YOU HAVE FOUND OUR OLD WEB SITE. BE SURE TO CHECK OUT OUR NEW AND IMPROVED SITE!     AB 2506: Two Views Proponents of AB 2506 believe the pending legislation would streamline and improve California 403(b) plans. Opponents of AB 2506 believe the legislation would restrict investment choice. The two opposing views are presented here.     Pro AB 2506 Supporters include: Faculty Association of California Community Colleges, 403(b)wise, Los Angeles Community College Guild, Meridian Wealth Managment, TIAA-CREF, and United Teachers of Los Angeles.   If you work in the private sector chances are you have the opportunity to contribute to a 401(k) retirement plan. And if you have the opportunity to contribute to a 401(k) retirement plan, chances are that your plan is administered by one, or a small number of investment companies carefully selected by your employer based on the following factors: services offered, investments offered, and fees charged. In selecting 401(k) vendors, private sector companies and an increasing number of public employer companies put out a Request for Proposal (RFP) to prospective vendors. Vendors interested in attaining the business are required to show why they should be selected. It's kind of like when you go to have an improvement or repair made to your home. You put out an RFP to prospective contractors. Based on quality of service provided and fee structure, you select a contractor.   This is not exactly the way the 403(b) plan works in California. Thanks to Insurance Code Section 770.3, school districts, in complete contrast to private sector employers, take a hands off approach to vendor selection. Districts believe that 770.3 requires them to allow all comers who meet the most minimum of standards. The result? Instead of a handful of carefully screened, quality investment offerings, school districts and participants are stuck with Mad Max-like chaos. It's not unusual for a vendor list, that is the list of available investment companies, to number over 100. This would be great if the list was made up of quality investment offerings. It's not. The typical vendor list is overwhelmingly comprised of high-fee insurance offerings sold by commissioned agents. The products pushed by these agents often sport annual expenses in excess of 1.8%. Furthermore, most of these agent-pushed products contain surrender penalties lasting for years.   Investment companies like Fidelity, TIAA-CREF and Vanguard, to name a few, are lauded in the financial press for their service, investment offerings, and fee structure. Without commissioned agents, however, it simply isn't practical for these companies to join the California 403(b) scrum. Their time and energy is better directed at 401(k) and 457 plans, where the RFP process ensures that they will be judged on the quality of their services.   Opponents of AB 2506 point out that TIAA-CREF (a sponsor of 403(b)wise), the largest pension plan administrator in America, is a major backer of AB 2506. What opponents of AB 2506 aren't pointing out, however, is that the average annual cost of an investment from TIAA-CREF is 0.40%. Furthermore, TIAA-CREF investments contain no surrender charges or exit penalties. TIAA-CREF, and companies like them, aren't asking to be the sole provider of 403(b) plans. Instead they are asking to be judged on their merits (service, offerings, and fee structure) in an open manner just like in 401(k) and public 457 plans.   An RFP process would require full disclosure of all fees, charges and operating procedures. Districts would finally have the ability (like their private sector counterparts) to exert control over their retirement plans. The true winners would be participants. All studies show that when faced with a manageable number of quality vendors to choose from, participation rates soar. It's interesting to note that more than 85% of 401(k)-eligible employees participate in their plans, while less than half this number of 403(b)-eligible employees participate in their's (Spectrem Group).   Sadly, the current version of AB 2506 has been so watered down that it doesn't even contain an RFP process. Heavy opposition lobbying put an end to that. That's too bad. Why shouldn't participants and school districts have the right to merit-screen investment offerings in the same way that their private sector counterparts do?   In its current form, AB 2506 simply advocates a California-specific registration process requiring companies to report fees, expenses (which are often buried or hidden), and services in an open and public manner. Participants would finally have a source for total and complete information. Who could be against this? There would be no limiting of choices. There would be no monopoly. The role of STRS would be that of registration, not vendor selection. Furthermore, under AB 2506 participants would be free to continue their relationship with their current provider and agent.   One thing AB 2506 can't guarantee, however, is the number of pointed questions on fees and surrender charges that participants might suddenly have for their providers if this legislation becomes law.     Against AB 2506 Opponents include: ROPE (Retirement Options for Professional Educators).   There's Just Something Wrong with Legislation That's Based on Taking Away a Teacher's Choice of Voluntary Plans by John D. Murphy, ROPE   AB 2506 supporters allege that low 403(b) participation rates among California school employees results from too many choices, and therefore, too much information to make informed decisions. Alternatively, those who do make decisions are not provided disclosure on the terms, costs, and penalties. In the absence of a mechanism to, reduce the number of 403(b) options, eligible employees don't make needed choices, and are not often aware of, or don't have access to low cost 403(b) alternatives.   California's actual TSA participation rate is unknown. A 40% rate that is attributed to California is a national rate taken from a study of 403(b) participation in school districts (201 were selected out of 14,716 public K-12 schools by the Spectrem Group in 2000). ROPE conducted a random, unscientific telephone survey of California school districts, and found rates that ranged from a low of 18% (rural), to a high of 90% (suburban). The payroll/benefits staff in Los Angeles Unified, the home of one of AB 2506's sponsors, UTLA, reported a 70% TSA participation rate. AB 2506 sponsors assert that a low participation rate is correlated with excess choice, but it is more realistically correlated with age and income (retirement is not on most people's minds until they reach their late thirties or early forties.) Some "low cost" TSA vendors do not offer 403(b) plans because they refuse to sign hold harmless agreements required by many school districts. Most TSA companies require full disclosure; if they don't, they should.   In a grossly unfair, involuntary exchange for information that is already disclosed by most responsible agents and TSA providers, AB 2506 takes away a school employee's absolute right to choose any TSA in the marketplace by repealing a school employee TSA choice guarantee in law since 1972. Section 770.3 of the Insurance Code also prohibits state agencies and departments, school and community college districts, and county offices of education from specifying which tax sheltered annuities employees can choose.   ROPE supports objective full disclosure and honoring school employee choice guaranteed in law. School employees need not sacrifice control over voluntary retirement plans to access 403(b) information or financial education. (The Spectrem Study found a high correlation between an agent's one-on-one activities with individual school employees and TSA participation rates — 53% versus 16% for group plans).   As with all legislation that is written ambiguously and imprecisely (individuals may wish to speculate on the degree of deliberateness), there appear all manner of supporters who claim special knowledge of its real intent. Almost without exception, the intent is benign, and the concerns of those opposed only venial self-interest or paranoia. Anyone experienced with or affected by legislation knows that its meaning and intent exists solely within the bill's language. In AB 2506, school employee TSA rights are taken away, and STRS, local school and community college districts, and county offices of education are given the authority to arbitrarily determine which voluntary TSA plans their employees are allowed to choose. The publicly stated goal of the sponsors and supporters of AB 2506 is to reduce the number of TSA providers, and they must responsibly acknowledge that this is the both the intended and expected result. If this is not intended result then the sponsors and supporters should keep: 1) the guarantee of absolute school employee control over voluntary TSA's and, 2) the prohibition against local school, community college district, and county office of education selecting or restricting school employee's TSA choices.   Limitations on choice mean limitations on competition. Limitations on competition mean fewer quality choices. Over-reliance on group plans (one group information meeting a year), or direct sales (telephone/Internet), means limited personal accountability for 403(b) product information and performance provided by one-on-one relationships with agents and financial planners. School employees get enough taken away from them. There's just something wrong with legislation that's based upon taking away a teacher's choice of voluntary retirement plans.   About ROPE   Retirement Options for Professional Educators (ROPE), an alliance to maintain professional educator choice in retirement plans formed in response to the introduction of AB 2506 (Steinberg), is comprised of professional educators, 403(b) agents and registered representatives, and 403(b) providers. ROPE supports full disclosure of all material facts affecting the selection and use of 403(b) plans, including terms, costs and penalties, and believes that such disclosure is the centerpiece of responsible professional practice of most agents and tax sheltered annuity providers. If it's not; it should be.   403(b)wise invites you to continue the AB 2506 debate on our Discussion Board. We have started a specific thread. We ask that all posters include their first name, last initial, job title and a valid email address.     Home | Disclaimer | © 2002 403(b)wise. All rights reserved.