How to campaign for a better 403(b) plan

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From an individual investor's perspective 403(b) plans can be great, acceptable, or very poor. Poor plans are characterized by very high costs and lack of fund choices. If your plan does not have reasonable fees and lacks even a few low-cost index choices, then you may want to approach your management with some suggestions for improving the plan.

Do your homework

1. Fully understand the vendors/plans currently approved by your district.[2]

2. Fully understand the vendors/plans you want your district to offer.

Employees may think that annuities are the only option in 403(b) plans. This is not the case, as there are actually three types of investments permitted: annuity contracts, custodial accounts for regulated investment company stock (mutual) funds, and retirement income accounts for churches.[3]

Make sure to request at least one mutual fund custodial company (not just annuity products from insurance companies) to the list of approved vendors. These are called 403(b)(7) custodial accounts and will allow you to invest in mutual funds. [4][note 1][note 2]

When working with a district/union, try to add at least one vendor that also offers a brokerage window option (SDBA - Self-Directed Brokerage Account) within the 403(b)b plan. This gives the employees the option of investing in funds, ETFs, CDs, Bonds, Stocks, etc. through an outside brokerage company. The Schwab PCRA (Personal Choice Retirement Account) is commonly offered. Employees now have the option to invest beyond the offerings of the 403(b) plan itself.[5]

Example: Choices from the main four 403(b) / 457(b) providers - AIG (formerly VALIC); Mass Mutual; Horace Mann; Voya - gives three of those plans that also offer either the Schwab PCRA (AIG) or the TD Ameritrade (Horace Mann and Voya) SDBA brokerage option. Additional fees apply for the SDBAs, but having the option available is worth campaigning for - especially for teachers who have worked many years and have built up a large base of accumulation. Here is an example for Iowa: Iowa Retirement Investors’ Club (RIC)[5]

3. Based on the previous research, you need to be able to concisely and clearly articulate the scale of the problem, why some vendors are exploitative, and why others should replace them. Expect a 90% probability that everybody you speak to will be reasonably ignorant (don't place a bad connotation on that word) and at least partially financially illiterate (again, don't place a bad connotation on that word)...do not condescend to them, be helpful to them.

4. Reach out to the desired vendors and get in touch with somebody that specifically works on 403b/457b enrollment. Learn how enrollment works from their end and get their direct contact information.

5. Learn about your district's bureaucracy as it relates to 403b/457b plans.

Example: Orange County (FL) has a "Retirement Services" department and above that is somebody with the title of "Senior Director of Risk Management." These are the folks most directly involved in the retirement plans. The district relies on a Third Party Administrator (TPA) to manage the nuts and bolts of running these plans, but for a variety of reasons they unfortunately also rely on them for input/advice. The TPA acts decisively against the best interest of employees, but they MUST obey commands issued from the district. Every five years the district convenes a "fringe committee" (the Union has a seat at the table in addition to district employees) and they're responsible for deciding which vendors will be added to or removed from the approved list. In order to be considered, vendors must respond to a Request for Proposal (RFP) that the district posts on a public website. Above all of that is the school board and superintendent, they can absolutely exert influence on this process. All of that is to say, you should understand how your district does business and you should identify the key decision makers.

Work your way up the chain

1. Start at the bottom of the chain of command for both the district and the union.[2]

2. You will have to educate these people and you'll have to do it both well and in way that is socially acceptable (you can't be rude, demanding, etc.).

3. Be prepared to do as much of their job for them as is possible because they may not be particularly interested in doing this. Perhaps they don't really care about this problem, perhaps they don't want something added to their plate, perhaps they are lazy, perhaps they don't want to rock the boat, whatever.

4. Your job is to clearly lay out the problem, lay out the solution, and offer to do as much work as possible yourself. Since you presumably understand the district's process, you understand the process of the vendors you'd like to see added, and you have contacts...you can probably push these folks right to the finish line and all they have to do is step over it.

5. Be prepared to listen to their concerns and their perspective because you may be able to use that information to remove whatever barriers are in their way (real or imagined)...plus people are more likely to help you if they think you care about their circumstances. It can be a give and take.

6. If you're not getting results (and maybe even if you are), then work your way up the chain of command.

7. If you still aren't getting results then you'll need to network with teachers and put pressure on the bureaucracy until they cave. Assume that people love to take the path of least resistance, and it might be your job to turn the path of inaction into a lot of work for them (constant phone calls, constant speeches at the school board meetings, etc).

Of course after all of this, you can still fail because you don't have the power to approve/deny vendors. However, the people who do aren't operating with ill-intent and can therefore be moved to do the right thing...even if they do require a lot of prodding (welcome to bureaucracy).

Notes

  1. Funds contributed to a 403(b) plan may be invested in annuity contracts, custodial accounts for regulated investment company stock (mutual) funds, retirement income accounts for churches, or a combination of these funding vehicles. Because custodial accounts and retirement income accounts are treated as annuity contracts under IRC 403(b)(7) and (b)(9)(A)(i) for purposes of the Code, the term "annuity contract" incorporates all three types of arrangements.
    Reference: I. Section 403(b) Tax-Sheltered Annuity Arrangements, Ron Hallsten and Bob Architect, IRS, 1995.
  2. Custodial Accounts: Because a custodial account under IRC 403(b)(7) is treated as an annuity contract, it generally must satisfy the various requirements of IRC 403(b). In addition, the assets of a custodial account must be held by a bank or other person who is approved by the Commissioner of the Service pursuant to IRC 401(f) (a "nonbank trustee"). The assets must be invested exclusively in regulated investment company stock (e.g. mutual funds). Consequently, a 403(b)(7) custodial account may not provide life insurance, although it may permit loans to participants. Both salary and nonsalary reduction contributions to a custodial account are subject to certain early distribution restrictions. Excess contributions to a custodial account are subject to a six percent cumulative excise tax under IRC4973.
    Reference: I. Section 403(b) Tax-Sheltered Annuity Arrangements, Ron Hallsten and Bob Architect, IRS, 1995.

See also

References

  1. "Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans)". What Is a 403(b) Plan?: Internal Revenue Service. January, 2019. https://www.irs.gov/publications/p571#en_US_201901_publink1000239614.
  2. 2.0 2.1 Unless otherwise stated, content in this section is based on this Bogleheads® forum post: Re: Teacher 403B Plans, EdLaFave. Jul 13, 2019.
  3. I. Section 403(b) Tax-Sheltered Annuity Arrangements, Ron Hallsten and Bob Architect, IRS, 1995.
  4. Bogleheads® forum post: Re: Wiki - How to campaign for a better 403(b) plan, MNGopher. Jul 16, 2019
  5. 5.0 5.1 Bogleheads® forum post: Re: Wiki - How to campaign for a better 403(b) plan, CyclingDuo. July 19, 2019

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