The Wise Cracks Blog by Dan Otter



Hey Pennsylvania K-12 Teachers: The Insurance Industry Just Made Your 403(b) Plans Worse

I have been at 403(b) reform for 19 years and while improvement has been a s-l-o-w process, K-12 403(b) plans are getting better. There is now more information than ever about the plan and its shortcomings at the K-12 level. A ground breaking series of articles by The New York Times shone a national spotlight on K-12 403(b) issues. Connecticut signed a 403(b) fee transparency bill that grew out of the series.

Less is More When It Comes to 403(b) Vendors

More and more school districts have seen the wisdom of putting their 403(b) out to bid in order to get the best pricing. That’s what private sector employers do. They typically have only one financial firm that had to compete to earn the business. The K-12 403(b) business is very different. Redlands Unified School District  in the town that I live — Redlands, CA — has 45 vendors! Imagine say Apple Computer having a 401(k) plan with 45 vendors. Steve Jobs might have called such a situation “Not insanely great.”

Et, Tu Pennsylvania?

California K-12 districts can’t even put their K-12 403(b) plans out to bid because of 1970s era insurance sponsored legislation. The state of Pennsylvania has no such legislation, until now. The insurance industry appears to have foisted Act 5 on Pennsylvania teachers. Isn’t it Act V in Shakespeare plays where we find out who killed the protagonist?

Act 5 Requirement for School Districts Regarding 403(b) Plans

Act 5 of 2017 inserted Section 8411.1 into the Public School Employees’ Retirement Code that requires school districts, beginning July 1, 2019, to have a minimum of four separate “financial institutions or pension management organizations” for each 403(b) plan sponsored. The term “financial institutions or pension management organization” is intended to include providers of an annuity contract or custodial account (collectively referred to as “vendors”). 

Public School Employees' Retirement System Calls Out Provision

Page 1 (in blue) of this document reads: "Act 5 contains a specific provision that serves to protect 403(b) service providers from competition with PSERS in the defined contribution space by requiring local school districts to retain a minimum of four 403(b) vendors."

The state retirement system literally calls the provision what it is: anti competitive. We are getting word that Pennsylvania school districts who did the right thing and reduced their vendor lists to one or two low cost providers are now scrambling to add vendors to comply with this absurd law. All of this will lead to more participant confusion and more money flowing from teachers to the insurance industry.

InvestmentNews has picked up on the this story: Pennsylvania law requires multiple record keepers for 403(b), 457 plans: Advisers think the law, which goes into effect July 1, will result in higher costs for investors.

Note: Story was updated on June 10, 2019 at at 5:19PM Pacific Standard Time.


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