Do Texas legislators read what they vote for? Do they do their homework?
The passage of HB2820 gives reason to doubt.
Written by Rep. Dan Flynn (R–District 2) and sponsored by Sen. Bryan Hughes (R-District 1), the bill repealed the requirement for financial product sellers to register with the Teachers Retirement System. It also eliminated the already catastrophic 2.75 percent annual expense ceiling on products sold to teachers in their 403(b) accounts.
It’s open season in Texas
Basically, the new law declared open season in Texas. It put a target on the backs of 635,000 public school teachers and employees. It made Texas safe for investment predators. The likely result will be poorer retirements for teachers and a multitude of lawsuits that may eventually cost Texas taxpayers hundreds of millions.
Isn’t this odd?
Business as usual
Nope. It is business as usual. This isn’t the first time Texas has refused to regulate financial products offered to Texas teachers. Seventeen years ago another bill attempted to rein in the high expenses for teacher 403(b) products. An early version of that bill put limits on expenses and charges.
Laredo class action improves teacher retirement, (03/03/2002) https://scottburns.com/laredo-class-action-improves-teacher-retirement/
The limits never made it to the final bill. At the last minute, the Texas State Teachers Association objected to the changes. Hard to believe, but they did.
So vendors had to register. But expense charges weren’t reduced. Front- and – back end commissions weren’t eliminated. Surrender charges weren’t eliminated on most options. The only limit was a sky-high annual expense of 2.75 percent.
The high cost of teacher hand holding, 03/19/2002 https://scottburns.com/the-high-cost-of-teacher-hand-holding/
Back to the future
Now the requirement to register products has been removed. Even the very rich limitation of 2.75 percent in annual charges has been removed. The only good news is that teachers aren’t required to save through a 403(b) plan. They can invest elsewhere with better results.
An alternative to 403(b) plans for Texas teachers, 09/14/2019
https://scottburns.com/an-alternative-to-403b-plans-for-texas-teachers/
Has something happened to make offering punitively high-cost retirement products in 403(b) plans (or anywhere) a good idea?
No. If anything, tolerance for consumer abuse has been disappearing everywhere but Texas. Beyond that, workers with 401(k) plans have enjoyed major improvement in plan menus and a long trend to lower expenses. We might ask, for instance, how Exxon Mobil’s 17,000 employees enjoy a 401(k) plan with expenses of 0.01 percent to 0.04 percent, while 635,000 Texas teachers and school employees must choose between thousands of options, many priced over 2 percent a year?
Elsewhere, the financial services industry competes with lower prices
Beyond the 403(b) plans of Texas, the entire securities industry competes to lower costs. And I mean really lower them. It is now possible for consumers to buy exchange-traded index funds commission-free on platforms like Vanguard, Schwab and Fidelity. So while savers are in a new age of no-commissions and 0.05 percent annual cost IRAs, Texas teachers are corralled in 403(b) plans dominated by high-cost choices.
Some readers may be skeptical of reduced tolerance for consumer abuse. So consider this: Earlier this month the Securities and Exchange Commission began an investigation into the sales practices for 403(b) plans in school districts. Following a recent SEC meeting, Dan Otter, the founder of 403bwise.org, told me: “The SEC is really on this issue.”
More recently, the New York State Department of Financial Services announced that it, too, is going to investigate sales of annuities to 403(b) accounts.
What the legislators ignored in 2 research studies
In fact, two research studies demonstrate that Texas legislation favoring unregulated venders is exactly what should not be done. Both studies are public information. They are readily available as quick downloads, even to Texas legislators.
In 2010 the TIAA-CREF Institute published a paper comparing what they called “open access” states (like Texas) to “controlled access” states. In controlled access states, providers must bid for access. The researchers found that expenses in the controlled access states were half as high as open access states. They also said that long-term outcomes for teachers were likely to be massively better.
While open access Texas had 54 providers, 172 products and 3,367 investment options in 2009, controlled access Arizona had one provider, three products and 22 investment options. Iowa, another controlled access state, had five providers, 10 products and 135 investment options.
Texas had an average expense of 1.75 percent a year. That’s double the 0.88 percent average expense in Arizona or the 0.85 percent average expense in Iowa.
The TIAA-CREF researchers calculated that the difference would materially improve the retirement income for teachers in lower-expense states.
Aon Hewitt, an investment-consulting firm, came to similar conclusions in a 2016 study, “How 403(b) Plans are Wasting Nearly $10 Billion Annually, and What Can Be Done to Fix It.” Their study suggested controlled access and avoiding “choice overload” by having a limited menu of options in the plan. They also suggested emphasis on target date and low-cost core index funds.
Texas is how NOT to do it
Texas is a poster-child for choice overload, confusion and deceptive sales practices. The TIAA-CREF Institute found 3,367 investment options in 2010. Today the number of options is three times larger, 10,112.
Related columns:
Scott Burns, “Laredo class action improve teacher retirement,” 03/03/2002 https://scottburns.com/laredo-class-action-improves-teacher-retirement/
Scott Burns, “The high cost of teacher hand holding,” 03/19/2002 https://scottburns.com/the-high-cost-of-teacher-hand-holding/
Scott Burns, “An alternative to 403(b) plans for Texas teachers,” 09/14/2019 https://scottburns.com/an-alternative-to-403b-plans-for-texas-teachers/
Sources and References:
“Who’s Watching the Door? How Controlling Provider Access Can Improve K-12 Teacher Retirement Outcomes,” TIAA Institute paper, 11/2010 https://www.tiaainstitute.org/sites/default/files/presentations/2017-02/98a.pdf
Aon Hewitt, “How 403(b) Plans are Wasting Nearly $10 Billion Annually, and What Can Be Done to Fix It,” 01/2016. (This study requires registration.) https://www.aon.com/attachments/human-capital-consulting/how-403b-plans-are-wasting-nearly-10billion-annually-whitepaper.pdf
Rick Seltzer, “Retirement Plan Roulette,” 08/18/2016, Inside Highered.com https://www.insidehighered.com/news/2016/08/18/retirement-plan-lawsuits-could-be-just-beginning
Rick Seltzer, “Duke Settles 403(b) Lawsuit,” 01/18/2019, Inside Highered.com https://www.insidehighered.com/quicktakes/2019/01/18/duke-settles-403b-lawsuit
Michael Taylor, “Who will fix 403(b) plans? Nobody.”, 03/20/2019, San Antonio Express News http://www.expressnews.com/business/business_columnists/michael_taylor/article/Who-will-fix-403-b-plans-Nobody-13744581.php
Dan Otter, “Why K-12 403(b) Plans Stink,” 10/02/2019 https://403bwise.org/blog/entry/blog-why-k12-403b-plans-stink
Greg Iacurci, “Investigation into 403(b) costs, sales could be an A+ for teachers,” Investment News 10/03/2019 https://www.investmentnews.com/article/20191003/BLOG03/191009964/investigation-into-403-b-costs-sales-could-be-an-a-for-teachers
Greg Iacurci, “SEC probing compensation, sales practices in 403(b) plans for school districts,” Investment News 10/08/2019 https://www.investmentnews.com/article/20191008/FREE/191009925/sec-probing-compensation-sales-practices-in-403-b-plans-for-school
Dan Otter, “Dodgers Are Part of the K-12 403(b) Problem,” 403bwise.org, 10/09/2019 http://403bwise.org/blog/entry/blog-dodgers-are-part-of-the-k-12-403b-problem
Motley Fool Staff, “Why 403(b) Plans Are So Awful So Often,” 10/13/2019 https://www.fool.com/investing/2019/10/13/why-403b-plans-are-so-awful-so-often.aspx?Cid=FUIgCk&utm_campaign=Jhc82U&utm_source=5mTYHf&utm_medium=m9Ieu8&utm_content=a17Anv&utm_term=9AHYiF
Michael Taylor, “403(b) plans in TX: the terrible problem of choice,” 03/12/2019 http://www.bankers-anonymous.com/blog/403b-plans-in-tx-the-terrible-problem-of-choice/
Contributor, “New York Investigating Sales of Annuities to 403(b)s,” 10/14/2019 https://www.thewealthadvisor.com/article/new-york-investigating-sales-annuities-403bs
Texas Representative Dan Flynn: https://house.texas.gov/members/member-page/?district=2
Texas Senator Bryan Hughes: https://senate.texas.gov/member.php?d=1
Dan Otter, founder of 403bwise.org: https://403bwise.org
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Ralph W. Lambrecht on Pexels
(c) Scott Burns, 2019