Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 7)

This column will be the last (for now) of my seven-part series on 403(b) plans. What follows is a summary of the most critical parts of those columns.

A Model 403(b) Plan
The ideal 403(b) plan should (1) operate solely in the interest of plan participants and their beneficiaries for the exclusive purpose of providing them with retirement plan benefits, (2) have transparent costs, each of which is reasonable vis a vis the service provided in return, and (3) feature broadly diversified investment options designed, within a portfolio context, to reduce risk and increase return.

In the process of delivering investment products to public school teachers (and employees of non-profits) enrolled in 403(b) plans, though, the main focus is on the convenience and (unreasonable) profitability of the insurance companies that distribute such products. Little more than lip service is paid to what's best for the welfare of plan participants.

Yet, placing the interests of 403(b) plan participants first actually produces the best outcome for them. To help ensure that outcome, school district officials must jettison the absurdities currently plaguing so many 403(b) plans. Here are some suggestions for creating a model 403(b) plan.

Get Rid of the Multi-Provider Model
The multi-provider model splits the 403(b) assets held by teachers into separate insurance contract accounts held at separate insurance companies. The single-provider model, on the other hand, allows school districts greater purchasing power, thereby resulting in lower and more transparent investment costs for teachers, and reduces administrative burdens

Get Rid of Annuities
Annuities and other insurance products appearing on the menu of investment options in retirement plans are just too costly, with many running 200-500 basis points. Compounding this problem is the fact that these costs are usually hidden (because they're high). If a cost is hidden, it's not possible to determine whether that cost is reasonable in relation to the service or product received so that the recipient knows it's getting full value.

Offer a Menu of Prudent Portfolios of Mutual Funds
Nobel laureate Harry Markowitz is the father of modern portfolio theory, not modern investment theory. The Employee Retirement Income Security Act of 1974 first applied key tenets of modern portfolio theory to the investment and management of assets by investment fiduciaries.

A basic tenet of modern portfolio theory is that properly constructed portfolios of investments are more conducive to wealth accumulation than individual, stand-alone investments. The "proper" construction of a portfolio involves assembling mutual funds that have dissimilar price movements to each other. This produces a portfolio with reduced risk which not only decreases loss but can also simultaneously increase return.