YOU HAVE FOUND OUR OLD WEB SITE. BE SURE TO CHECK OUT OUR NEW AND IMPROVED SITE!     The 403(b) in California is Broken. Here's the fix...     Despite recent legislative efforts, the 403(b) retirement plan in California is a fiasco. The typical vendor list here is a bloated mess of high fee vendors. Los Angeles Unified School District is the poster child for this train wreck. They boast (tongue in cheek) more than 140 "choices." Choice in this case is an extremely subjective term. Most of the "choices" at LAUSD are high-fee variable annuity offerings sporting onerous surrender charges. Worse, LAUSD employees receive zero 403(b) education. In fact, LAUSD's website has this message for would-be 403(b) participants: "Most participating companies phone numbers can be easily obtained with a little research and due diligence on your part." To aid in this "due diligence" LAUSD lists these sources for information: 800-555-1212 and the Yellow Pages. So instead of getting unbiased 403(b) information from their employer, employees are practically forced to turn to sales pitches from vendor agents to get 403(b) information.   In their defense, LAUSD, like all California school districts, feel handcuffed by archaic state insurance law (section 770.3) that they believe forces them to allow all annuity comers. Earlier this year an effort was made to alter 770.3 to allow school districts and public agencies to prescreen vendors. The idea was to initiate a request for proposal (RFP) competitive bid process widely used in other states. Unfortunately, this effort (known as AB 2506) met the deep-pocketed wrath of the insurance industry whose agent-pushed products would sorely suffer if employers were allowed to reel in 403(b) plans. Despite being severely watered down, the bill did make some progress. Beginning in 2004, vendors will have to register and disclose all fees and surrender charges in a centralized registration process. This is a start, but with more than a year to go before this registration process takes effect, there's no guarantee that insurance interests won't lobby this to death as well.   From the participants' view, there is virtually no screening of providers or products and little or no access to independent product information or financial education. Districts rarely provide educational programs to faculty and staff regarding the various tax-deferred investments. As it now stands, some districts believe such a program would increase both potential cost and potential liability for the district. So even well meaning districts are loath to get involved. Instead, districts refer employees to the providers' representatives to communicate information on enrollment, asset allocation, distribution options and other features of the program. This lack of district involvement clearly favors a commissioned sales force (i.e. more expensive) over non-commissioned, direct distribution, low cost providers — the very vendors 403(b) participants crave.   Clearly, the 403(b) in California is broken. Here's the fix: adopt a 457(b) plan. The 457(b) is a tax deferred retirement plan available to employees of certain governmental and tax exempt employers, including school districts. While quite similar to the 403(b), the 457(b) has one particularly appealing characteristic: it isn't subject to 770.3. This means that school districts could initiate an RFP process where they could actually spell out exactly what they want from a vendor. Vendors would then compete to earn the right to be the sole 457(b) provider. Assuming the RFP process was conducted with the best interests of employees in mind, results of such a process could include:     access to higher quality investment options in all appropriate asset classes — vendors would pitch their best products     better control of compliance — only dealing with one vendor     superior investment education — winning vendor better able to provide education and communication to employees vs. current sales pitch approach     reduction or elimination of employer paperwork and administration — dealing with only one vendor would streamline the payroll process     online enrollment — employer could demand this feature     plan would be perceived as a benefit — districts could use plan as a recruitment tool     The beauty of the 457(b) plan is that it can be offered along with the 403(b). Employees could actually contribute to both plans. In fact, employees with enough includable compensation could contribute the maximum to both plans. For 2002, that would be $22,000. Employees eligible for catch-up contributions could contribute even more. Another key benefit to the 457(b) is that distributions are not subject to the 10% early withdrawal penalty. The point, however, isn't that employees would contribute the maximum to each plan, or even that they wouldn't be subject to a 10% early withdrawal penalty. The point is that California employees would have a much better chance to have a quality plan in the 457(b) than the 403(b). So California teachers take note, there's a simple new formula for retirement: 457(b) > 403(b).     Home | Disclaimer | © 2002 bWise Guys, LLC. All rights reserved.