Financial watchdog Ed Siedle recently penned a column explaining to non-federal government workers what was wrong with their defined contribution plans (government workers have a 457(b) and/or a 403(b)) and imploring them to do something about the poor quality of most of these plans. Siedle says “The odds are so stacked against most 457 and 403(b) investors that they’ll be lucky if the principal they invested is available upon retirement.”
As readers of my blog (this one and The Teacher’s Advocate) know, I’ve been saying something similar for over a decade. The vast majority of 403(b) & 457(b) plans that our nation’s state (which includes cities, counties, municipalities, etc.) government employees invest in are high in cost, laden with surrender charges (and long surrender periods) and pay commissions that would likely not be allowed in ERISA plans (state government plans are exempt from ERISA).
Fiduciary responsibility is left to the states to determine and many states don’t have the best protections. For those that do – much of the time the employer is ignorant of these laws. Fiduciary truly is the “F” word. Siedle says it this way “At first glance, it’s clear that 457(b) and 403(b) plans are an investment backwater. Whoever is supposed to be making decisions and watching over these plans, isn’t, and probably has never been told he or she has a legal, not to mention moral, obligation to establish an investment program is good for participant workers.”
However, for all the poorly run plans that exist, there are some very well run plans and they are increasingly setting an example for the others and driving down costs as well increasing transparency. Many of these plans have trustees (fiduciaries) who follow ERISA principles and are members of a growing association that serves government defined contribution plans named NAGDCA, or the National Association of Government Defined Contribution Administrators. Even more of these plans have hired fee-only consultants to structure and monitor their plans, bringing a professional eye to a world heavily dominated by commission based salespeople.
I’ve had the pleasure of serving government DC plans for the better part of the last decade and only discovered NAGDCA in 2006. The beauty of NAGDCA is that it demonstrates that for all the bad plans Siedle mentions, there are other plans doing things the right way and in many cases doing things better than their 401(k) cousins.
NAGDCA brings together the fiduciaries of plans from across the nation to help them run their plans in an efficient manner. There is an annual conference (September 30th – October 3rd in San Diego) and webcasts throughout the year on timely topics as well as a presence in Washington.
This last year NAGDCA has been working hard to provide resources for sponsors of government 403(b) plans and even created several sessions dedicated to 403(b) for the conference.
I guess my point here is that I agree with Ed’s assessment of the 403(b) & 457(b) marketplace – it’s a mess and I’ve used the term “Wild, Wild West” for as long as I can remember. My perspective on the matter however might be slightly different though as I see a bright future ahead for both of these plans as organizations like NAGDCA bring together the right leaders to effect change.
The fee-only consultant community is also rapidly helping participants transfer from the commission based old way of doing things. For the first time in my career I can see a path for government DC plans to follow and that path was started by a handful of government employees, record keepers, consultants and organizations who a long time ago had a different vision for these plans. That vision has grown significantly over the years and this year’s NAGDCA conference will be the most attended ever.
There is (if you’ll allow me to say it) hope and momentum in the fiduciary movement and I am willing to bet that ten years from now, when we look back – the change that occurred will have been dramatic. Yes, the road ahead is long and the path already travelled has been difficult, but I can see the light.
Full & Proud Disclosure: I am a member of NAGDCA!
Scott Dauenhauer CFP, MSFP, AIF