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403(b) for Schools


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Is a school district considered a governmental employer and thus not offer a 401(k) plan? Seems to me that, given the salaries and contribution levels involved that the participants would be better served combining their buying power and thus recieiving a better class of funds.

To me, and I'm strictly looking at it from the side of the participants. I'd much rather have a 401(k) and have access to the institutional class funds than a 403(b) where they hit me up with loads and higher expense ratios. Surely it can't be for the financial advice they are receiving on an individual level as most of the people that hit up these teachers are true ninnys looking for an easy trail.

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Yes, can do 403b but not 401k

Seems crazy to me given that they've made the two plans basically the same. Districts are basically tossing their employees to the dogs in exchange for the ability to avoid fiduciary responsibility and liability. From what I can see, only difference outside of responsibility/liability is the ability to make catch up contributions after 15 years of employment rather than waiting until age 50.

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Public schools are not subject to the fiduciary provisions of ERISA. Why should the the school district's taxpayers pay for fid lawsuits under state law because of poor investments? Most school districts are too small to support their own retirement plans and cant afford to pay for expert advice (which would be footed by the taxpayers). There are some attractive reasons to offer 403b annuities over 401k plans, e.g., they are not subject to ADP testing (I dont know if grandfathered govt 401k plans are exempt from ADP testing) or requirements for qualified plans such as determination letter. Also 403b plans require universal availability for all employees who work 20 or more hours a week without any waiting period. If teachers dont like the choices in a 403b plan they can choose to invest 4-5K in an IRA which is close to the maximum amount that most teachers can afford to defer each year.

You also seem to be rather ignorant of the rules for public 403b plans. Some states require that SDs allow every carrier who solicits the SD to offer their 403b products to the SDs employees. This has resulted in the refusal of low cost providers such as Vanguard to offer their products to such school districts because the high marketing costs related to such sales could not be passed to the employees.

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Public schools are not subject to the fiduciary provisions of ERISA. Why should the the school district's taxpayers pay for fid lawsuits under state law because of poor investments? Most school districts are too small to support their own retirement plans and cant afford to pay for expert advice (which would be footed by the taxpayers). There are some attractive reasons to offer 403b annui9ties over 401k plans, e.g., they are not subject to ADP testing (I dont know if grandfathered govt 401k plans are exempt from ADP testing) or requirements for qualified plans such as determination letter. Also 403b plans require universal availability for all employees who work 20 or more hours a week without any waiting period. If teachers dont like the choices in a 403b plan they can choose to invest 4-5K in an IRA which is close to the maximum amount that most teachers can afford to defer each year.

You also seem to be rather ignorant of the rules for public 403b plans. Some states require that SDs allow every carrier who solicits the SD to offer their 403b products to the SDs employees. This has resulted in the refusal of low cost providers such as Vanguard to offer their products to such school districts because the high marketing coss related to such sales could not be passed to the employees.

The only valid reason that you even gave was the ability to avoid fiduciary provisions of ERISA. But to me, if it were that onerous and expensive of an issue then we wouldn't have 401k's at all. Certainly the cost of one lawsuit can wipe out a few years worth of contributions by an owner and sponser of a small plan. So why bother? Has to be that the number of lawsuits is minor, or non-existant, if the plan is well designed and well monitored.

The rest of your arguments make no sense. ADP testing? Not relevent in probably 70-80% of the School Districts. Random sampling of my state tells me that the smallest districts have 1 HCE. The largest ones have <1% of the staff considered HCE's. For those districts, if it's truly an issue they can stay 403(b) or do what everyone else does...educate the staff to encourage participation. Eligibility would be no different and internal workload would be less as there is ONE provider. Costs can be absorbed by the plan and still be cheaper than the typical 403(b) alternatives. And the fact that most can invest in an IRA is the same argument against all DC plans that don't have matching contributions. Why bother at all? The majority of people don't contribute even the IRA maximum to their 401ks.

As far as ignorance? If I knew all of the laws pertaining to them, I likely wouldn't have posted...correct? But, The fact that Vanguad doesn't choose to offer their products doesn't mean that there aren't others who do. Can't count the number of times that my spouse has been approached by investment advisors who are promoting rediculously priced products. Those are the ones that prompted my thread. And even if Vanguard did offer their 403(b) product, would it be at the fee level as a 401(k) plan that offers Vanguard Institutional Funds?

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You are still missing the point. If an private employer who establishes a plan gets sued for fiducary breach there is no increase in property taxes. In NJ school districts are liable for all kinds punative damages for sex discrimination and other employment violations. There is no need to put the taxpayers at risk for poor pension plan investments. Further any school district can establish a 457b plan which is the govt sponsored equivalent of a 401k plan and has all of the features of a k plan without the issues of a k plan if they are willing to assume the fid risk. So why bother with the complexities of a k plan? You are also ignorant of the economic issue in govt plans- employees are covered by a state sponsored DB retirement plan that usually requires employee contributions of 5% of comp or so which means that employees have less discretionary funds to invest in a DC type plan.

You dont grasp the economic issues involved in marketing to small groups who cant offer enough premium volume to satisfy the admin costs of low cost providers which leaves the market to the agent driven products which have higher costs needed to sell on a one on one basis. Some states/ public employee groups have sponsored 403b plans although this creates other issues, e.g. requiring the provider to pay a fee to the organization that controls access to the participants, eg. 1% of the premium volume.

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Unfortunately (or fortunately depending upon your point of view) when you're talking school districts or any governmental entity, you're talking politics. Who sells these insurance 403(b) contracts in these small school districts? It's the local insurance guys, the ones who are on the PTA and the school board, and who play golf with the school administrators. If you're a state legislator, would you restrict their ability to sell their product? This is not to say that there are not advantages to local service. Your more savvy teachers will choose the better product - they'll get the literature and go with a Vanguard or Fidelity, but many will just go with old Joe (or old Mary) who sells "Old Charter" insurance, because they know them, they can call them on the phone, and there is certainly a benefit to that.

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Guest LVanSteeter

There are mutual fund companies that offer 403(b)(7) plans to school districts. That is if the district hasn't been 'convinced' that every provider needs to sign an agreement that is only applicable to insurance companies.

Check out Fidelity for one.

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Why would there be any higher marketing costs for selling to a SD as opposed to selling to any other employee group?

How would any higher marketing cost be "passed" on to the employees of an SD? The sales loads etc are not variable at will, they are set with the product and product approval. As a result the sales charges for a particular product is the same regardless of purchaser.

The marketing costs associated with selling to an employee is usually borne by the sales rep who is compensated from the sales charges. The sales charges do not differentiate by job description or location, so an employee of a SD pays the same as an employee of a hospital.

It is the fact that there are no or little sales charges which which to reimburse or compensate the sales rep that leads to there being very few sales reps being willing to sell those products. Very few or no representation is what causes the low load providers to not have much presence in most SDs, not the inability to pass on any alleged higher marketing costs.

There is also the reluctance to service SDs caused by the Hold Harmless requirement and the service fees charged by some SDs.

The situation is even further aggravated by the requirement that some have for a minimum amount of new cases in order to get a payroll slot. No or little commission means that very few, if any, sales reps will make the initial thrust to get these "start up" enrollees.

On top of all of this is the issue of endorsement and sponsorship. Without endorsemnt or sponsorship by an employee union, most sales reps in most districts have restricted access to employees of SDs. As a result the employees tend to see, on SD property, mainly the sales reps from the providers that are endorsed mainly by the teachers union and NEA. These unions endorse the providers for revenue. No or low sales charges means no or low revenue to the endorsing union.

Sales reps whose providers are not endorsed have to try and canvass employees off premises during the employee's non working hours. This severly restricts sales.

Sales reps generally are reluctant to work for no or little commission from fewer more difficult and restricted sales. The result is that the low cost providers get no representation and therefore very few sales.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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  • 3 weeks later...
You are still missing the point. If an private employer who establishes a plan gets sued for fiducary breach there is no increase in property taxes. In NJ school districts are liable for all kinds punative damages for sex discrimination and other employment violations. There is no need to put the taxpayers at risk for poor pension plan investments. Further any school district can establish a 457b plan which is the govt sponsored equivalent of a 401k plan and has all of the features of a k plan without the issues of a k plan if they are willing to assume the fid risk. So why bother with the complexities of a k plan? You are also ignorant of the economic issue in govt plans- employees are covered by a state sponsored DB retirement plan that usually requires employee contributions of 5% of comp or so which means that employees have less discretionary funds to invest in a DC type plan.

You dont grasp the economic issues involved in marketing to small groups who cant offer enough premium volume to satisfy the admin costs of low cost providers which leaves the market to the agent driven products which have higher costs needed to sell on a one on one basis. Some states/ public employee groups have sponsored 403b plans although this creates other issues, e.g. requiring the provider to pay a fee to the organization that controls access to the participants, eg. 1% of the premium volume.

MJB: You need to do some research about the 403b situation in NJ. The State's Division of Pensions and Benefits has offered a 403(b) Plan to all of the State's public school employees for more than 40 years. The trouble with it is an investment lineup of 1...an all equities fund. According to you they should have been sued years ago for fiduciary breach...it hasn't happened. What say you?

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You are still missing the point. If an private employer who establishes a plan gets sued for fiducary breach there is no increase in property taxes. In NJ school districts are liable for all kinds punative damages for sex discrimination and other employment violations. There is no need to put the taxpayers at risk for poor pension plan investments. Further any school district can establish a 457b plan which is the govt sponsored equivalent of a 401k plan and has all of the features of a k plan without the issues of a k plan if they are willing to assume the fid risk. So why bother with the complexities of a k plan? You are also ignorant of the economic issue in govt plans- employees are covered by a state sponsored DB retirement plan that usually requires employee contributions of 5% of comp or so which means that employees have less discretionary funds to invest in a DC type plan.

You dont grasp the economic issues involved in marketing to small groups who cant offer enough premium volume to satisfy the admin costs of low cost providers which leaves the market to the agent driven products which have higher costs needed to sell on a one on one basis. Some states/ public employee groups have sponsored 403b plans although this creates other issues, e.g. requiring the provider to pay a fee to the organization that controls access to the participants, eg. 1% of the premium volume.

MJB: You need to do some research about the 403b situation in NJ. The State's Division of Pensions and Benefits has offered a 403(b) Plan to all of the State's public school employees for more than 40 years. The trouble with it is an investment lineup of 1...an all equities fund. According to you they should have been sued years ago for fiduciary breach...it hasn't happened. What say you?

The same Division of Pensions and Benefits had it right for 25 years when they offered an internally managed 457(b) for State employees. This plan offered 4 investment funds each sporting an expense ratio of 8 bp. This all changed on January 1, 2006 when the state farmed out the plan to Prudential Financial. Now the Plan has 23 investment funds with the lowest cost one charging 25 bp and the highest about 175 bp. In your opinion has the State breached its fiduciary duty by closing out the old funds to on going contributions?

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You are still missing the point. If an private employer who establishes a plan gets sued for fiducary breach there is no increase in property taxes. In NJ school districts are liable for all kinds punative damages for sex discrimination and other employment violations. There is no need to put the taxpayers at risk for poor pension plan investments. Further any school district can establish a 457b plan which is the govt sponsored equivalent of a 401k plan and has all of the features of a k plan without the issues of a k plan if they are willing to assume the fid risk. So why bother with the complexities of a k plan? You are also ignorant of the economic issue in govt plans- employees are covered by a state sponsored DB retirement plan that usually requires employee contributions of 5% of comp or so which means that employees have less discretionary funds to invest in a DC type plan.

You dont grasp the economic issues involved in marketing to small groups who cant offer enough premium volume to satisfy the admin costs of low cost providers which leaves the market to the agent driven products which have higher costs needed to sell on a one on one basis. Some states/ public employee groups have sponsored 403b plans although this creates other issues, e.g. requiring the provider to pay a fee to the organization that controls access to the participants, eg. 1% of the premium volume.

MJB: You need to do some research about the 403b situation in NJ. The State's Division of Pensions and Benefits has offered a 403(b) Plan to all of the State's public school employees for more than 40 years. The trouble with it is an investment lineup of 1...an all equities fund. According to you they should have been sued years ago for fiduciary breach...it hasn't happened. What say you?

The same Division of Pensions and Benefits had it right for 25 years when they offered an internally managed 457(b) for State employees. This plan offered 4 investment funds each sporting an expense ratio of 8 bp. This all changed on January 1, 2006 when the state farmed out the plan to Prudential Financial. Now the Plan has 23 investment funds with the lowest cost one charging 25 bp and the highest about 175 bp. In your opinion has the State breached its fiduciary duty by closing out the old funds to on going contributions?

In your opinion are NJ School Districts liable for fiduciary breach for allowing high priced variable annuities to be sold under 403(b)?

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Is a school district considered a governmental employer and thus not offer a 401(k) plan? Seems to me that, given the salaries and contribution levels involved that the participants would be better served combining their buying power and thus recieiving a better class of funds.

To me, and I'm strictly looking at it from the side of the participants. I'd much rather have a 401(k) and have access to the institutional class funds than a 403(b) where they hit me up with loads and higher expense ratios. Surely it can't be for the financial advice they are receiving on an individual level as most of the people that hit up these teachers are true ninnys looking for an easy trail.

WSP: All NJ School District employees should use the 403(b) plan offered by the State's Division of Pensions and Benefits for his or her common stock allocation. I know you will welcome the expense ratio of zero. Now how's that for looking out for the little guy?

Joel

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Guest yanfan

Joel,

I am a public school teacher in NJ. My district recently approved Vanguard as one of our 403b vendors. I just started reading about the SACT plan offered by the state. It is a one fund option that seems to be similar to an S & P 500 fund with a zero expense ratio. Having a low cost provider, such as Vanguard, with many options seems like an easy choice; however, a zero percent expense ratio and decent long term performance are hard to beat. I would like to hear your overall thoughts of this plan. Thanks for taking the time!

John

http://www.state.nj.us/treasury/pensions/fact35.htm

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yanfan

A previous poster in responding to another poster stated that " You are also ignorant of the economic issue in govt plans- employees are covered by a state sponsored DB retirement plan that usually requires employee contributions of 5% of comp or so which means that employees have less discretionary funds to invest in a DC type plan."

Yet here you are another NJ public school employee investing discretionary funds in a 403(b). And in a no load/low load fund at that, something that the same poster mjb thinks is not readily available.

As far as I know Vanguard and other low cost providers are available in NJ and public school employees do somehow have money that they invest with such providers, and apparently in sufficient numbers to make it worthwhile. Am I correct as far as you know ?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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yanfan

A previous poster in responding to another poster stated that " You are also ignorant of the economic issue in govt plans- employees are covered by a state sponsored DB retirement plan that usually requires employee contributions of 5% of comp or so which means that employees have less discretionary funds to invest in a DC type plan."

Yet here you are another NJ public school employee investing discretionary funds in a 403(b). And in a no load/low load fund at that, something that the same poster mjb thinks is not readily available.

As far as I know Vanguard and other low cost providers are available in NJ and public school employees do somehow have money that they invest with such providers, and apparently in sufficient numbers to make it worthwhile. Am I correct as far as you know ?

GB: as usual you misconstrue posts which you then take out of context in your response. I will depart from my usual rule of not responding to your irrelevant posts to correct your mistakes. Your quote of my comment ignores that it was made in response to the Q of why local govt do not need to establish 401k plans with all of the additional complexites for entites in which few ee are HCEs. I never suggested that 403b plans by low cost providers were not available to SD. Indeed my posts state that economies of scale for public school employees could be achieved through a 403b plan established by an employer or employee organizations as an alternative to high cost individual annuity products. Alternatively, low cost providers are available to those school districts which sponsor a 403b plan if there are a sufficient number of employees. (In NJ as in other states there a many small school districts, including 23 that have no schools, which are not attractive to low cost providers.) I have stated that a SD can offer a 403b plan to employees provided that the plan does not result in any cost/expense to the taxpayers because of mis management of the plan or administrative expenses.

Joel: You should direct you questions regarding fiduciary duty for the state 457 plan and 403b plans to the NJ attorney General who has jurisdiction over this issue. Please post the response for all to read when you get it.

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mjb

The real reason why you no longer respond to my posts is not related to "irrelevancy". It was because you were challenged to explain why you think that any post is/was irrelevant or wrong etc so that other posters could then either agree or disagree with you. When you could not do so successfully, you then took the postion of not responding to my posts especially those that question your posts. I notice that there are now others who do question the accuracy and relevancy of some of your posts.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Joel,

I am a public school teacher in NJ. My district recently approved Vanguard as one of our 403b vendors. I just started reading about the SACT plan offered by the state. It is a one fund option that seems to be similar to an S & P 500 fund with a zero expense ratio. Having a low cost provider, such as Vanguard, with many options seems like an easy choice; however, a zero percent expense ratio and decent long term performance are hard to beat. I would like to hear your overall thoughts of this plan. Thanks for taking the time!

John

http://www.state.nj.us/treasury/pensions/fact35.htm

Hi John,

I recommend this fund for the SP 500 portion of your pre-tax investing account.

It is interesting to note that the State of NJ is all over the map when it comes to watching out for fees paid by plan participants. Is it not outrageous that after 25 years of having one of the lowest cost programs in the nation the Deferred Compensation Board decided to farm their 457b plan out to Prudential Financial with expense ratios that average about 12 times higher than what the state use to charge directly.

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JoL: Maybe the 457b account was transferred because the fees were too low for the premium volume and the Board did not want to continue manage the investments with a substantial increase in fees. Fund families roll up funds or eliminate lines of business that are money losers all the time.

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You dont grasp the economic issues involved in marketing to small groups who cant offer enough premium volume to satisfy the admin costs of low cost providers which leaves the market to the agent driven products which have higher costs needed to sell on a one on one basis. Some states/ public employee groups have sponsored 403b plans although this creates other issues, e.g. requiring the provider to pay a fee to the organization that controls access to the participants, eg. 1% of the premium volume.

mgb: Where have you been? Don't you know that the NY AG has been investigating just such a relationship between the New York State United Teachers and ING. The union has been collecting an endorsement fee of about $3.4 million annually in order for ING to place the union label on its 200 bp variable annuity product known as "Opportunity Plus". What an outrage!! Eliot Spitzer is expected to hand down his ruling/settlement shortly.

Nothing prevented the union from going to a low cost provider like Vanguard...but then the union would be ethical. The union wanted to use section 403b as a revenue enhancement...they could not care less about the financial futures of their members.

Of note: For nearly 20 years the union has in place for its employees a no-load 401(k) Plan. How's that for sporting two hats?

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JoL: Maybe the 457b account was transferred because the fees were too low for the premium volume and the Board did not want to continue manage the investments with a substantial increase in fees. Fund families roll up funds or eliminate lines of business that are money losers all the time.

Mgb: Please stop winging your answers. Your assertion makes for nonsense inasmuch as a tripling of the fees to 24 basis points stills makes the old program one of the lowest cost programs of its kind in the nation.

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Folks:

Because this governmental plan in NJ is not subject to ERISA, it seems like the state assumes the role of fiduciary.

Does the state also assume the role of the ultimate guarantor of underfunded defined benefit plans?

Would the state offer any guarantees for defined contribution plans?

Don Levit

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Don: its the NJ taxpayers not the state who are guarantors of the $12B deficit in the state public employee DB pension plans which is why there is a call for give backs by public employees to reduce the deficit. There is a separate liability for retiree health ins for NJ public employees. Why woud the state guarantee DC funds?

Joel: You can take your issues to the NJ attorney general. There is no reason for taxpayers to subsidize a 457 plan.

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Joel: You can take your issues to the NJ attorney general. There is no reason for taxpayers to subsidize a 457 plan.

I find that statement quite ironic in that communication professionals in our field constantly tout a quality retirement vehicle as a reason for coming to or staying at a place of employment. Why would the state be any different? Certainly we all want our state governments to employ quality individuals, don't we? And an attractive compensation and benefit package will attract quality employees. You may as well question the government offering ANY benefit package; including paid vacations.

That being said, I do agree that there must be limits as to the level of subsidization of a government sponsored DC plan. If the plan utilization is extremely low (especially given the already stated fee structure) then I don't think that's a good use of money. At some point the cost-benefit ratio swings too far to the side of the costs and it becomes necessary to take it "out of house". Me personally? I say make the switch when it costs more to administer the plan then the state will lose by having the employees gripe over the change at the water cooler while on the state's time. The fewer the people utilizing the plan, the sooner you make that switch.

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