The Consequences of Consolidation

By Brian H. Graff

Even as we adjust to the impact the IRS 403(b) regulations have had on our industry, we continue to face an even bigger threat: the continued focus by various states and school districts to consolidate and perhaps even replace existing 403(b) programs for teachers.

The result of this kind of consolidation is not better products for teachers. The real consequence is that teachers have fewer choices, including the right to work with the very advisors they’ve grown to trust.

This trend toward cutting the number of eligible 403(b) options in favor of a single provider is often recommended by “consultants” with clear conflicts of interest. Many earn large set-up fees, commissions and trails from the financial service providers awarded the contract. Business officials have been told that a single provider will lower their costs as well as lower fees to teachers. There is no real evidence that shows that either is true and there is some evidence that teacher participation rates are suffering.

In addition to school districts, states have increasingly been getting into the act. Iowa passed legislation to create a state-run 403(b) program that is limited to only three providers. Although it’s not mandatory for school districts to participate, they’re under tremendous pressure to do so, and school districts in Iowa are not given the choice to offer their own selected options to teachers. The Florida Model Plan, for example, does allow each participating school district to add its own options on top of the core options provided in the plan.

Teachers should not be denied the ability to choose who they work with when planning for their retirement. NTSA, with the support of the resources offered by ASPPA, has engaged in a concerted effort to tell our side of the story and stem this tide. And we’ve already produced positive results.

Last year, the LA Unified School District was planning on using an RFP process to consolidate and limit the number of 403(b) providers that would be permitted to offer their products to teachers. We fought back, arguing that such an effort violated state law and would ultimately hurt teachers. Although the school district is going forward with hiring a TPA to administer the program, they backed off, at least for now, on any efforts to limit the number of providers.

Just this year, there was an effort in Illinois to create a state-wide 403(b) program, similar to the one in Iowa, to be established by the state comptroller’s office. We engaged quickly and with the help of our lobbyist in Illinois, the proposal is on hold and probably won’t be considered until next year. Even if it is reconsidered, we have commitments from the state comptroller to work with us to find a solution that doesn’t limit teacher choice.

There are a number of other states considering similar proposals for a state-wide 403(b) program. Further, as states deal with growing budget deficits many are considering replacing existing defined benefit plans with state-run defined contribution plans, particularly for new employees. These proposals to create state-wide defined contributions typically limit the number of investment providers. By steering teachers away from existing 403(b) programs, these state-wide defined contribution plans will also have the effect of limiting teacher choice.

Where states are contemplating limiting their existing defined benefit programs for teachers, NTSA strongly believes they should utilize their existing 403(b) programs as part of the solution. In other words, if a state wants to change the benefit structure for incoming teachers, it should use the existing 403(b) program as the defined contribution plan for teachers. This could mean that 403(b)s could now be receiving matching and other employer contributions in addition to the teacher’s own contributions.

We’re certainly not saying the 403(b) industry is perfect as is. There are many instances where hiring a single TPA to gain efficiencies and lower administrative costs to the school district may make perfect sense. Further, NTSA supports transparent disclosure of investment fees and all other expenses so that teachers clearly understand what they’re paying and what they’re getting in return. However, both of those objectives can certainly be accomplished without limiting the number of 403(b) providers and curtailing teacher choice.

NTSA stands for the proposition that teachers should be able to choose the investment option that best suits their needs and the freedom to work with the advisor that they trust. The right advisors can help teachers be informed consumers and help them select from among their array of products the ones best suited to their clients’ unique needs.

There will, of course, be some teachers who want a very low-cost option with limited service and those schools that want to offer such an option to their teachers should be able to do so. But that should not be at the expense of the teachers who want to work closely with an advisor on a one-on-one basis, and are willing to pay for that level of service.

Along these lines, the NTSA Leadership Council has developed a set of working principles as we continue to deal with developing state proposals that potentially impact existing 403(b) programs. These principles are:

1.) For teachers and other eligible government employees, the 403(b) should be the primary retirement savings vehicle for such employees and should not be displaced by a state-wide defined contribution plan.

2.) To the extent any state considers a state-sponsored or state-wide 403(b) program, participation in such a program should be optional on the part of any school district or other qualifying governmental entity.

3.) Such a state-sponsored or state-wide 403(b) program should be administered by a truly independent TPA firm that agrees to never offer any investment products to employees covered by the program.

4.) Although the state-wide 403(b) program itself can negotiate with certain investment providers to be offered through the program, each participating school district or other qualifying governmental entity must be permitted at its election to offer an unlimited number of additional investment options to its employees. These options shall also be administered by the same TPA that administers the state-wide program.

5.) The state-wide 403(b) program shall not establish, limit or otherwise attempt to influence the costs, fees or other terms or conditions of any additional investment options selected by the participating school district or other qualifying governmental entity.

6.) Any terms that apply to such additional investment options for participating in the state-wide 403(b) program, such as a per-participant monthly fee for administration, must be no more onerous than those applicable to the investment providers selected by the state-wide 403(b) program.

7.) State-wide 403(b) program marketing materials to school districts and other qualifying governmental entities, as well as their employees, must not favor the investment providers selected by the state-wide 403(b) program, and must fairly and clearly indicate that other investment options are available.