 For almost two years, Creative Benefits for Educators has been in the forefront of activities putting Florida educators in position to benefit from coming changes in federal regulations regarding employee funded retirement programs. See the following questions and answers regarding the coming changes and how they will affect you and all members of FEA.
What is a Section 403b plan?
Also called tax-sheltered accounts.
A 403b is a type of retirement plan for employees of tax-exempt organizations, including the public schools.
"Pre-tax contributions" are withheld from an employee’s pay check and deposited directly into the plan. Employers can also make direct contributions on behalf of employees.
What are the IRS reforms and how is IBC involved?
In 2007, the IRS established new regulations holding school boards and other public employers more accountable for the operation of the 403b plans offered to their employees.
There are about 130,000 active 403b accounts in Florida K-12 today, with another 60,000+ dormant ones (no contributions are currently being made).
Under the umbrella of the Independent Benefits Council (IBC), the four major education groups— the Florida Education Association, the Florida Association of School Administrators, the Florida Association of District School Superintendents and the Florida School Boards Association — decided to develop a 403b Model Plan that could be recommended to all 67 school districts.
The IBC’s objectives were to create a Model Plan that would:
(1) Assist all 67 districts in complying with the new IRS rules, and
(2) Use statewide purchasing power to negotiate the best possible combination of quality, service and pricing for employees throughout the state.
Has this effort been successful?
Yes! More than a year ago, the four organizations launched a comprehensive process resulting in the recent adoption of the Model Plan, which meets the IBC’s goal of delivering a plan to the districts, complying with the new IRS rules and providing significantly better pricing of high-quality 403b products available to employees.
The Model Plan was adopted on January 28, 2008.
What was the process?
IBC organizations contributed the funding to hire an independent consultant to assist in developing the Model Plan.
None of the IBC’s member organizations will benefit financially from the outcome of efforts to reform 403b program or implementation of the Model Plan.
The IBC’s consultant in this effort, Gallagher Benefit Services (no relationship to former Florida CFO Tom Gallagher), in Boca Raton was selected from six companies that responded to a request for proposal (RFP) seeking companies interested in working on the project.
TSA Consulting Group, which provides independent compliance administration and educational services to 60 of the 67 districts on 403b plans for 60 of the 67 school districts, also agreed to assist.
A work team of school district Risk Managers also worked with IBC throughout the process.
It was agreed the Model Plan: should be limited to at least three, but no more than five, companies in order to negotiate significant cost savings for employees; and the Model Plan would include three categories of investment portfolios reflecting the diverse needs of Florida’s 360,000 teachers and professional staff. The three categories would include plans ranging from those offering a high level of personal service – at a moderate price – to a low/no-service approach with rock bottom pricing. A third category would provide a middle ground of service and pricing.
The three investment categories are:
* Annuities
* Multi-product custodial accounts
* Mutual funds
All interested companies were invited to participate. Gallagher Benefit Services contacted all of the 90 companies currently providing 403bs in Florida K-12 and posted the RFP on an industry Web site to encourage interest from companies not currently operating in Florida.
How many companies bid?
24 companies submitted 30 proposals (some responded in more than one category).
After initial evaluation, the field was narrowed and 11 companies were invited to interview in Tallahassee in December.
Additional drill-down occurred with follow up meetings at Gallagher Benefit Services in Boca Raton.
On January 28, 2008, Gallagher presented its recommendations to the IBC.
What criteria were used in evaluating vendors?
Each of the plans was scored in seven categories:
* Expense charges
* Investment options
* Participant services
* Company experience
* Conversion and implementation
* Administrative services
* Account administration services.
Additionally, all vendors were required to provide full fee disclosure.
Which companies were selected as superior in quality, pricing
and service?
Annuities (Full-service)
AIG Retirement (VALIC);
AXA
Multi-product custodial accounts (Mid-level service)
PlanMember Financial Corporation
Mutual funds (Low/no service)
American Century
Waddell & Reed
What did these companies promise?
Each of the five companies signed a Letter of Commitment agreeing to:
* Certify the plan proposed for IBC is the best it currently offers in any Florida K-12 district.
* Offer favorable rates to all districts regardless of size.
* Automatically upgrade plans when newer, more enhanced products become available.
* Ensure its representatives agree to sell only the product bid for the Model Plan (no bait and switch).
* Provide a detailed plan to convert its existing contracts to the Model Plan, thereby creating immediate benefits for their current participants.
* Where applicable, reduce its fees to all adopting school districts as statewide assets under the Model Plan grow.
* Guarantee rates for three years. IBC’s consultants will review financial data from years one through three and, if they find a company’s proposed fees for subsequent years are excessive may eliminate them from the Model Plan.
How will the Model Plan benefit employees of the 67 school districts?
This is the first significant statewide reduction in pricing since 403bs were established 50
years ago.
The approved plans are the best offered in Florida K-12.
On average, during a 30-year career, an employee can expect his/her investment account to accumulate 1/3 more assets from the Model Plan than existing contracts. For example, a $450,000 accumulation under an existing plan might be worth $600,000 with the Model Plan. If an employee were to choose the lowest priced plan, the gains could be even larger.
The Model Plan companies will offer these improved, lower priced plans to employees throughout the state, regardless of the size of the districts employing them. Small and medium-sized districts will stand to benefit the most from participation.
Companies in the Model Plan will reduce their pricing even further in the future, as their assets grow – and these reductions will apply to everyone, no matter how large or small the district.
How do we know school system employees want this?
A Mason-Dixon poll of K-12 employees, commissioned by the IBC, was conducted in December, measuring attitudes toward retirement and financial matters. The survey results strongly support the IBC’s efforts to initiate reforms in the 403b industry. Among the results:
* Nearly 9 in 10 are concerned about their ability to meet financial needs after retirement, with the same number concerned that Social Security might not be available to them when they retire.
* 8 in 10 say they are not entirely satisfied with the financial results from their current tax-deferred investment plan.
* 8 in 10 say they do not have a good understanding of the fees they are being charged by the companies managing their investment plans.
* 9 in 10 say it is important for them to know they are getting the best deal for their investment dollars.
* 3 in 4 say they are willing to pay more in fees in return for plans offering either some personal service or full service.
* Most importantly, 8 in 10 say if the state’s four major education associations got together to evaluate all of the plans and negotiated the best service and lowest fees for school employees, it would be very important these plans be available to them through their respective school districts.
What happens to those who have an existing investment account with a company that’s not authorized by the school board?
The new IRS regulations become effective January 1, 2009. After that date, 403b contributions can be made only to companies authorized by the school board and which meet the new IRS requirements.
Individuals who have existing accounts with companies not authorized by the school board may leave their funds in their accounts, but they may not make new contributions to them after January 1, 2009.
Teachers and education staff professionals who have existing accounts with companies not authorized by the school board may choose to transfer their assets to one of the authorized companies; however, this decision should be made after carefully considering the impact of any surrender fees or termination charges, based on the terms of the existing contracts.
Why should local school districts adopt the Model Plan?
All of the heavy lifting has already been done for the school districts.
It provides the very best deal to teachers and education staff professionals.
While the number of 403b companies will be reduced, employees will be able to select from 600 high-quality investment options and the new line-up of 403b offerings will be easier to understand.
There will be various investment categories ranging from full-service, for those who want individual assistance and advice, to no-service, for those who prefer to handle their own investments.
All of the approved companies have agreed to remit to the school board $12 per participant, per year, to offset additional administrative expenses associated with the new IRS rules.
What options do school boards have?
They must adopt new procedures regarding 403b plans.
Approved provider companies must comply with the new IRS regulations.
Each school district may adopt the Model Plan or develop its own slate of “authorized” provider companies.
A school district may adopt the Model Plan if it feels it needs to add one or more companies to the authorized list. In that case, it has the right to do so. In those instances, every effort should be made to require any companies added to the Model Plan meet the higher standards—and fee reductions—agreed to by the companies selected by IBC to participate in the Model Plan.
Dollars invested in 403b accounts are not school board funds… they are retirement investments made by employees, themselves.
With school funding projected to be very tight for the foreseeable future, adoption of the Model Plan might be the best opportunity to put money in teachers and education staff professionals' pockets, and it won’t cost taxpayers—or the districts,—a penny!
To learn more go to www.themodelplan.com |
