The Texas Teachers’ annuity story continues:
“I was excited. I have quite a bit of correspondence with them about the proposed rules. I thought the rules were great. But now we’re right back where we started,” Don Reiser said.
“Ameritas had a variable annuity to be offered. No surrender charges. No commissions. Low expenses. But now it’s business as usual.”
That’s what Mr. Reiser had to say about the abrupt reversal the Texas Teachers Retirement System did last month. After offering new rules for teacher 403(b) plan investments that would have cut expenses dramatically, the Teachers Retirement System suddenly reversed itself in late February. They restored annual contract charges, high front and rear loads, and allowed annual expenses as high as 2.75 percent— even though Watson Wyatt, a national benefits consulting firm, had suggested the original reductions after a consulting study.
Mr. Reiser is President of Ameritas Direct, a Houston based life insurance company that sells life insurance and variable annuity products through a no-load distribution channel— much like the no-load distribution channel used by many mutual funds.
He told me he was disappointed at the recent change. It meant, he said, that the usual flood of high cost vendors would continue to dominate the market for 403(b) investment products available to Texas teachers.
“We think a website could provide the guidance teachers need,” he said.
“Our product would meet the (low cost) criteria. We would be there. But this is an incredibly fragmented market. How do you let teachers know? If we could figure that out, we’d be a player. If the universe (of vendors) had been narrowed we could have done it.”
Instead, the universe of vendors has not been narrowed, expenses will remain high, and low cost distribution channels will continue to be shut out. As pointed out in a recent column, the cost difference could reduce a teachers’ retirement nest egg by nearly $500,000.
That’s caviar, not chicken feed.
Asked why the TRS had reversed itself, spokesperson Howard Goldman said, “The goal of TRS… is to eliminate extraordinary fees while allowing employees as much choice as possible. The law (Senate Bill 273) does not direct TRS to limit choices among vendors or investment products in a manner that creates preferred access by a limited number of vendors.”
Unfortunately, failure to limit vendors puts a kind of Gresham’s Law into operation. Just as bad currencies force out the good, high expense products force out the lower expense product.
In California they are trying to deal with the same problem— lack of oversight by independent school districts and a super abundance of high cost vendors. Dick Schaefer, Western region legislative liaison for TIAA-CREF, told me there were as many as 120 vendors for California teachers. “What AB2506 (a reform bill) is trying to do is set up criteria that would allow the school districts to make choices at reasonable cost.”
“We found there is a lot of disappointment in how 403(b) s are being presented. Teachers felt they weren’t getting good education and information. They could only deal through sales agents. They wanted to deal direct.”
Texas and California, however, are Balkanized into individual school districts that cannot, by law, limit vendors.
Ironically, this battle was fought and won more than seven years ago at the University of Texas. At that time the State Auditors Office examined 403(b) programs at state institutions of higher education. The Auditors Office found over one hundred vendors. The Auditors Office expressed concern that the existing chaos could expose the state to lawsuits.
The University of Texas responded by requesting proposals, eliminating some vendors, and negotiating better terms such as front and back end fees and some account charges. They also reduced the “float”, the time between making a contribution and getting it invested. As a consequence, University of Texas employees can now choose from a menu of companies that provide mutual funds, variable annuities, and fixed annuities.
Now let’s do a little liability calculation. Texas has 250,000 schoolteachers. High fees could shrink their 403(b) nest eggs by as much as $500,000 each. Multiply the two numbers and you’ve got a class action suit with a $125 billion target. Add another $125 billion and you can include the 250,000 teachers in California.
You could, of course, dismiss the entire issue since it only involves 500,000 schoolteachers in two states. If so, you dismiss at your own risk. Wherever you live in America, Texas and California are large enough to constitute our educational Achilles Heel. We may retain more classroom teachers—and have a shot at keeping up with Sunbelt growth— simply by having the decency to offer employee benefits that work
What’s the biggest obstacle to change?
You guessed it. It’s the lobbying power of the insurance industry.
403(b) Website: www.403bwise.com
Earlier columns on this topic:
Class Action Suits and Change: http://www.scottburns.com/020303SU.htm
The High Cost of High Fees in Teacher 403(b) Plans: http://www.scottburns.com/020319TU.htm
U.T. Takes Charge of 403(b) Investing: http://www.scottburns.com/950523tu.htm
Here’s the current list of 403(b) vendors for the University of Texas
http://www.utsystem.edu/OHR/tsaprov.htm
(c) Scott Burns, 2022