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September 2, 2010 |
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| May 13, 2008 |
By: Wayne Tompkins |
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ive investment companies have won bids to participate in a new multibillion dollar supplemental retirement program for Florida school district employees that could be adopted statewide next year, consolidating a county-by-county process in which more than 90 companies participated.
AIG Retirement, AXA, PlanMember Financial, American Century Investments and Waddell & Reed emerged as the winners for the “Model Plan,” which a nonprofit council formed by four state education associations is pitching to each of Florida’s 67 county school districts.
The plan is being launched in advance of new Internal Revenue Service regulations that take effect Jan. 1, 2009. School systems on that date will be responsible for overseeing and coordinating 403(b) accounts, which are offered to its employees to supplement payouts from the Florida Retirement System and Social Security.
“The school boards didn’t have any oversight in terms of the quality of the product or the return,” said Tom Cerra, a Miami-based education consultant who chairs the council.
Currently, school districts merely act as passive facilitators between employees and supplemental retirement plans, deducting money from salaries and sending it to the company.
“The truth is no one in the past was looking at whether a plan was a good investment for these people,” Cerra said. “Are the administrative costs fair? Is the commission fair? In many cases, the products that were being sold to the employees were not the best product. The administrative fees were high, and the commissions were very high.”
School districts will now have to know exactly how much money their employees are contributing and who they are contributing to.
The five companies, selected from 24 who submitted proposals to the Independent Benefits Council, will provide 403(b) annuity products to a potential customer base of 1 million public school employees and dependents, who currently contribute about $380 million annually to such accounts.
“It wasn’t just a regular selection process,” said Steve Banks, a partner of TSA Consulting Group in Fort Walton Beach, which provides compliance administration services to 403(b) eligible employers. “The goals going in were to provide a mix of products and services that would complement one another. There were specific categories of investments that were requested.”
In seeking a service-based annuity provider, a mutual fund and a multiproduct custodial platform, Banks said that the IBC wanted separate companies in each category. “We wanted a diverse cross-section of companies providing the services, because on a statewide basis, it’s very difficult for one company to do everything.”
The Florida Education Association, the Florida School Boards Association, the Florida Association of District School Superintendents and the Florida Association of School Administrators joined to form the council. Two independent consulting firms, association representatives and a group of school district risk managers also vetted the companies, seeking what they felt were the best products at the lowest administrative fee and commission, based on the level of service each employee wants to receive.
Billions of dollars are at stake for the five companies over the next several months as each of the 67 school districts decides what course to follow: They can adopt the model plan in its entirety, adopt it with amendments or decide to go their own way. The changes do not permit keeping the status-quo.
“No district, of course, is bound by the model plan,” said Bill Montford, chief executive of the Florida Association of District School Superintendents. “It was a matter of our doing some legwork and homework for them. They can take it into consideration when they are making their own decisions, but certainly it’s a viable option for our school districts.”
The federal government established the 403(b) in 1958 so that employees in certain tax-exempt organizations could establish retirement savings programs. A cousin of the better-known 401(k), it has grown into a nearly $700 billion industry.
The new IRS regulations not only require significantly greater oversight and monitoring by the school districts, they invalidate all current plans not in compliance with the new rules. District employees will not be permitted to make any new contributions to unauthorized plans after the Jan. 1 deadline.
The urban anchors of Miami-Dade, Broward and Palm Beach counties seem certain to emerge as a battleground for the plan. While only 24 companies submitted bids out of more than 90 doing business in the state, some companies are exiting the business in the face of the IRS changes.
Others are crying foul.
“We’ve been getting a little heat from companies that have been shut out,” Cerra said.
Banks said the council is confident it has found the best five plans for school employees.
“The issue with most of the districts is that it is politically very difficult to whittle down their companies to a manageable level, because the squeaky wheel gets the grease,” Banks said. The new 403(b) regs and the IBC initiative have given districts “the political will to make the major changes that were necessary,” he said.
The model plan is predicted to put billions of dollars into employees’ investment accounts over the next 20 to 30 years that otherwise would have been paid in vendor fees.
The five companies have committed to upgrade all existing contracts to newer, enhanced products, sell only the products they bid under the plan and reduce fees to all adopting school districts. Fees will be guaranteed for three years.
The plan’s backers say it could give the employees thousands more at retirement simply by doing what they are doing now.
If a teacher contributed $4,000 each year to a product offered by a model plan vendor and realized a rate of return that increased by just 1.5 percentage points, from 4.5 percent to 6 percent, the additional dollars to the teacher after 10 years would be $4,521.85. Under this scenario, the teacher would receive an additional $24,838 after 20 years. After 30 years, additional dollars would total nearly $80,200. There is no increased cost to school districts.
The council estimates that over a 30-year career employees may increase the value of their accounts by a third or more. Assuming a one-third increase in return on investment, if an individual would have accumulated $300,000 over his or her career under the current system, they might gain another $100,000, raising the value of their investment to $400,000.
Cerra said even the state’s bigger districts weren’t able to negotiate a deal of this size, and the smaller districts haven’t had any clout at all. In theory, everyone in the state will get a better deal, he said.
Each district may consider whether any other 403(b) companies should be added to the “approved” list in addition to the five charter companies.
“Educators, and the school districts themselves, are sometimes overwhelmed by the sheer number of investment plans they have available to them and may not necessarily have the time or resources to discern which offer the best value,” said Wayne Blanton, executive director of the Florida School Boards Association. “The new IRS regulations present a golden opportunity for school districts to approach investment plans with a simpler, more cost-effective process that offers the highest quality investment plans.”
Wayne Tompkins can be reached at wtompkins@alm.com or at (305) 347-6645.
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