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Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 5)

We've gone over how to create a suitable 403(b) plan. Here's how to help school officials to put it into place.

W. Scott Simon, 08/02/2007

In last month's column, I offered 13 suggestions to help create a model 403(b) plan suitable for any school district in the country. School officials making the effort to implement this model will find it easy in some districts but probably difficult in many others. That difficulty will result from the withering onslaught coming from the big insurance companies against any attempts to replace the absurdly overpriced, junky investment options they offer all too often to schoolteachers in 403(b) plans. These companies dominate the K-12 market for 403(b) plans, and they will not give way easily to the model 403(b) plan I have suggested. That model doesn't allow for annuities and, therefore, the entities that sell them, insurance companies. See my suggestion No. 2: Get rid of annuities and offer only mutual funds.

Elected school superintendents and school board members are subject to political pressure by insurance companies (among other groups). The most effective form of this pressure, of course, is to withhold campaign contributions from any elected school district officials brave enough to make a move to replace insurance company products in 403(b) plans with the kind of low priced, broadly diversified mutual fund investment options discussed in last month's column.

There's no doubt that the money weapon can be very effective when insurance companies use it against elected school district officials. Jesse "Big Daddy" Unruh, former Speaker of the Assembly who dominated California politics for over two decades, wasn't far off when he purportedly said: "Money is the mother's milk of politics."

On the other hand, no one is asking elected school district officials to lay down their lives in the fight against terrorists in 140-degree heat either. All such officials have to do--within their own context of making America better and stronger--is know what the right thing is, brace themselves for a (rhetorical) fight (against insurance salesmen mostly), and then simply do what they already know is the right thing: implement that model.

Think (Slightly) Outside the Box
School district officials who are interested in adopting the model 403(b) plan must think slightly outside the box. They should begin by mentally throwing out what most existing 403(b) plans feature: annuities that usually are much too costly and are lousy investments to boot. This mental exercise may be difficult for many school district decision-makers because the insurance companies have hoodwinked them into believing that such companies and the nonsense they peddle are the only game in town. This belief has (bad) consequences: School district officials who continue to allow schoolteachers in 403(b) plans under their control to usually pay retail (nay, retail-plus) costs for mediocre (nay, less than mediocre) investment options.

My partners and I in our registered investment advisory firm have been able to obtain from a major retirement plan services provider an additional percentage point in interest on its money market account for a client of ours with less than $5 million in assets. Now, if little old us can leverage a large provider like that with such little money at stake, imagine the huge amounts of money that school district officials could save for participants in 403(b) plans, some of which have millions of dollars in them, or tens of millions or hundreds of millions or even billions of dollars.

School district officials should insist that any retirement plan services provider wishing to do business with them conform to their requirements. In far too many cases, insurance companies and other providers have somehow convinced the decision-makers at these school districts that they must kowtow to them. Like Cher in the movie "Moonstruck," I want to (rhetorically) slap such officials across the face and say: "Snap out of it!" These decision-makers are the ones in control because ultimately they're the ones who are sittin' on a pile of assets. School district officials have enormous purchasing power that can be used to the full advantage of their participants; they shouldn't think for a minute that the providers can push them around and make them conform to their silly requirements.

Define the Goal First and Then Work Back
After clearing their minds of the prattle often voiced by insurance companies and other offending providers, school district officials should then be in a position to start with a clean slate and define clearly the kind of model 403(b) plan they want (I described that model in last month's column) and then work back from that goal, filling in the process along the way.

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