Advice for 403(b) Participants



How Can Advisors Serve the 403(b) Market?

Very few competent and fiduciary based advisors have the background knowledge to work with public school employees. This book will help complete the training needed to provide top notch advice to an underserved market.

Note: This is an excerpt from Scott's book Wild West: Providing Fiduciary Advice to Public School Employees.

What follows is the first chapter, essentially a short history of my time working in this fascinating market. I’ve met lifelong friends while working to improve teacher retirement plans and picked up some amazing clients. If you like what you see, please pick up the book or the audiobook and join the cause.

Dan Otter and I do a podcast called The Teach and Retire Rich podcast. I encourage you to listen to all the episodes, but Dan interviews me about the book in Episode 23

Chapter 1: Mini-Memoir

There are several million public school employees working or retired in the United States. A small minority contribute or have contributed to a defined contribution plan such as a 403(b) or 457(b) — plans explained in Chapters 5 and 8. Almost none receive financial advice from a fiduciary. I want to change that.

I've had the pleasure to serve school employees as a financial advisor for more than 15 years.

It started in 1998, when my wife and I were freshly minted college graduates living in Santa Ana, California, a diverse city situated between Disneyland and the beaches southeast of Los Angeles. I was working as a Registered Representative Sales Assistant at Merrill Lynch and my wife, Shauna, was in her first year of teaching seventh-grade science at a school in Newport Beach.  I had been in the financial services industry for five years, in the brokerage world for less than two and was working my way up from the bottom at what I then thought was a world-class company. I was blissfully unaware of the world of 403(b) plans.

Back in 1998 the United States was in the late stages of one of the greatest bull markets in history. The stock market was reaching new highs seemingly every day and talk was in the air of a new era in which market cycles were a thing of the past. Budget deficits had turned into budget surpluses, the tech boom was fueling the NASDAQ to valuations never before seen. “Irrational exuberance” entered the lexicon and I was getting an earful from brokers upset with the sign on my desk that said, “Don’t confuse brains with a bull market.” Even in my lowly days as a sales assistant I had an antagonistic side that looked to rattle the establishment.

Don’t get me wrong. Even though I thought stocks were in a bubble, I thought there was money to be made. I remember a client of a broker I worked for who had just made a killing on some dumb Internet stock, one that would later go bankrupt and never have significant revenue, let alone profits. He asked me what the next hot thing was. My crack research had led me to believe that selling gift cards online was a business with unlimited possibilities, so I made the recommendation. The stock crashed, the client lost the money he had gained, and I learned a valuable lesson.

My stock recommendation was one of the rare occasions that I drifted from my rule of building a diversified portfolio and doing real financial planning for clients. I was on my way to becoming a Certified Financial Planning Practitioner, and my true focus was paying my dues so that I could start my own CFP practice. While the majority of brokers at Merrill Lynch had no financial planning training, they were trained to present themselves as planners and to sell “financial plans” in order to gather assets under management or sell expensive financial products. After reviewing several of these canned plans (the data was sent to a central processing unit and a two-inch thick binder was sent back to the broker) it was clear to me that they bore no relation to the client’s actual situation.

I began using my CFP training to rewrite the boilerplate plans for a broker I was working for, and then I helped him present the plans to clients. My initial financial plans were very rudimentary, created on an Excel spreadsheet using static rates of return and charts I created myself. But these plans were meaningful to the people the broker was working with because of the specific recommendations and clear path designed for each client. The plan became the center of the relationship, not just another sales tool to gather assets.

This planning path eventually led me to discover the Financial Planning Association (FPA), the National Association of Personal Financial Advisors (NAPFA) and more importantly, the term fiduciary (and eventually stewardship).  It’s not an understatement to say that discovering what a fiduciary is and does changed the course of my life and career. For a kid who was fascinated by the books Den of Thieves, Liar’s Poker, Barbarians at the Gate and the quintessential finance movie of all time, Wall Street, a new world had opened up — working with money in a way that was honorable. I was going to be a fiduciary.

There was just one problem, I worked for a company where fiduciary was more associated with a different f-word, the four-letter kind.

At the same time I was trying to find my way in the brokerage industry, my wife was working her way through her first year of teaching. A degree in biology helped her get a job as a science teacher while she pursued her credential and master’s degree. She could tell you all you wanted to know about the anatomy of a tiger shark — trust me, it’s more than you’d want to know — but when it came to money and retirement planning, it just wasn’t something she was interested in, let alone a topic she could easily dissect.

One day a man showed up at my wife’s classroom door after school. He introduced himself, said he was sent from the school district and the state retirement system and had just met with some of my wife’s colleagues about their retirement. He inquired whether she had a few minutes to sit down and learn about her retirement benefits. This fateful meeting would have implications for my life I could never have anticipated.

Given that I worked for a major Wall Street firm, my wife asked if the man could come back at a time when I could join them. We met a week later in my wife’s classroom and the man quickly explained how the state retirement system worked, then moved on to explain to us that we could begin contributions to something called a 403(b). He used the term “TSA” for tax-sheltered annuity. I’d heard of these accounts before and knew they were associated mostly with public school employers, but had yet to encounter them.

A few more minutes passed and the situation became uncomfortable. The man who said he was “sent from the district and the state retirement system” had now shifted into a sales pitch for a product called an Equity Indexed Annuity as well as cash value life insurance. Confused about why a person who worked for my wife’s employer and the state would be selling commission-based products, I asked him whom he really worked for. It turned out he was an insurance agent, he did NOT work for the state; he did NOT work for the school district. He had lied his way into my wife’s classroom in an attempt to sell us products that were not in our best interest. This was 1997 and little has changed.

I kindly asked the man to leave and reported him to the school, the district and the state.  I never saw him again, but thus began my journey into the dark world of 403(b) plans.

You might be thinking that as a Registered Representative of Merrill Lynch I was the pot calling the kettle black, but I was a strict no-load mutual fund guy. For years I had advised my parents on their retirement accounts and remember helping them out of their “loaded” Putnam funds and replacing them with T. Rowe Price and Vanguard. I believed low costs were important to a successful investment and retirement outcome.  While this belief was antithetical in the brokerage world, I was just a lowly sales assistant at the time, not a broker selling product. I was beholden to no one, so I thought.

The conniving 403(b) salesperson angered me. I didn’t appreciate salespeople running around our educational institutions lying to educators and selling them products that clearly were not good for them. I wondered whether this was an exception or common in the public schools. I soon came to find out it was no exception, the 403(b) was the Wild West of retirement plans.

My next step was to call the school district office and get the truth about what was available for my wife’s 403(b). It turned out the school officials were clueless as well. I was faxed a list of more than two dozen companies, some with phone numbers, some without. None of the companies listed offered no-load or low-cost products, so if you wanted a 403(b) you had to go through a broker and pay commissions. I remember thinking how absurd this was. I decided I wanted nothing to do with the 403(b). We’d invest elsewhere.

A few years passed and I was learning a lot about the brokerage world, mainly what not to do. The focus on products, not people, drove me crazy. By this time I had changed firms twice, spending a year at Solomon Smith Barney Citigroup and landing as an “Advisor Trainee” at Morgan Stanley Dean Witter (MSDW). Smith Barney was no different than Merrill Lynch, and MSDW would turn out to be more of the same.

In the year 2000, with markets entering a downward spiral and the beginning of the crash in tech stocks I began the trainee program at MSDW. I was sent to Manhattan for three weeks, staying in a hotel across the street from Madison Square Garden with a friend from my days at Bank of America. MSDW bused us every morning down to the World Trade Center, where we made our way up to the 66th floor. Being that high up at the Trade Center was awe-inspiring. Looking down on the Statue of Liberty from that height made it appear miniscule. I remember staring out across the waters and seeing planes in the distance flying into the various airports. A year later, the building would be gone.

Wall Street at that time still held great fascination for me, I was walking on air.  Downtown Manhattan was bustling. I was wearing my best suits, power ties and making friends with ambitious, intelligent people. This was my dream coming to fruition. But even then, there was a darkness that I felt, an incompatibility between me and the culture. The word fiduciary was never uttered, unless it was with the admonition, “You are not a fiduciary, do not hold yourself out as one.”  Most of the three weeks were filled with product training, all proprietary. A whole week was dedicated to teaching prospecting techniques that focused almost solely on cold calling. There was no way I was going to be a cold calling cowboy, I had a finance degree, damn it!

I was a 25-year-old kid who looked 17 at best, being trained to pick up a phone book and dial random people to sell proprietary, expensive, Morgan Stanley Dean Witter products. I was feeling as far away from being a fiduciary as one could feel. Before I left Manhattan it was clear I was not going to survive the Wall Street culture. I could not push expensive variable annuities and proprietary mutual funds on unsuspecting people for a commission in which MSDW would end up taking a 75 percent cut.  

It was upon my return from New York that my path again crossed the 403(b) world. Suddenly a vision for my career began to take shape. While I made good friends at Merrill, Smith Barney and Morgan Stanley and believe many of the people to be good people, I could not ignore the culture of deceit, arrogance and corruption that permeated nearly every layer.

Not long after I returned from New York, one of my wife’s colleagues asked me to come to the school to help her decipher her retirement statements. She had been investing in what she called a TSA. It turned out that TSA stood for Tax-Sheltered Annuity and was another term for a 403(b) product.

The statement was just one page and had little information. What I could glean was that it was an Equity Indexed Annuity (EIA), the same product that my wife had been offered a few years earlier. After obtaining a copy of the policy, I was shocked. The product had a surrender period approaching 20 years and a surrender charge approaching 20 percent. Each contribution began a new surrender period and charge — what is called a rolling surrender. The agent who sold this policy told my client that it should return 7 to 12 percent annually because the Standard and Poor’s 500 had averaged 15 to 18 percent gains. I’m not exaggerating.

The pretense of the sales pitch was that the teacher would receive the upside of the stock market with none of the downside. The potential negative effects of participation rates, spreads, the lack of dividends or liquidity were disclosed in the contract, but the teacher relied on the representations of the agent and had no basis for understanding the terms of this policy.

Quite frankly, it took me a month to understand how this policy worked and months more to begin to understand the inner workings of this subset of fixed annuities. The more I learned, the angrier I got, as did that teacher when I reviewed her accounts with her as my client. These products were designed to allow the insurance company to manipulate the rate with impunity. Rarely would the client come out ahead of a similar savings product. I could not allow this to continue. Someone had to step in and advocate on behalf of educators; someone had to be their fiduciary. I became a man on a mission.

There was one big problem, I still worked for a company in which the term fiduciary was not to be spoken. In addition, I was only 25 years old, still baby-faced, and the stock market was crashing. I had almost no money and had no plan for taking on the 403(b) world. I was naive as to the depth of the problems in 403(b) and to the politics involved.  I knew I couldn’t stay at Morgan Stanley, but could I really start my own firm focused on educators and survive as a fiduciary?

After encountering additional headwinds at Morgan Stanley and pressure to sell proprietary mutual funds — and refusing to do so — I made the decision to start my own Registered Investment Advisory firm and go it alone. I figured I’d be making good money in a few years and my wife’s small teaching salary would get us through. That’s another story for a different book.

As I was beginning to form my company I came across a website,  I was not alone. 403bwise was started by two educators who were just as upset as I was with how educators were being treated by their employers and product salespeople in regards to the 403(b). The goal of 403bwise was to educate other teachers and empower them to lobby their employer for better 403(b) options. Dan Otter, the co-founder and spokesman, appeared in news articles and in radio interviews, and the site was gaining a quick following.  

I decided to e-mail Dan after I had left Morgan Stanley to start my own company, Meridian Wealth Management, in February of 2001. I wanted to know how we could work together. As luck would have it, Dan lived just 45 minutes from me. We corresponded for a few months when I proposed that we write a book together. I had already written a few hundred pages and Dan was in the process of writing as well.  With his communications and journalism background and my financial background, we could co-author something relevant.

We met that summer for the first time and began combining our book concepts, a natural match. Dan realized immediately that my dense and technical writing was not going to appeal to educators who wanted concepts boiled down to their essentials and communicated clearly. Luckily, Dan is a fabulous communicator and was able to incorporate my technical meanderings into a simple and entertaining book titled The 403(b) Wise Guide. This would be the beginning of a continuing friendship and working relationship.

Dan and I sold more than 12,000 copies of The 403(b) Wise Guide before letting it go out of print to be replaced by Dan’s follow-up book, Teach and Retire Rich. The Wise Guide kicked off my campaign to advocate on behalf of the education community for better investment options, but also created a lot of enemies in the insurance world.

The Wise Guide brought Dan and me invitations to speak at conferences and schools across the country. Even vendors were interested in talking to us.

A vendor that pursued us rigorously was Great-West Life, an Insurance company based in Canada that had a subsidiary building a low-cost, institutional type product for the education market. The product was called Educator’s Money and it was being led by two women, Barbara Healy and Jackie Fabitore-Matheny. Barbara and Jackie wanted us to come out to the Great-West campus so they could show us around and sell us on the idea of Educator’s Money. Dan and I were quite skeptical, after all, it was an insurance company and Barbara and Jackie had come from working on a product at Nationwide closely tied to the National Education Association that we did not think was appropriate. In fact, I had written an exposé about the product, “Does The NEA Practice What It Preaches?” The NEA Foundation that runs the product was not amused.

Barbara asked us to keep an open mind, and Dan and I decided to make the trip to Denver, Colorado. We came away impressed with Educator’s Money and even more impressed with Barbara and Jackie. Both would eventually leave Great-West and Educator’s Money would shut down, but we would all stay involved in 403(b). Barbara and I work together on projects and I have deep respect for her. I also respect Jackie though she has recently left the 403(b) industry.

I didn’t meet him, but the future CEO of CalSTRS (California State Teachers’ Retirement System), Jack Ehnes, was working at Great-West at the time Dan and I were there as guests (more on this later).  

One of our first speaking engagements was at a conference in Washington, D.C. It was memorable for a couple of reasons, first because we were a mile away from where the first person was killed by the D.C. sniper — we heard the sirens of the emergency vehicles in route — and second because of people we met.

We felt like outsiders at the conference. It was mostly corporations entertaining existing clients, but we did manage to hand out a few books, including one to the deputy chief executive officer of CalSTRS, Ed Derman. Ed was in charge of a 403(b) plan, one of the first low-cost products to gain traction in California, and we wanted to support it. While Ed didn’t call us, our paths were to cross again in the near future.

The conference was great, but Dan and I were looking to do more. In 2001-2002 we got involved in a legislative effort to reform the 403(b) in California. Legislation had been introduced to allow school districts to reduce the number of vendors they offered, potentially even to a single vendor. At the time, most school districts offered numerous providers, some more than 150 names, and this hasn’t changed much.

California is an “open vendor” state (more on this in Chapter 14), meaning any vendor who wants to offer a 403(b) product may do so. With few exceptions, the school district  must offer it. With so many providers it was impossible for any single vendor to gain enough economy of scale to offer lower fees, nor was there any incentive. We wanted to change this and actually force vendors to compete using a Request for Proposal process, allowing for a single vendor.

This idea did not go over well. It brought out the worst in the insurance industry and the worst in the insurance agents who marketed 403(b) products, with a lot of misleading information communicated to participants and employers. A group representing 403(b) insurance agents even bought the .net and .org extensions to 403bwise and began using those sites to lobby against the legislation, until they got a stern letter from Dan’s attorney. One tone-deaf attack on the legislation compared it to the Nazi regime, enraging the bill’s sponsor, who happened to be Jewish. This comparison made the lawmaker push the legislation even harder.

My company, Meridian, publicly supported the legislation called AB 2506 and even submitted written testimony. During this time I was able to meet someone I had conversed with extensively on the 403bwise discussion boards, a teacher named Steve Schullo. Steve had been advocating for years in the Los Angeles Unified School District for better 403(b) options and for education on retirement topics. He had even formed a group that met periodically. Steve has become a close personal friend of mine (along with his husband, Dan Robertson) and he went on to serve on the retirement committee for the Los Angeles school district, helping to influence policy.

Steve was supporting the AB 2506 legislation as well and was given a chance to endorse it before a state Assembly panel. But, as can happen with legislation, in an effort to get something passed, the single-provider language was stripped from the bill. The “open-vendor” law would remain, but each provider would be required to register and have its costs and services disclosed in an online databank maintained by CalSTRS. The online disclosure databank, while a small victory, did little to change the uncompetitive nature of the California 403(b) market.

In March 2003 Dan and I were invited to a conference in Atlanta. I remember the conference for a couple of reasons, one because the ground invasion of Iraq began while we were there. (Dan said while watching CNN, “I don’t have a good feeling about this, Scott,” rather prescient in hindsight). Secondly, Ed Derman of CalSTRS was scheduled to speak.

This time Ed heard Dan and me speak and afterwards invited us to lunch. He asked if we wanted to be involved in building the disclosure databank, which was to be called 403bCompare. He said he couldn’t pay us much, but would appreciate our input. We both jumped at the opportunity.

An Industry Committee was created to help guide the creation of 403bCompare. It consisted of all the major 403(b) vendors, the same ones who just vehemently fought the legislation. Dan and I were the lone outside consultants. It wasn’t just angry vendors though, there were friendly faces, including Barbara Healy, representing Great-West and Educator’s Money. Jack Ehnes had just left Great-West to join CalSTRS as the chief executive officer.

I worked closely with the project manager of 403bCompare and with the committee. A lot of compromises had to be made to keep everyone satisfied, but the project launched and was a success, the first online disclosure database for 403(b) products in the nation. This is not to say it was easy or perfect.  

While the contract I had was small, it gave me an opportunity to work closely with CalSTRS and demonstrate my knowledge of the 403(b) and the marketplace. I was asked to continue consulting for 403bCompare.

The speaking engagements, political activism and consulting kept me busy — but they didn’t pay much. We sold a lot of books, but not enough to make a living. I was a financial planner at heart and was working on my master’s degree in financial planning to complement my CFP designation. I needed clients and I needed them fast as my wife’s salary as a teacher wasn’t enough and we had a baby on the way.  

Then TIAA-CREF, a company that had supported the AB 2506 legislation, suddenly decided to exit the public school employee 403(b) markets, disappointing Dan and me. I was running out of good options for my clients’ 403(b) money.

I began my own website, The Teacher’s Advocate,, and an advertising campaign to get educators to workshops that I would give on financial topics affecting them, but focusing on 403(b).  My message was unique, after all, there were few fiduciary-based advisors in the 403(b) world. Of course the term “fiduciary” was foreign to most educators, so gaining clients still wasn’t easy. I also gave workshops that were sponsored by CalSTRS. I would team up with a CalSTRS counselor who was giving a presentation on the defined benefit plan and then I’d spend 30 minutes discussing the 403(b).  

School employees became my niche market but I still took on other clients. I had also become a fee-only planner, which meant I took compensation only directly from my clients, not from product providers. At first I offered my services purely on an hourly basis, but I couldn’t live on what that generated and began also managing money for a retainer, usually based on assets. I joined NAPFA (National Association of Personal Financial Advisors), became a NAPFA Registered Advisor and this exposure also helped me gain new clients, but it was still a rough first three years.

With the book, the speaking, the political activism, the website, the blog, a consulting relationship with CalSTRS and a growing clientele of school employee clients, I was becoming known as the go-to guy in the fee-only community for anything that had to do with public school employees’ retirement programs.

The longer I worked with CalSTRS executives, the more they began to trust that I would always put participant interests first. After I made recommendations to improve the CalSTRS 403(b), then called VIP, CalSTRS hired me to provide consulting for the program and help take the plan out for a competitive bid. We began writing the Request For Proposal (RFP) in late 2006. The RFP was released in 2007, but with two unique items: how revenue was collected and how we approached target date funds.

One thing that irked me about 401(k) and 403(b) plans then — and now — was how non-transparent they were. I didn’t like that recordkeeper revenue was hidden inside mutual fund expense ratios; I felt that the fees to run a plan should be explicit.  Participants should see the administrative fees and have them disclosed. Mutual funds shouldn’t be chosen based on how much revenue they produce or how much revenue the plan needs to generate, the investment options in a plan should be chosen because they represent the best option at the lowest possible price for the participant.  

I recommended to CalSTRS they switch to a platform that was revenue-neutral. This meant that CalSTRS, aided by my recommendations, would choose the investment lineup and when possible, choose the lowest-cost, institutional share class with a preference for funds that did not have revenue sharing built in. If a fund we wanted only came in a share class that paid revenue, the revenue would have to be paid to the participants or offset the explicit administrative fee. The fees to administer the plan should be explicit and detailed on the statement.

My other recommendation which made the program unique was the requirement that the recordkeeper allow us to offer our own custom target date portfolios and to offer three separate glide paths - conservative, moderate and aggressive.

To my surprise, TIAA-CREF was one of the respondents to the RFP. TIAA-CREF is a financial services organization mostly focused on managing retirement funds for employees of universities and non-profits. It had tried and abandoned the public K-12 403(b) game in recent years, but now wanted to get back in. We were skeptical, but ended up choosing TIAA-CREF to be the recordkeeper for the 403(b) and the upcoming 457(b) for CalSTRS. The program was renamed, CalSTRS Pension2.

In July 2007, the Internal Revenue Service issued final 403(b) regulations, updating original rules that were more than 40 years old with rulings from the interim years and new guidance. This led to  several years of tumult in the industry, but also significant asset growth for Pension2. I knew that the final regulations were coming and recognized that the marketplace was going to need a trusted entity for helping districts comply. Looking at the marketplace in California I was skeptical of the firms that offered such services, as most were commission-based sales organizations not focused on providing good compliance.  

CalSTRS went back to the legislature and got a law (AB 2462) that allowed the fund managers to offer a compliance service to school districts. The service became known as 403bComply and while it didn’t win significant immediate market share, it had a dramatic affect on the pricing and services offered by the other firms. The presence of Comply kept other firms accountable and forced them to compete with lower prices than they otherwise would have charged.

In late 2007, CalSTRS hired a new director to head Pension2, Compare and Comply, Julia Durand. Julia came from CalPERS, the state agency that manages pension and health benefits for California public employees and retirees, and had a background in 457(b) plans. We attended the NTSAA (National Tax Sheltered Annuity Association) conference together in February 2008 along with Barbara Healy. Barbara had moved on to work with CUNA Mutual while also doing consulting work for SST Benefits Consulting, a firm specializing in government defined contribution plan consulting, based in Sacramento, California.

The NTSAA is an entity we’ll talk about later in the book, but it is not, in general, friendly toward my way of thinking.

As Julia and I were mapping our strategy for moving the CalSTRS plan forward, Barbara introduced me to Bill Tugaw, owner of SST Benefits Consulting. He was impressed with my work at CalSTRS and was interested in hiring my company to consult with his clientele. It sounded like a great opportunity to learn the 457(b) government side of the business and I began doing consulting work for Bill later that year.

My company, Meridian Wealth Management, which had started as a financial planning firm, had morphed into a planning and consulting company — working with individuals and government entities, and my name had become almost exclusively associated with 403(b).

By 2013 my planning client base was nearly $50 million in assets and the consulting portion was in the billions. The CalSTRS program has grown to nearly $500 million and continues to grow at double-digit rates annually.

I could fill another book with what happened between 2008 and the present, but that’s not very relevant to our purpose here.

The rest of this book is dedicated to training you on the public 403(b) market, specifically in the K-12 arena.

Wild West: Providing Fiduciary Advice to Public School Employees is now available on all the major online bookstores (Amazon, iTunes, Barnes and Noble, Google Play) in an electronic version and has just been launched as an audiobook on Amazon, Audible and iTunes.