Omni/TSACG/Daybright Send Letter to Baltimore City Public Schools Board Members
I annotate the highly misleading and disappointing letter
Recently, the largest provider of 403(b) compliance services in the United States lashed out at one of its large clients, the Baltimore City Public Schools, in a letter addressed to the board.
The letter was meant to address the District’s decision to take control of the school district’s retirement plans; however, instead it turned into a cautionary tale of a conflicted company pushing what is in my opinion misleading information.
This post is meant to annotate and dispute the letter’s talking points and provide my own opinions.
I find it essential to point out two things that struck me about the letter:
It’s audacious of a contractor for the school district to advocate on behalf of the salespeople and vendors of the 403(b) plan over the plan participants the school district is charged with protecting.
It should be noted that it’s the vendors that are responsible for paying TSACG’s fees. Does TSCACG view those who pay them as their clients, not the plan provider who hired them to be objective? This is yet another reason why reform of the 403(b) is desperately needed.
You can find a copy of the letter here.
My annotations:
“Loss of Current Investment Provider: The district is being advised by a consultant whose recommendations frequently include stopping all contributions to the deselected providers. If the district adopts this recommendation, over 98% of current contributions will stop. It is likely that a significant number of these disenfranchised employees will not re-enroll with the provider selected by the district.”
Response:
TSACG is misinformed. While I am not privy to any inside information, my understanding is that BCPS does not plan to stop participant contributions; instead, they will be redirected to the chosen recordkeeper. Participants current amount of money being deferred will not change; only the where those funds are sent to. The money will continue to flow from participant paychecks.
Should the board make a different decision about contributions, it will be incumbent on the new record keeper to have a plan to ensure participation does not fall.
“Loss of Choice: Over 4,000 employees currently contribute to the plan through their preferred investment providers. Forcing all employees into a single investment provider will eliminate their ability to choose the advisor and investment product that best fits their financial needs and goals. Earlier this year, the National Tax-Deferred Savings Association sponsored a survey of educators around the country, and the results were clear: educators want choice in their supplemental retirement plans (please see attached).”
Response:
In my opinion, TSACG fails to put the current project into context and misleads as to how advice works.
The norm in the United States of America for retirement plans is and always has been to offer a single option for a defined contribution plan. A single record keeper reduces plan complexity, dramatically lowers costs, enables proper oversight, promotes a unified education message, and enables participants to access investment options they may not otherwise be able to on their own.
TSACG also confuses the issue of choice. Being offered a list of bad choices is not choice. If a butcher offered you any cut of meat you wanted, as long as that meat was expired, would that be a choice? Of course not. It’s the illusion of choice.
Putting a plan out to bid forces vendors to compete, and when they compete, the participants win.
TSACG also misleads about participants ‘ability to choose the advisor.’
A single record keeper for an employer plan does not preclude an employee or participant from using any advisor they choose. In fact, by offering a lineup of low-quality 403(b) products, participants are prevented from working with a fiduciary advisor and are forced to work with a salesperson instead.
What TSACG leaves out of the conversation is that very few of the people servicing Baltimore 403(b) participants are Advisors in the technical sense. That is, most of the people servicing participants do not have a fiduciary duty to their customers at all times.
If one does not act as a fiduciary at all times with participants, they are not an advisor. They might be knowledgeable, personal, and a fine person, but they are not an advisor.
TSACG and the lobbying organization they belong to are guilty of equating all people who service 403(b) participants as “advisors” when, in reality, most are not fiduciaries at all times.
If TSACG is insinuating that the existing salespeople who sell the current 403(b) products will no longer work with participants because they will no longer receive ongoing contributions, perhaps the salespeople were only masquerading as advisors.
No one is forcing participants to move their existing assets to the new recordkeeper, only future contributions.
All participants will have the ability to choose any advisor (or salesperson) they prefer (assuming that advisor will offer their services without a public employer retirement plan subsidy), and they will be able to choose from an investment menu that allows them to properly diversify their retirement money, just like the best defined contribution plans in America.
Participants are not losing choice; they are losing access to high-cost, non-transparent financial products from insurance and investment companies that prey on unsuspecting educators.
It should be noted that TSACG’s parent company, Daybright, does NOT offer “choice” to its employees. They offer a single 401(k) plan with institutional-quality investment options at super-low costs. In other words, BCPS is trying to do what Daybright has done for its employees, and TSACG wants to prevent it.
Daybright has a fraction of the employees that BCPS has, yet offers a far superior defined contribution plan.
“Loss of Service:
During the Q&A phase of the RFP, the following question was asked to the district: “How many on-site/virtual education days does the City Schools currently receive? How many on-site/virtual education days will the City Schools request from the new provider?” Answer: “Please include 10 on-site support days and unlimited virtual meeting options in your response.” Given the number of district work sites, it is unlikely a single provider can provide the same level of service that is being offered by the advisors/investment providers in the plans today.”
Response:
TSACG continues to mislead when they use the term “advisors.”
They use this term to refer to anyone who services a 403(b); however, the overwhelming majority of financial professionals who service 403(b) products are either not advisors in the legal sense or are not acting as fiduciary advisors at all times. Instead, they are salespeople, often, highly conflicted salespeople. See the previous response.
What TSACG might get right in this particular response is that any winning vendor needs to provide appropriate coverage to school employees to educate and help enroll. Not having enough educational and enrollment opportunities would be a significant mistake.
We would agree with TSACG that 10 days of on-site support is not enough for the size of Baltimore City Schools.
“Reduced Participation: Experience from other districts shows that a single provider model drastically reduces employee participation in supplemental retirement savings, potentially leaving many financially unprepared for retirement.”
Response:
This is a statement that lacks data support. Many school districts across many states have successfully consolidated their 403(b) plans from multiple vendors into a single recordkeeper.
This is fear-mongering.
Over the past two decades, state and local governments have overwhelmingly consolidated vendors in their 457(b) plans to a single vendor, and these plans routinely have higher participation rates than government 403(b) plans. The state of Florida recently announced a plan to consolidate from three vendors to a single recordkeeper for its statewide 457(b) plan.
403(b) plans across the United States have successfully transitioned to a single vendor.
Montgomery County Public Schools
Denver Public Schools
Chicago Public Schools
Anchorage School District
There are dozens and dozens, perhaps hundred more.
It’s true that a poorly planned single-vendor transition could lead to lower participation, but it’s also clear that the status quo is not working. You have the worst of both worlds: low participation and high costs.
“Restriction of Plan Provisions: The provider frequently selected by the district’s consultant does not have the ability to adjudicate plan transactions unless they are the recordkeeper. Because of this restriction, participants will be forced to move their assets to the new provider to access funds for emergencies. This could result in the loss of a higher interest rate being earned on their existing account or the incursion of surrender fees.”
Response:
TSACG believes they know the outcome of the RFP before it is actually completed.
If this complaint is valid, it doesn’t invalidate the move to a single record keeper for the plan.
Instead, it argues that the chosen record keeper shouldn’t require participants to move their existing assets to the new record keeper to access their funds in an emergency. This is reasonable and should be addressed before selecting the winning bidder, but it has no bearing on whether the RFP should proceed.
“Higher Fees: The structure of the RFP requires the winning provider to pay a one-time $55,000 consulting expense to cover the cost of the RFP and pay $55,000 + 3% COLA for ongoing years. It is likely that some if not all of this expense will be passed on to the plan employees in the form of higher investment expenses. Further, this structure precludes low-cost, do-it-yourself providers, like Vanguard, from bidding. Currently, more than 350 employees who contribute to Vanguard could lose access to their Vanguard accounts and be forced into investments with higher fees, directly impacting their retirement savings.”
Response:
It’s a little rich for TSACG to point out how much a district contractor will be making, given how much they make from this plan.
With over 10,000 existing participants, it’s highly likely that TSACG is making multiples of what the current consultant will be paid.
TSACG should disclose how much revenue they collected from the Baltimore City Public Schools retirement plans in 2024 and 2025 (and the prior 17 years), and how those fees increase the costs of the products available. They should also disclose how that revenue will change as a result of this RFP.
Vendors pay TSACG to provide compliance. If vendors didn’t have to pay TSACG, they could, in theory, pass those savings on to their customers.
It is a common practice for consultant fees to be paid from plan assets. Nearly all consultant-led plans in the state and local government space are paid for from plan assets, and this has never prevented them from receiving competitive bids.
The irony is that participants are paying higher fees now because of the plan structure TSACG currently endorses.
The board must ask itself, is it better that 350 employees (Vanguard contributors) pay slightly higher fees so that 3,650 can pay dramatically lower fees?
Vanguard investors will not be forced to move their existing assets; only future contributions will be required.
“Potential Risks to Baltimore City Public Schools
A public school 403(b) plan cannot trigger or elect coverage under the Employee Retirement Income Security Act of 1974 (ERISA) as they are given the broad exemption found in 29 CFR §2510. 3-2. As governmental entities, public school districts are not subject to the fiduciary obligations imposed by ERISA under federal law. The consultant advising the district is known, however, to encourage their clients to assume a fiduciary role. Employees gain no legal protection or benefits from a plan being managed like an ERISA plan.”
Response:
ERISA is a law passed in 1974 that indeed does not apply to government plans. The statement that “Employees gain no legal protection or benefits from a plan being managed like an ERISA plan” is curious. Yes, the employer and the employee do not have greater legal protections from the employer acting like a fiduciary; however, to say that there are no “benefits from a plan being managed like an ERISA plan” is a stretch.
If there are no benefits to employees from ERISA, why has the law lasted so long and protected so many participants over the decades? It’s absurd to claim that ERISA provides no benefits to plan participants; it clearly does. There is a big difference between a program where fiduciaries make decisions for beneficiaries and one where people have no fiduciary duty, and we can clearly see those differences in how bad most 403(b) products are. Employees benefit immensely when fiduciaries are involved.
A school district should provide proper oversight of the retirement plans offered to its employees. Offering predatory products is a bigger risk to the employer than offering a retirement plan with fiduciary oversight, high-quality investment options, and low fees.
“No Fiscal Savings: Reducing the number of vendors does not result in cost savings to the district. In fact, if employees stop saving due to loss of choice, the district may face increased fiscal pressure as more employees are unable to retire on time.”
Response:
It’s striking that TSACG is suggesting not doing the right thing for employees because it might not save the school district money.
The likelihood is that a high-quality retirement plan will help the school district attract and retain quality employees and help those employees save more for retirement. This is a win for everyone, except TSACG, which omits that they are likely to lose a lot of revenue if they do not continue as the compliance administrator. Since we are not privy to how the plan will be structured or what contracts will be retained, we do not know whether TSACG will continue to service the BCPS after the implementation of the RFP.
TSACG likes to say it is independent, but its revenue comes directly from vendors who stand to lose access to the district. Many would argue that this clouds their objectivity.
“Compliance Risks: The single provider must aggregate data from all legacy vendors to ensure IRS compliance. An inability to do so will put the district in the position of authorizing certain plan transactions. Additionally, during the Q&A phase of the RFP, a question was asked concerning how the new recordkeeper would aggregate loan information to ensure compliance with IRC 72(p). The response provided was “the decision has not been made yet. ”Compliance with 72(p) is not optional. The structure being contemplated by the district potentially exposes the district to negative audits and federal fines as seen in neighboring districts.”
Response:
The new record keeper will need a plan to address compliance. If TSACG is suggesting that the deselected vendors will not provide data to the school district to help keep the plan in compliance, this seems more like a threat.
At no point did the district or its consultant indicate that complying with IRS regulations was optional.
More fear-mongering.
“Unproven Model: Similar approaches have been rejected in other districts, such as Frederick
County, Maryland, which maintains high participation and low fees with multiple providers.”
Response:
A single vendor is perhaps the most proven model in the United States.
Nearly all defined-contribution retirement plans in the United States have a single record keeper. This is across public and private as well as plan type (403(b), 401(k), 457(b) and 401(a)). To suggest otherwise is to mislead. In fact, the largest plan in the United States, the Thrift Savings Plan, is single vendor.
Many school districts have successfully transitioned to a single vendor.
“Audit Exposure: Surrounding districts have faced full IRS audits. Without a dedicated TPA aggregating data from all vendors, BCPS risks non-compliance and costly penalties.”
Response:
The IRS doesn’t prohibit a single record keeper for a 403(b) plan.
The IRS requires compliance.
The IRS also requires compliance from the vendors who have been deselected.
Going single-vendor does not preclude the winning vendor from maintaining compliance with the plan.
Compliance is obviously essential, and the winner of the RFP must do what is necessary to comply with all IRS regulations.
As the RFP concludes and a recordkeeper is chosen, I will continue to update on the progress.
Scott Dauenhauer, CFP, MPAS