Wise Cracks Commentary with Dan and John Some in Texas Seek to Pollute 457 Plan     Having grown up in Southern California we are all too familiar with smog and pollution. We have seen many a beautiful Southern California day ruined by a hazy brown cloud that hangs over the region like a grim noose. It is kind of the same thing with the 403(b) plan here: a beautiful thing ruined by selfish interests.   Despite the best legislative efforts of many, the 403(b) in California remains relatively unhealthy to most investors. Thanks to the signing of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, however, the skies for 403(b) investors lucky enough to have access to 457 plans here are beginning to clear. Before we get to Texas and pollution, the teacher in us demands that we provide a little background info...   Background The 457 plan has traditionally covered state and local government employees, which included some teachers. In the past, teachers who wished to contribute to both plans were limited to the total aggregate amount of the 457 (only $8,500). The Economic Growth and Tax-Relief Reconciliation Act of 2001 (EGTRRA) repealed coordination of contributions between 403(b) and 457(b) plans. This means that employees with enough includable compensation can contribute the maximum elective deferral limit to both a 403(b) and a 457(b). For 2003, this is $12,000 for a whopping total of $24,000. Participants eligible for catch-up provisions can include even more. It is important to note that not all school districts offer 457 plans. The trend to add 457 plans is encouraging, however.   The real beauty for Californians is that unlike the 403(b) plan here, employers have the ability to choose exactly which 457 provider(s) they want. This isn't the case with the 403(b). Thanks to arcane Insurance Code (Section 770.3), school districts feel obligated to let just about all interested financial providers sell 403(b) product, regardless of vendor quality or fee structure. Their only recourse has been to impose hold harmless agreements on vendors, which has only exasperated the situation. These onerous "agreements" purport to transfer liability that might result from improper 403(b) administration to participants and investment providers. What they really do is just about limit vendors to commision based insurance products. The reason? Limited employer control leads to vendor lists containing scores of providers. It is not uncommon in California to have more than 100 providers on a vendor list. Non-commissioned, direct distribution vendors, which are typically low cost, have little incentive to enter this scrum.   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. 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.   457 Advantage With the 457, school districts can initiate a Request for Proposal (RFP) process common in the 401(k) world where the employer spells out exactly what they want from a vendor. Vendors would then compete to earn the right to be a 457 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   lower cost investment options — vendors would pitch their best prices   better control of compliance — only dealing with limited number of vendors   superior investment education — winning vendors better able to provide education and communication to employees vs. current sales pitch approach common to most 403(b) plans   reduction or elimination of employer paperwork and administration — dealing with less vendors 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     Which finally brings us back to Texas. Like California, this state has some pretty poor 403(b) legislation. Like California, many are hailing the 457 as a solution to their 403(b) ills. But unlike California, there are some folks in Texas who are seeking to introduce legislation that would curtail employer control over 457 plans, in effect polluting the 457 there. As home to Houston, the city that is seriously pushing Los Angeles for title of dirtiest in the land, maybe this shouldn't be a great surprise. Lets all hope the only thing that spews from Texas 457 plans is clear thinking.   Home | Disclaimer | © 2001-2003 bWise Guys, LLC. All rights reserved.				Back to the latest Wise Cracks