K12 457 plans

[Guest sschullo]

Hi,

I am a new member of my district's 457 oversight committee. I read the book "hand for investment commitee members" by Russell Olson. While the book is very good, the problem with the book is that the information provide assumes that committee members represent defined pension plans (overseeing fund managers of a portfolio of stocks and bonds, etc) rather than defined contribution plans (select a diversified portfolio of mutual funds such as Vanguard, TR Price, etc.). Our role is to make recommendations to the CFO, who has the full legal responsiblity. We have a certified professional who consults the committee.

Question: is there a book that talks about our role as members of a defined contribution plan?

Thanks in advance,

Steve

[Guest mjb]

See Chapter 4 of the 457 Answer book published by Aspen Publishers (1-800-638-8437).

[Guest sschullo]

Thanks mjb,

Steve

[Peter Gulia]

mjb, thanks for suggesting my work in Wolters Kluwer's 457 Answer Book.

Mr. Schullo, as you already knew, the key for an investment committee of an individual-account plan that provides participant-directed investment isn't the ultimate decisions but rather selecting a menu of investment options from which a participant could direct investment to meet his or her retirement investment goals. In my experience, making menu decisions for a participant-directed plan is much harder than making an ultimate investment decision.

[Guest sschullo]

Hi FGC,

I have enough experience to know what a diversified portfolio consists of and its based on the NASD guidelines, so selecting a menu for the participants was straightforward. I was wondering about the other less obvious responsibilities and rights to information the committee members are entitled too. For example, I think the members should know what the compensation rates and bonuses of the TPA reps who are selling the portfolio to the employees. We already got them to reveal revenue sharing fees to participants. Are we entitled to know whether, for example, the financial consultant is a fiduciary or a non fiduciary. These types of questions are ignored. The reason I have asked is because the consultant unilaterally and deliberately decided to pick funds that were very expensive to the participants. So I ask what do they need the money for? Again, I am ignored. I would like to point to a reference so that I can get my questions answered.

Thank you,

Steve

[QDROphile]

Why are you looking for some outside source of authority to prevent being abused by a vendor? The vendor should tell you everything you want to know, especially about fees, expenses, and the direct and indirect compensation of the vendor. Vendors are supposed to serve. You don't need a book to tell you to quit doing business with vendors who ignore your pertinent questions. What are you going to have to prove to the vendor next?

[Peter Gulia]

My writing for Wolters Kluwer’s Answer Books has been mostly for the opportunity to put education out to other practitioners and especially to smart people who haven’t yet engaged a lawyer. But a book (or an Internet bulletin board) is about general information.

Advice about a particular situation and not-hypothetical facts belongs in a client-lawyer setting, with all of the many protections that Federal and State laws provide for such a relationship.

If your committee hasn’t already selected a lawyer in whom you have confidence, consider that the first duty of a fiduciary is to gather sound information needed to support his, her, or its decision-making – and that includes expert legal advice if that’s what a fiduciary needs to evaluate a choice or support a negotiation.

Your note last evening tells us that you’re passionate about trying to help the plan’s participants. So I wish you and everyone involved luck in finding the information and advice that would help; and express my own hope that all people will learn how to work together to produce good retirement incomes.

[Guest sschullo]

Hi

Why do I need a book? To get my questions answered and you are right even that may not work. I want to know if there is legal support for this. Yes, we have an attorney assigned to the committee; he doesn't answer my questions either.

I think it has to do with the politics of our employer to its employees. A couple of other employee members and I are at odds with our employer's benefits department, the TPA and the financial consultant over the expenses of the plan. Its a new 457 plan. This is no small town enterprise. You know all three parties involved: my employer, TPA and the consultant by name and they are not going to listen to bunch of complaining, but smart employees, who know something about revenue sharing, fees and costs and how they eat away at one's nest egg over time. We know the debate between active and passive investing, and risk and return with MPT and the EMH. We are told by some reporters and the other financial professionals that very few 457 oversight committee ask these kinds of questions about lowering costs by using indexes or choosing a fund without revenue sharing arrangements, for example. The financial consultant is terrible in my opinion, they did not listen to the committee at all, but our employer's the benefits department chair, who is the chair of the committee, warned us not to go against the financial consultant recommendations because they know what they are talking about, blah, blah, blah. The TPA just sat back and said nothing.

Thanks for your responses. You have encouraged me to talk with my fellow committee members to pass a motion to get these questions answered. I was under the impression that compensation (not the costs of the funds, we know that) of the vendor reps and the bonuses (which I TOTALLY object to) are not public, not even to the committee.

Thanks again,

Steve

[Guest RI Consultant]

Steve . . . Stick to your position! The Plan Sponsor has a right to know ALL expenses of the Plan so insist on it. Your employer probably went with the selection of expensive mutual funds since the revenue sharing will pay expenses that would otherwise (often, but not always) be paid by the employer. However, the employer can charge plan expenses to participant accounts so you need to look at what total plan expenses are and estimate total revenue sharing (usually listed in the funds as 12b-1 fees) and see if it's about even or not. Isn't politics great? You definitely need an attorney who can advise you and the other Committee members about their fiduciary responsibilities and potential liability. Good luck! You can look at www.DOL.gov for a plan expenses worksheet. It also includes a definition of terms which is very helpful. It refers to 401(k) plans but works for any plan. I'd suggest you ask your vendor to complete the DOL worksheet and also try to do it yourself to see if all makes sense.

[Guest sschullo]

Hi RI,

Sorry it took so long to respond. My employer hired a new financial consultant to the committee. I took the bull by the horns and volunteered myself on this committee to I could have some input into the selection of a financial consultant that will respond to the requests of the employees. I am confident that the committee is in very good hands now.

FYI, the fees (expense ratios and revenue sharing) of the plan have been exposed in every detail. My employer pays nothing into the plan. Remember this is a K12 school district.

I am told that 80 basis points charged on every mutual fund in the plan is more than enough for the TPA to bring the product to the employees with followup individual consulting.

Thanks for the link to the DOL worksheet.

I let you know what happens at the next meeting in July.

Thanks to all,

Steve