August 2008 “So what do you do when your 403B plan choices have been reduced to pure trash?.”

~My Better Half

The Professional Opinion

S&P 500 Index: 1267.38

Some History
Presidential elections, 20 of them now, have always been preceded by gains or slight weakness in the stock market.  Bob doesn't expect this time around to be any different.  There have only been two instances in which the market registered double digit gains in the months after June and prior to a presidential election.  Gains and losses averaged from @ -3% to +6%, which is considered the norm.

The first half of this year is very similar to the extended bottoming seen in 1994 and that extended eight months.  The bottoming we are experiencing is now in its seventh month.

The market has had more to contend with than Bob expected.  Bear Sterns,  Fanny Mae and Freddy Mac,  $150.00 a barrel oil,  the sub prime mess and on and on.

'Although the percentage decline below the initial January 22, 2008 closing S&P 500 Index level has been in the single-digit range, the overall decline has exceeded our expectations, thereby proving the fact that stock market timing is a very difficult exercise.'

Bob continues by saying further gains in the market are going to be linked oil prices.  High oil prices act as a tax on consumers, limiting the amount of discretionary income they have.  Low oil prices mean the consumer has more money to spend and that helps out the economy.  He thinks oil prices will trend down towards the $100.00 a barrel level if  the geopolitical world stabilizes.  Iran continues to be a thorny issue. If confrontation with Iran continues to escalate, the price of oil will react accordingly.

It is safe to say that this is a challenging environment..

Economic Outlook

Bob is maintaining an outlook of 1 - 2% real gdp growth for the rest of 2008.  He sees 2009 as somewhere between 2 - 2.8%.

The YOY Personal Consumption Index has increased to 3.1%, the Core Index is sitting at 2.1% , and the CPI is up 5% year over year.
The CPI Core Index has risen 2.4%.  Inflation is expected to moderate over the next few quarters. Unit labor costs remain low  and these costs need to stay under control to keep inflation in check.

The Fed

The Fed is expected to leave the  Fed Funds rate at 2% and it is expected to remain at that level for the near future.  

A New Mutual Fund Makes the  List.

The Vanguard FTSE All World Ex-USA index fund has been added to the list.  

The Vanguard FTSE Social Index Fund has been deleted from the list.


The key to economic growth is oil prices and thank god Obama has an answer for that.  All we need to do is keep the tires on our vehicles properly inflated and our engines tuned up and we won't need to drill or anything!

Garnet Hill Garnet from Ely, Nevada
Garnet Hill Garnet from Ely, Nevada

No this isn't from the Yukon (sigh of relief),  these are garnets from garnet hill in Ely, Nevada.  Too bad these little gems aren't worth hundreds of dollars a carat because we got a bunch of them of them this trip.
Garnet Hill Garnet from Ely, Nevada Garnet Hill Garnet from Ely, Nevada
This time around I hit the mother lode. This garnet measures a bit over 3/8" of an inch.  Most of the garnets in the area measure less than 1/4".  You can get larger garnets if you have a little luck and opt for hard rock mining.  The one on the right is just at 1/4".  Fun stuff!
Personal Portfolio
Ending July 31, 2008

The Bank Stocks

The general state of the banking industry last month seemed eerily similar to the after-effects of the bust in 2000 and it
seemed foolish to ignore financials whose value has been cut in half if not more, with some being virtually relegated to penny stock status.

I decided to buy WM in the low 3's and some more ABK on speculation, and increased positions in WFC and BAC.

Wells Fargo

That run up in the stock price of WFC provided a boost to the market as a whole. It was good to see a bank actually increasing their dividend payout. I think everyone breathed a sigh of relief.  That, followed up by BAC not cutting their dividend produced some very healthy returns indeed.

I set BAC and WFC stocks to reinvest their dividends so with any luck and in a couple years I will have to start selling shares to keep within the 4-5% of the portfolio range.
ABK......I have been trading in and out of this one.  I think if you want to do some swing trading, this one is worth consideration.
I am keeping a core position in this and basically trading on a percentage of the profits. It is a gamble.

I financed the new bank stocks with more Silicon Imaging (SIMG), reducing it to about 1.5% of the portfolio.  I think SIMG still stands to do well over the long term but I think more bang for the buck is in some of the financials.

Silicon Imaging

Speaking of doing well long term,  investors were pleased with SIMG's second quarter results.  That PE of about 40 is cause for consideration though. - a considerable amount of future earnings being priced into the current stock price.

Maybe someone knows something we don't and  another 'stimulus' check is on the way for buying more HDTV's!

Washington Mutual - I chickened out and sold it prior to their earnings announcement.
Washington Mutual Loss

Any other distressed financial institutions out there?  Silly question.


How about E Trade?  They took a big earnings hit but have been actually growing their subscriber base.  I bought this at $3.53  with
the proceeds from WM.  My view is that this one will recover over time and the price is certainly right.  I don't think they are going anywhere soon, except as maybe a takeover candidate by someone like Schwab or Ameritrade.

This month's question of the month actually comes from my wife:

So what do you do when your 403B plan choices have been reduced to pure trash?

A Little Background
For years my wife had a 403B plan through Fidelity with the school district.  It was one of the best plans I had personally ever seen in terms of fund choices and cost.  I have never had a retirement plan that good.  She made a lot of money in that account by investing wisely.

Then came the IRS.

The IRS in its wisdom decided to change the rules and to make a long story short, make the district 403B providers more accountable for the choices of plans they offer. Since the district didn't ........

(I suppose I should add before proceeding further that the words which follow are personal opinion.)
want to be responsible for oversight any more than they had to,  they sent a questionnaire out to their existing 403B providers and asked them to respond within a specified time frame.  Guess who the only responders were?  Insurance companies providing annuity plans and one brokerage offering loaded funds.  (A More Detailed Explanation is Here)

We went down to the district's CFO and had a conversation with her about the new plan choices.  Her answer boiled down to one that said the district was not obligated to provide a 403B plan at all, so we should be happy we are being offered one even though it is now a pile of crap.  

I have a legal question: If a district decides to offer a 403B plan that is a pile of crap and plan participants get sucked into annuities and other options virtually guaranteed to lose them money and they do, does the district by offering up a pile of crap assume a measure of responsibility for losses and sub par performance sustained by their plan participants?  

A CFO ought to know better than to serve up a 403B plan with high cost insurance products and loaded mutual funds.  I wonder if a some legal pressure can be brought to bear on the situation.

Examining the Options
The first thing we should do is examine the new plan choices before making further disparaging remarks. Let's get started.

Option 1 - AIG VALIC
You've got to love Google, aye?  AIG pops right up.
AIT - Valic

It appears the only thing a teacher can get through AIG in terms of  a 403B plan is an annuity.

Let's see what else we can dig up.

Note: Check out the teachersadvocate sites.  There is useful information there.


This is but one example regarding AIG-Valic.  I don't think we need to look any further into AIG as a viable choice for a 403B plan.

Option 2 - American Fidelity
American Fidelity

American Fidelity pops right up too and at the outset identifies itself as an insurance company.  

Want to bet this is another high cost annuity provider?

American Fidelity

Click on through and what are the options?  Annuity plans.  If you will notice four choices down, this company has the gall to offer a ROTH IRA as an annuity.  What is wrong with that picture?

American Fidelity

I decided to dig just a bit further since they offered their 2008 first quarter performance and took them up on their offer to have a look:

American Fidelity

Are these the performance figures and fees a CFO would be proud of?  Is this something you would offer your friends and family as an ideal investing vehicle?  One thing you will have to credit American Fidelity with is that at least they are up front about the fees incurred in this high cost variable annuity masquerading as a worthy 403B investment plan.

But hey,  if you don't believe me, here is the Original PDF.

And if you don't like this one,  how about their Separate Account B?

Personally,  I think we will pass on this as a 403B retirement choice.  

Teachers don't make enough as it is to have to contend with the likes of this.

That's two down.  Let's check out the third option.

Option 3 - Life Insurance Company of the Southwest.

Life Insurance Company of the Southwest

I think it is pretty well established that this is a life insurance company but look at this!  They offer Flexible Premium Annuities!

Life Insurance Company of the Southwest

They even have a happy face more than willing to direct you to your new high cost variable annuity program!  Lets have a look!

Life Insurance Company of the Southwest

Hmmm............looks like annuities are the only things they offer to school district members.  Why am I not surprised?

Life Insurance Company of the Southwest

I could not find much more in this site but I think I get the general flavor.  I did find some stats while digging around you might be interested in.  Notice that the average commission received by an agent for a high cost  index annuity is 8%.  Look at the surrender period statement too.

I don't think we are going to go there either.

Moving on to the next choice.

Option 4 - Security Benefit

Secuirty Benefit
I think I am beginning to see a pattern here but in all fairness I suppose I should click on through.

Security Benefit

These people seem to be more into fixed annuities.

Notice the initial bonus of three percent for the one account and two percent for the second.

Subtract those percentages from the performance shown  and your money would be better stored under the proverbial mattress.

Security Benefit

The NEA choice piqued my curiosity.  After all, teachers pay lots of union dues to the NEA. 

The NEA would undoubtedly have a vested interest in seeing their members with investment options which would do the union proud.

At last!  An an organization who is looking out for teachers and their retirement!

Security Benefit

...........or are they.

As a CFO, I wouldn't be overly proud of offering my hard working district employees this as another retirement vehicle.

As a head of the NEA,  I should be embarrassed.

My analysis of this 'investment' choice - Don't Walk.....Run.

Lawsuit Says Teachers Are Overcharged on Annuities

Article Tools Sponsored By
Published: July 17, 2007

A lawsuit filed last week in federal court in Washington State contends that the National Education Association breached its duty to members by accepting millions of dollars in payments from two financial firms whose high-cost investments it recommended to members in an association-sponsored retirement plan.

The case was filed on behalf of two N.E.A. members who had invested in annuities sold by Nationwide Life Insurance Company and the Security Benefit Group. It contends that by actively endorsing these products, which carry high fees, the N.E.A., through its N.E.A. Member Benefits subsidiary, took on the role of a retirement plan sponsor, which must put its members’ interests ahead of its own.

By taking fees from the two companies whose annuities N.E.A. Member Benefits recommended to its members, the N.E.A. breached its duty to them, the suit contends. The N.E.A. is the nation’s largest professional organization; its Web site says it serves 3.2 million workers in education, from preschool to university graduate programs.

The suit reflects heightened concern among retirement plan participants that excessive fees are diminishing their savings and enriching financial services firms. Last November, the General Accountability Office published a study concluding that retirement plan participants, as well as the Labor Department, needed clearer information on fees in these investment vehicles.

Lawyers representing the plaintiffs said they had been unable to calculate the total payments received by N.E.A. officials from Nationwide and Security Benefit since 1991, when the products were first endorsed by the organization. But a recent Security Benefit prospectus indicated that fees paid to N.E.A. Member Benefits might exceed $2 million a year. That prospectus said Security Benefit paid the N.E.A. subsidiary $510,000 a quarter.

The suit, filed in United States District Court for the Western District of Washington at Tacoma, said that such payments were not disclosed to N.E.A. plan participants. Instead, N.E.A. Member Benefits maintained that it selected Nationwide and Security Benefit based on competitive criteria, the suit said.

Lisa M. Sotir, general counsel to N.E.A. Member Benefits, declined to comment on the lawsuit, saying that she had not yet seen it.

Michel Cole, a spokeswoman for Security Benefit, said it was against the firm’s policy to comment on pending litigation. Erica Lewis, a spokeswoman for Nationwide, said company officials could not comment until they had seen the complaint.

Lawsuits on behalf of pensioners are usually brought under the Employee Retirement Income Security Act of 1974, known as Erisa, which requires organizations overseeing retirement plans to put their beneficiaries’ interests first.

The type of 403(b) programs at issue in the complaint are typically exempt from Erisa. But the lawyers bringing the case argued that because the N.E.A. actively promoted the annuity products to its members, it essentially stepped in as a plan sponsor. That made it subject to Erisa’s fiduciary duty requirements, the lawsuit contended.

“The Erisa exemption applies to situations where the employer does nothing more than arrange for salary deferral for its employees,” said Derek W. Loeser, a lawyer at Keller Rohrback in Seattle, which represents the plaintiffs in the case. “But in endorsed plans, the union together with the insurance company are taking over the role that the plan sponsor plays.”

From 1991 to 2000, Nationwide was the exclusive N.E.A. plan provider. The company sold its N.E.A. Valuebuilder accounts, with more than $860 million in assets, to Security Benefit Life Insurance Company for $72 million in 2000, the suit said.

Since 1991, the suit said, N.E.A. members have invested more than $1 billion in the Valuebuilder plan.

The fees levied in the Nationwide and Security Benefit annuities “far exceeded” those of comparable retirement vehicles available elsewhere, the suit said. The fees in one of the annuities recommended for the Valuebuilder plan reached 10.62 percent, according to the suit, making it exceedingly difficult for investors to make money in the plan.

Dan D. Otter is a teacher and operator of, a Web site aimed at educating retirement plan participants about high fees associated with some of the investment vehicles. He said teachers were especially vulnerable to problematic plans. “There is an army of agents trolling school districts across the country selling high-fee variable annuities,” he said. “I want all 403(b) participants to know how the plan works and also advocate for low-cost choices.”

According to regulatory filings, N.E.A. Member Benefits “recovers its costs through contracts with various program suppliers” as well as the N.E.A. In 2005, the corporation generated income of $52 million, the filings stated.

Ms. Sotir said that figure included income generated from many contracts, including those covering the N.E.A. credit card, home financing and life insurance programs. “Valuebuilder is a very small portion of that,” she said.

The suit against the N.E.A. is the second such case filed by lawyers at Keller Rohrback against an association that administers retirement accounts to its members. Last April, the firm filed a class action against the New York State United Teachers Member Benefits Trust, a retirement plan set up to benefit teachers in the state.

Edward A. H. Siedle, a lawyer and president of Benchmark Financial Services in Ocean Ridge, Fla., a company that investigates money managers on behalf of pension plans, also represents the plaintiffs in the case. “Investors may purchase annuities for lifetime income, but for unions, endorsing annuities is lifetime income,” he said. “Teachers deserve better.”

Option 5 - Waddell & Reed
Waddell & Reed I know something about so I called them directly. 

The man I spoke to on the phone was very personable and when I explained what I wanted, he was entirely sympathetic to the districts new 'investment' choices.  He stated he was the only one on the list who wasn't an insurance company providing annuity products.

Being somewhat jaded about all this,  I asked him what type of mutual funds he sold and he listed out some impressive names. For a few moments there was a glimmer of hope.

I then asked what expenses were associated with these funds.  Were they front end loaded?

Yes and No.

There were three ways a fund could be purchased.

A:  You can buy the fund with a 5.75% load up front and incur no further fees, like one would with American funds.

B:  You can buy the fund back end loaded where each year you hold it the load decreases.

Example:  Hold for less than one year - 5.75% is charged. Hold 2 years, you pay a 4% load, three years - a 3% load and so on.

C:  You pay no load at all but each year you pay a wrap fee of somewhere around 2-3%.

A wrap fee means you are charged a percentage of your portfolio each year as a management fee,  same as Adam Bold and the Mutual Fund Store.

Option A to me is the least onerous of the the three choices but given my wife's retirement time horizon, any of these options are not something I would look at.

Substituting a 5.75% load for an 8% commission to an annuity salesman still leaves a bad taste in my mouth.

That appears to be about it for 'investment' choices.  I suppose I should look at the list the CFO gave me one more time and see if I perchance missed a diamond in the rough.

Option 6 - AG Edwards (?)
Somehow AG Edwards got added to the list. I am thoroughly familiar with the company and since I can't have all the fun,  I suggested my wife set up an appointment with them, go in ignorant of subjects financial and see what they suggested.

Oh, and take the list of 'investment' options with her.

The appointment was a short one.

The broker took a look at the list and didn't understand why AG Edwards was on it.

They were not involved in the district 403B fiasco.

The broker then said that she could not in good conscience endorse any of the annuity plans offered up by the insurance companies.  Waddel and Reed.... that was up to my wife. The broker said she could offer options for taxable accounts and if there ever was a need, please call.

Two thumbs up for honesty.

AG Edwards was one of the companies fined millions for allowing companies to time the market using their branded funds. The gist of this was that companies with enough $$$ could buy mutual funds at the beginning of a trading day rather than at the end of the session like the rest of us. It was an unfair advantage and they skimmed millions.

Not all AG Edwards brokers are ethical.  I saved one news item from a few years ago regarding brokers selling high cost annuities to uneducated victims.  It makes one ill knowing this happens on a regular basis:
Oceanside woman sues A.G. Edwards
Date: April, 2005

By Edmond Jacoby
North County Times

An Oceanside woman has sued national brokerage firm A.G. Edwards alleging that the company earned secret commissions when it sold her nearly $500,000 of a type of security known as a variable annuity.

Kathleen Mitton, described in the suit as a retiree and an elderly investor, became the latest person in the San Diego area to file a complaint in federal court over the sale of the investment products, which combine a form of life insurance with mutual fund shares. Similar suits were filed on Jan. 20 by William Dornan of Vista against Morgan Stanley Inc. and on Jan. 21 by Jane Westbrook of Santee against Merrill Lynch & Co. Inc.

According to Mitton, the company sold investments she held and reinvested the money in the variable annuities, which left her in the position of having to pay large penalties for early termination of the annuity contracts to gain access to the money.

A.G. Edwards "never informed Ms. Mitton that the annuity products offered were limited to products offered by the participating insurance companies and that it had entered into ... undisclosed fee sharing agreements providing undisclosed compensation to (Edwards) for the sale of certain annuity products," the suit says.

The company did not return a call seeking comment.

"When I came to North America from Scotland," Mitton said, "I had to borrow my fare from the Canadian government. After a few years in Canada, I came to the United States with $2,000 in my pocket."

She said she accumulated the money in her IRA slowly by repeatedly buying homes that she renovated and sold, and by putting every cent she could into her retirement fund during the 14 years she worked at the San Onofre Nuclear Generating Station.

As a retired investor with an adult son and no other potential heirs, Mitton said she had no need for the nearly half-million dollars of life insurance that was a component of the annuity. Moreover, she said, some of the mutual funds in which she had invested were sold to pay for an annuity that in turn invested in those same mutual funds. She was forced to refinance her Oceanside home twice to avoid paying up to 20 percent in early termination fees to withdraw money from her Individual Retirement Account, she said.

"I'm really in favor of cracking down on these people selling these variable annuities," she said.

Michael Fangman, who is named in the lawsuit as her A.G. Edwards financial adviser but who is not named as a defendant, said he does not recall enough of the details to comment on Mitton's complaint.

No longer employed by A.G. Edwards, Fangman said that when he worked for the company, he was not aware of any undisclosed compensation arrangements the company might have made.

San Diego attorney Ronald Marron, who represents Mitton and the other two plaintiffs, is seeking court recognition of all three cases as class actions, and he says that in each case, the class might be as large as tens of thousands of people.


I would opt for none of the above given the time frame my wife is looking at in terms of retirement.  

She is too close to the end to be forking over fees to high cost annuities, loaded funds and wrap accounts.  It makes no sense.

What I would do is this:

1.  Figure out how much she is currently deferring.
2.  Place that amount (less taxes, of course) in a money market fund (Schwab comes to mind).
3.  Find out how much can be contributed to a ROTH IRA and fully fund it.
4.  Use the balance to start building assets in tax efficient mutual funds and DRIP Plans.
5.  Plan on paying more taxes in the future.

And Last but not Least:

Pay a visit to the union local and see what if anything can be done about persuading the district to give their employees 401B options that are not loaded, not high cost insurance company annuity contracts  and are choices the district can be proud of when offering retirement plan options to their current and prospective employees.

Closing Comments

This is not something to just tick off your list of things to do as expeditiously as possible, CFO. You should try putting some genuine thought and consideration into your actions.  Your actions have a genuine effect on employees.

'Caveat Emptor' is not acceptable when you know as well as I know, CFO,  many employees are either uneducated or under-educated in this area.  

What you are doing is throwing sheep to wolves.

And while I am at it, how the district can allow these jokers selling their wares into schools where they try to convince those ignorant
of subjects financial that rolling over their 403Bs into brand new high cost annuities is a wise investment choice is beyond me.

Doesn't anyone up on the food chain know any better?   Or Care?

I spent about two hours researching these new 403B plan 'investment' choices which is probably about two hours more than the CFO did and came up with more than enough reasons to reject the entire list out of hand.

'Disappointing' is the kindest word I can use to describe the apparent total lack of research and care at the district level in providing these new 403B 'investment' options to their employees.  I wonder if it occurred to anyone that the reason insurance companies are so eager to respond and sponsor these contracts is because they know they are going to make a profit.

The employees I think are the big losers, or should I say victims in this deal. In my opinion the district needs a new CFO for starters.

I would then schedule periodic seminars held by by fee based financial planners or instructors whose purpose would be to educate district staff about the world of finance and how to avoid the sharks swimming in it.  Sounds like a job a CFO in search of new employment opportunities should be able to do.

Now how would that be known as a district that cares.  Word would get around.

HELP!, or, the Death of 403bs
Posted by wunnerful1 on May 31, 2008 at 12:37:09:

My employer notified all of us that routinely
contribute to 403(b) (TSA)/457 plans just a few weeks ago with the following background:"

On July 26th, 2007, the IRS published final 403(b) regulations which apply to retirement savings arrangements sponsored by eligible
organizations. These regs, with few exceptions,
are effective beginning 01/01/2009.Currently, 403(b) investments are considered agreements  between employees and investment companies.

Employees are responsible for investment product selection, determining with the provider company if conditions are met for loans,
hardships, other distributions and fund transfers
to other products/providers.Employers have been the conduit for transferring funds from an  employee to the investing company, but have had relatively little involvement with the functioning of the programs.

These relationships change significantly under the new IRS regulations. The final regs allocate increased responsibilities to the employer as  a sponsor of the 403(b) 'Plan' and broaden documentation. The employer and the Provider must adhere to the terms of the written plan.

Most importantly, the employer is responsible for monitoring all financial aspects of the 'Plan' with respect to their employees' investments.

The employer must ensure that the 'Plan' Providers follow the terms of the 'Plan' as well as the IRS

In Reply to: need 403b help--HELP! posted  by reluctant on May 22, 2008 at 09:10:42:

I think it's entirely normal for a fund co.
to make a transfer to comply with the new IRS rules  generated to comply with the new labor dept. rulings. I love it...rules on rules.

The real problem is that the new IRS rules require explicit employer management and oversight of the employees fund(s) accounts.
Most .orgs of any size, rather than handle such a liability laden situation, handed it off under contract to a small
 number of agents
(self interested, obviously).

A number of funds have decided they could not handle the extra reporting expenses (between the
lines, intimate involvement of 100s if
not 1000s of .orgs) and are canceling their 403(b) support by the end of the year, per IRS dictate.
What does this mean for us that
have existing
403(b) accounts? 2 things-A) Existing shares in an account that will not be supported by the fund as a 403(b) will have
to be
 transfered to another fund that does support 403(b)s under the newest IRS regs.A-1)

If your existing fund continues to support
403(b)s under the newest IRS regs, let it ride, but expect implicit employer involvement and
costs for the fund to deal with the expenses.B) Your employer will dictate this year what the cut off date that you can make your
last contribution to your 'old' fund is.

You will be offered a low number of 'agents' (being .orgs,
employers generally go for the lowest bidder) to manage your account and absorb the liability for the employer.I also have been contributing to a 403B plan being that I also work for a  .org.

We have been offered Fidelity, ING and some local
nondescript co. as 'agents' to handle my employers responsibility/liability under contract.