbenefit plan, but there is no good reasonwhy a public sector employee shouldnthave a great defined contribution planalso.

We commend the unions andassociations who have got onboard with

advocating for better defined contributionplans and invite those who are on thefence to get off it and start helping. Ifunions would help advocate for greatdefined contributions plans instead of

pushing their own, members could savebillions over the next decade and theunions could attract involvement from thecurrent membership and add newmembers. Nothing wrong with a littleethical consideration on these mattersespecially pertaining to their membersfinancial interest.

Employers Who Are Unwilling

One objection that I continue to hear fromthe industry is that the employers dontwant to be involved in the monitoring andoperations of the 403(b) and 457(b) andthis is confirmed by the employers Ispeak to. However, not wanting to beinvolved and saying that its fine foremployees to be taken advantage of aretwo different things. School employersdo not want their employees to have less

money or consumer protections justbecause the employer has other things tofocus on.

Multiple Employer Plans

The solution to this problem is simple andhas been around for a long time -- theMultiple Employer Plan. Under thisoption a state or other entity can sponsora defined contribution plan and assume

all responsibility. By removing theresponsibility the employer has noliability. These low-cost multipleemployer plans exist now and arepopping up everywhere and employersonly need to do the diligence and thenadopt them. No monitoring of investmentoptions or investment advisors is needed



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as the employer has hired someone elseto do it for them. In fact, since theemployer has hired a professionalindependent fiduciary, the employees arelikely to see lower costs and all the

consumer protections the ERISA worldoffers.

Conclusion

It was the best of times, it was the worst

of times...er, it was the best of plans, itwas the worst of plans. Are governmentdefined contribution plans about to enterthe light, or will they stay in the darkness?Public sector employees need to keep

more of their retirement plan money sothat they can retire in dignity. Its timepublic employees enjoyed the sameconsumer protections as their privatesector neighbors.

About The Author

Scott Dauenhauer, CFP, MSFP, AIF is anIndependent Fiduciary for families andgovernment entities and has beenadvocating on behalf of schoolemployees for better retirement plans forover a decade.

Scott is a frequent speaker across thecountry on topics ranging from inflation,target-date investments and governmentdefined contribution plans as well as the

Co-Author of The 403(b) Wise Guide. Heruns two blogs:www.teachersadvocate.blogspot.com andwww.meridianwealth.wordpress.com.

Scott has been quoted in nearly everymajor publication including the New YorkTimes, L.A. Times, Wall Street Journal,Smart Money & Kiplingers.

He can be reached via e-mail at scott at

meridianwealth.com

http://www.meridianwealth.wordpress.com/http://www.teachersadvocate.blogspot.com/http://www.meridianwealth.wordpress.com/http://www.meridianwealth.wordpress.com/http://www.teachersadvocate.blogspot.com/http://www.teachersadvocate.blogspot.com/

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