Investor “Choice” has become a Code Word for Conflict of Interest

A study was published regarding employee retirement plan participation that could easily have  appeared in the farcical newspaper, The Onion. We are now being told  that a lack of employee choice is reducing participation in teacher’s 403(b) plans.

This study is completely disregarding data that shows these plans have a miserable participation rate of around 30%. This despite the fact that states like California have unlimited amounts of vendors and most districts average between 10-20 separate options!

It seems absurd and self serving to claim the real reason for this pathetic rate of participant contributions to these plans are too few choices!

Why the change of heart?. It seems the state of Michigan is offering a 457 plan that is cramping the style of the insurers and broker dealers. This more investor friendly option offering a low cost alternative to expensive annuities is doing quite a bit of damage to insurer’s bottom lines.

Research compiled by the National Tax-Deferred Savings Association in Arlington, Va. shows that eliminating employees’ choice significantly reduces participation in voluntary retirement plans. In Southern California, for example, 50% of workers stopped contributing to their 403(b) plans when their existing provider was no longer available.

Hmmmmm… Could it be possible that the reason for this decline might be that Michigan Teachers are switching to the lower cost 457 plan? These plans are a form of deferred compensation run by individual states for public employees. Instead of having multiple vendors, 457 plans lower costs significantly by providing a single option.  They are often a terrific alternative to 403(b) plans dominated by large insurers and broker dealers.

This drop in 403(b) contributions can be explained by financial accounting rather than a lack of choices. The decline in expensive variable annuity 403(b) plan contributions has been offset by a corresponding increase in 457 plan assets. The net contributions of teachers have not decreased, they have been reallocated to more efficient investments.

There is another reason this study is ludicrous. Behavioral finance experts have proven that too much choice actually creates inertia and indecision. . This is aptly named the paradox of choice. In order to believe the NTSA backed study, one must discredit years of scientific research undertaken by impartial experts in a multiple of fields beyond investing.

This funny math has not gone unnoticed. My friend and teacher advocate Scott Dauenhauer has written a scathing rebuke of this” study.”Among other points, Scott hits it out of the park when he states, it turns out that one in particular accounted for much of the drop, yet was not mentioned in the ASPPA/NTSA study – the addition of a 457(b) plan.

At best, this study could be classified as misleading. Why would the NTSA want to use the guise of more employee choice to rope teachers into paying two to three times as much for their retirement  investments? A big clue can be found in their list of strategic partners.


ADMIN Partners
AXA Equitable
EFS Advisors
Great American Insurance Group
GWN Securities
Lincoln Investment Planning
National Life Group
OFG Financial Services
PenServ Plan Services
PlanMember Services
Security Benefit
The Legend Group
TSA Consulting Group
U.S. Retirement Partners

Most of these organizations sell high priced mutual funds or variable annuities through commissioned sales people. While this is not against the law (yet), it would be disingenuous to say that the purpose of this study was to protect employee choice and not the revenue streams of their  partners.

Using the misleading word of “choice” to snare investors into high priced products that often come with surrender fees is outrageous. Unfortunately, this has become much more than a localized public school teacher issue.

House Speaker Paul Ryan recently tweeted  Welcome to #Obamacare for financial planning.  

 This same patriotic argument of freedom and individual choice is being used as a mask to protect the profits of big insurance companies and brokerages. Political contributions also play a large role in this Patrick Henry like oratory.

Speaker Ryan believes that the proposed fiduciary rule to protect investors is unfair. According to Ryan, it would eliminate “their choice” to be taken advantage of by big brokerage firms and insurers.

Its a shame that words like freedom and choice are being used to enslave generations of investors to high fee products. This results in a direct transfer of billions of  participant’s plan contribution dollars in the form of unnecessary fees into the pockets of these organizations.

When bad choices are eliminated from the investment spectrum, investors have more freedom to pursue their hopes and dreams. Less is often more. When conflicted politicians and organizations start screaming about “choice”, this means its time to limit your servings, not increase them.

In conclusion the words of fee only planner Sheryl Garret sums things up quite nicely, “More choice doesn’t improve an investor’s experience. Fewer and better choices are what we need.”