Wise Cracks Commentary with Dan and John Opinion: Orange County Mess Underscores Farce That is the California 403(b)     Nationwide teachers are facing increased workloads and decreased budgets. Nowhere is the pain as severe as in the suddenly not-so-great state of California. Record budget deficits here have led to deep cuts in education by a Governor who once declared his first, second and third priorities to be education. It couldn't possibly get worse for California teachers could it? Well it just did for educators in nine Orange County school districts who care about their 403(b) and 457(b) retirement plans.   In another example of the farce that is the California 403(b), the Orange County Nine (see list below) have abandoned their teachers' best interests under the guise of compliance and budget concerns. These districts have outsourced 403(b) and 457(b) responsibility to a Third Party Administrator (TPA) who will manage these plans free of charge. On first blush this action sounds quite reasonable. Districts are concerned with compliance issues and want to ensure their plans are in order. Districts are equally concerned with budget issues, and getting a service free of charge would seem to make sound fiscal sense. But even elementary school students know that nothing in life is free. And therein lies the problem. While not specifically charging the district, Envoy Plan Services, the chosen TPA, plans to assess vendors $3 per participant per month. But we all know who is really going to be paying this fee. And we all know how many low-cost direct distribution vendors will want to be involved in such a fee structure.   Fault doesn't lie with TPA Envoy Plan Services. And a case could be made that fault doesn't really lie with the school districts. Both entities are simply reacting to the utter farce that is the California 403(b). The sad part is that the solution is so obvious.   Background California 403(b) plans suffer from a dubious insurance law known as 770.3. Under this provision school districts believe they are denied the ability to select 403(b) vendors of their choosing through the Request for Proposal process. The RFP process allows the employer to capitalize on its tremendous purchasing power (i.e. strength in numbers) to gain access to lower cost products and better services including compliance control. The RFP works like this: employers contact vendors (of the employer's choosing) to let them know they are seeking bids from companies wishing to offer 403(b) services in their district. The vendors then compete to earn the school district's business. During this process the employer can demand access to lower cost products, education, and yes, agent services. The employer can also demand that the vendor provide compliance control, eliminating the need for a TPA. So instead of the competition occurring in classrooms and the staff lounges as it does now where scores of agents fight to earn business, the competition occurs during the RFP process among companies the district chooses. Instead of districts employing TPAs, selected vendors handle compliance issues.   This is exactly what school districts do in regard to health care providers. The typical school district offers three to five health care providers that have been pre-selected by the employer. The employer is attractive to the health care provider because of the number of participants it will provide. This in turn results in lower health care costs to the district and to the employee.   School districts in California understand 770.3 to read that if they let one insurance company sell product in their district they have to let all sell product. This is why you have California vendor lists ranging from 20 to more than 100. It would be one thing if these vendor lists included low-cost direct distribution vendors. Typically, they don't. Mutual fund companies like Vanguard see little value in participating in such a large vendor scrum. Under this scenario, the only way a Vanguard can get its message out about its services and attractive fee structure would be to hire agents, which in turn would destroy its low-cost business model.   Can you imagine if health care was provided to teachers the way the 403(b) is provided in California? Teachers would be left to choose from scores of health care providers. In order to drum up business, health care providers would be forced to hire sales agents to troll classrooms, union halls and staff lounges. To pay for the agent services premiums would have to be raised. And we thought health care was expensive now!   Failed Reform Effort In 2002 a legislative effort (AB 2506) was undertaken to alter 770.3 to allow school districts the ability to engage in the RFP process. A ferocious lobbying attack was waged by insurance industry interests fearful their agent-pushed plans would lose favor under such an arrangement. Opponents of the RFP process, with a straight face, no less, argued vehemently that AB 2506 would take away investment choice. Of course they failed to point out that true investment choice does not exist in California 403(b) plans. The typical vendor list in California is stocked with lots and lots of vendor-pushed choices and few to zero low-cost direct distribution options. This is hardly choice.   The RFP process would allow school districts to offer a plan of their choice. Not insurance interest's choice. Under the RFP process school districts would have the ability to choose companies offering agents in the field, and companies offering direct distribution, low-cost investments if they so chose. Under this scenario a teacher who needs the services of an agent would have the peace of mind that the agent they are working with comes from a company their employer selected. And under this scenario, do-it-yourselfers looking for direct distribution, low-cost investments would have that choice as well. This is true choice. The employer has choice. And the employee has choice.   What's often overlooked in the battle for 403(b) hearts and minds is that the 403(b) is for teachers and not-for-profit workers. Not agents. Not insurance companies. And not mutual funds companies. Opponents of the RFP process can spin their turf-protection arguments a myriad of ways. They've tried to put forth the argument that the RFP process would take away choice and be akin to a world where only General Motors could sell vehicles. We think a car analogy is a perfect way to sum up the current state of the California 403(b). But the most accurate one comes from Henry Ford when he was asked about color choice in his Model T. "You can have any color you want," he replied. "As long as it is black." California teachers want more colors in their 403(b). Especially in Orange County.   The Orange County Nine Capistrano Unified School District Magnolia Elementary School District Ocean View School District Orange Unified School District Placentia-Yorba Linda School District Saddleback Valley Unified School District Savanna Elementary School District South Orange County Community College District Westminister Elementary School District   Home | Disclaimer | © 2001-2003 bWise Guys, LLC. All rights reserved.				Back to the latest Wise Cracks