It has all the makings of a decent B-movie. Visualize a U-shaped mahogany conference table at which members of the California Legislature Insurance Committee consider California Assembly Bill AB 1949. Supporters of the bill form a long line going almost to the back door. That line is composed of teachers, administrators, representatives from the California State Teachers' Retirement System, or CalSTERS, and several reps from the financial industry, according to a blog post on 403bwise.com. A half-dozen or so people composed of insurance industry reps and union officials stand together, united in opposition to the bill.
Emotions run high, as the rivals communicate their views with passion. The bill in question would authorize K-14 employers to get competing bids from at least four vendors of 403(b) products with the goal to offer low-cost high-quality products to teachers and school employees.
Proponents argue the current system gives vendors unfettered access to peddle their very expensive insurance products to teachers. "Californians are literally drowning in choice, bad choice," Dan Otter, a teacher who runs 403bwise.com, wrote back in 2002, and reiterated in a recent blog post. "The typical 403(b) plan here is littered with scores of high fee vendors. So what looks like choice is really no choice at all."
Detractors of the bill say the new legislation limits choice to the detriment of teachers. "AB 1949 was promoted under the guise of reform," says Chris DeGrassi, executive director of the National Tax Sheltered Accounts Association, or NTSAA, which is part of the American Society of Pension Professionals & Actuaries, or ASPPA. "However, at its core, AB 1949 was legislation drafted by the largest 403(b) investment providers with the intent of eliminating all other competition from the marketplace."
What he says appears to be accurate. In fact, among the bill's proponents were such insurance giants as The Hartford, low-cost provider TIAA-CREF and Variable Annuity Life Insurance Company, or VALIC.
I'll give away the ending: AB 1949 was defeated last week. "I am disappointed but not surprised," says Otter, who has been fighting for reform in the 403(b) space for years.
403(b) plans recently underwent an overhaul at the national level, as explained in Bankrate's story, Shakeout in 403(b) plans affects teachers. Currently in a handful of states, 403(b) products in the public school system are sold in an open playing field, where any willing provider can vie for business. An analysis of AB 1949 by CalSTERS describes the current system as "a chaotic amalgamation of expensive and confusing choices. This hinders the ability of members to make the most informed and cost-effective choices possible regarding their retirement savings."
CalSTERS' analysis cites a study by TIAA-CREF, which asserts that California educators pay among the highest fees. As an example, one unnamed vendor in California charges 1.51 percent for an index fund with an 11-year surrender period, according to the analysis. That same vendor charges 1.07 percent and no surrender charges in a district that allows competitive bidding. Outside of California, that vendor charges 0.67 percent for the same index fund with no back-end fees.
NTSAA's DeGrassi says that study is flawed because it's based on a limited data set. "The only other statewide data points for the study are Texas and Iowa. Data from three very different states is not a national study," he says.
Still, why do people from different areas of the country get the same product at such different prices?
And of course, politics are a big part of this clash as well. Otter says the California Teachers Association opposed the bill "because they have put out an RFP (request for proposal) in an effort to offer a 403(b) product that would be a revenue generator, as it is for the NEA. The National Education Association sells a very high-priced 403(b) product called the NEA Valuebuilder. According to the Los Angeles Times, in 2004 the NEA received $49.6 million from endorsed companies, including Security Benefit," he says. That's the life insurance company that issues the NEA Valuebuilder Variable Annuity, which appears to be a value for the NEA, at least.
Right now, teachers in California have a tool called 403bcompare.com, which enables them to look up the product offerings of dozens of vendors. DeGrassi says the database is flawed because some expenses shown are not charged, and some fee information understates actual fees. "NTSAA fervently supports the continuous development of policies that help public education employees prepare well for retirement," he says. "In fact, we are pushing a national effort for investment transparency based upon the model developed for private sector plans."
In the meantime, California teachers are going to have to do a ton of homework to find low-cost fund options that are available to them.