The investment options contained in most 403(b) plans, in the words of the French, are ‘garbage’. The majority are chosen by conflicted Compliance Third Party Administrators (CTPAs) who are paid by the vendors or, incredibly, even owned by them!
Pseudo “preferred provider lists” are created and teachers become cannon fodder for greedy, large insurance companies and brokerage firms. This scheme must be stopped and stopped now.
There was a cheesy 1977 movie called The Sentinel which scared the crap out of me when I was a kid. It was about a building in Brooklyn Heights that turns out to be the gateway to Hell. The one thing that kept the damned minions from being unleashed upon an incognizant society was a creepy blind priest, who played the role of a stoic watchman.
While the blind priest somehow held these grotesque figures at bay, the gatekeepers of 403(b) plans have failed miserably. Unscrupulous vendors have run wild, unleashing a form of investment hell upon unsuspecting, honest educators.
A big part of the problem is 403(b) plans are multi vendor (unlike 401ks, which rely on one company for investment options). This makes the job of compliance unnecessarily more expensive and treacherous. New regulations were applied in 2007 because many vendors were not IRS compliant. This made this task even more arduous.
The budgetary apocalypses that followed the great recession left many districts without the funds to satisfactorily administer their plans under these new rules. The schools’ hands were tied and many were forced to make a deal with the devil.
CTPAs stepped in to fill the void. In return for “free” compliance services, the districts gave up the store. Many CTPAs implemented “pay to play” boondoggles. The Vendors often pay the compliance fees. Coincidentally, they also end up on “preferred” provider lists after throwing some more pesos into the kitty.
Transparency has become a farce. Good luck trying to figure out the source of many CTPA’s income. This is not disclosed on the plan documents, though it is often the criteria by which investment funds “are vetted by qualified experts.”
In reality, these lists are for teachers who “preferred” to get ripped off with expensive, illiquid, and inappropriate investment options, like variable and equity indexed annuity products.
Words like “preferred” and “carefully vetted” were deliberately inserted to give a misleading impression that being on the list made these investments more appropriate for teachers.
Many teachers believe these options are on these platforms because of their superior returns and low costs. Nothing could be further from the truth. This misinformation is the bait for demonic financial fishermen looking to snare innocent educators. Disturbingly, some vendors often recruit former teachers to give the false impression of kinship!
The approved vendors’ “qualifications” are usually an uncanny ability to sign up large amounts of customers. This inflates the profits of the CTPA and gains them membership to exclusive platforms. Their marketing methods often include misleading marketing, impromptu raids on teachers’ cafeterias or kickbacks to union bigwigs or school officials.
These CTPAs, and the school districts that employ millions of teachers nationwide, have absolutely no fiduciary responsibility for product selection and monitoring. This is the heart of the fleecing of the American public school teacher.
For this system to begin to treat teachers with the respect they deserve, a number of reforms need to be implemented immediately. My friend and teacher advocate, Scott Dauenhauer, has a number of excellent suggestions to deal with this crisis:
- School officials and CFOs need to become more financially literate;
- CTPAs MUST disclose how they are paid and how they select providers;
- Districts should move from a multi- to single-vendor system;
- School employers must have a fiduciary responsibility to their employees; and
- 403(b) plans must be subjected to a competitive bidding process and not run by a conflicted third party.
The crew at Ritholtz Wealth Management, and other like-minded people, are going to push for these changes. We feel this is the least we can do for those entrusted in securing our nation’s future by educating our children. Why do this? It is the right thing to do, and that is reason enough.