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| > Investing > Fiduciary Focus |
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| Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 2) |
| by
W. Scott Simon
| 05-03-07 |
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Well, well, well. I received more e-mail from last month's column than any other that I've written for Morningstar. The majority of e-mail messages were from those who bore the terrible brunt of (mostly variable) annuities including high and hidden fees, poor performance, and the inability to jettison in a cost effective way such "blood suckers" (in the words of one such e-mailer). If anything, this group thought that my column was way too tame in the way that it discussed annuities.
A minority of e-mails came from those who make (some or all of) their living selling annuities. This group wasn't happy with me at all. One reader wrote that the column was a "total waste of [Simon's] and my time." Other comments that I received: "I find your article to be very uninformed"; "[Your assertion about high fees is] a gross misstatement"; "You do the public a great disservice by writing such an article that lacks responsibility"; "You, Mr. Simon, are a poop-head." (Just kiddin' about that last one; one of my little nephews thought it would be cool if they said that.) After all this vituperation, at least I can always count on my mother for support. Right, Mom? Uh, Mom, are you still there? Harry Truman once said that if you're a politician in search of a real friend, buy a dog. So surely my faithful dog, Spot, won't turn on me. Okay Spot, please stop baring your fangs.
Breathe, Breathe Slowly
Let's all back off for a bit, take a breath and relax. First of all, I'm not anti-annuity. As I said in last month's column: "The problem in the K-12 403(b) plan market is not the annuity as an investment vehicle per se. In fact, an annuity can be a useful vehicle for accumulating assets for retirement or as a way to generate some future income stream." It's clear (even to me) that with the impending tsunami of the baby boomers rolling into retirement (and semi-retirement), annuities will play a large and important role. Much research is now being conducted to create new annuity products that will help these people live a more comfortable life.
Now, Hyperventilate
The real problem with annuities in the 403(b) market stems from the absence of a regulatory system that requires school districts to actually assume fiduciary responsibility for the investment selection, expenses, and education involving the 403(b) plans they sponsor. (Such responsibility exists more so in the large hospitals and other non-profits market, but much less so in the K-12 market.) School districts, in the main, sponsor these plans as an accommodation or arrangement only.
(In my state of California, for example, state law requires school districts to give access to any provider licensed to sell a product; this is known as the "hog wild" model. Any sponsor that actually does want to provide some modicum of fiduciary responsibility by going to a "RFP model" with the ability to truly screen vendors is therefore prohibited from doing so.)
School districts select providers based on very little investigative criteria and then place them on a list from which school teachers make their investment selections. Teachers naturally assume that their plan sponsor has conducted meaningful due diligence on the providers.
There's not a regulator or a plan sponsor in sight to care about the travesty of this system and its inevitable result: a 403(b) market dominated by providers selling, for the most part, a lot of junky, high-priced, poorly performing (annuity and non-annuity mutual fund) products to school teachers in 403(b) plans. One reader opined that such products offered in 403(b) plans are little more than "an insurance company income stream with no efforts."
That notion suggests the rest of the problem: In the process of delivering investment products to public school teachers (and employees of non-profits) enrolled in 403(b) plans, the main focus is on the convenience and (unreasonable) profitability of the insurance companies that distribute such products. Little more than lip service is paid to what's best for the welfare of plan participants. The process of delivering investment products to public school teachers (and employees of non-profits) in 403(b) plans has become distorted to the point of complete backwardness: providers come first, while teachers (and employees of non-profits) come in a distant second.
The consequences of this distorted process include such absurd and financially harmful (to plan participants but not providers) business practices as seven-year, 14-year, and more annuity surrender fees, two-tiered annuity contracts bearing surrender charges that end only when participants annuitize them (the provider's goal being to retain any balances for participants who die at normal mortality or sooner), or rolling over an annuity into an IRA but having to wait for it to be paid out in five equal annual installments--after paying on the annuity for 20 years. Such business practices that many providers engage in clearly frustrate the portability provisions of EGTRRA, which are applicable to all types of retirement plans, including 403(b) plans.
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| W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing. Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals. For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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