San Diego County Office of Education's $100 MM Giveaway?
The Fringe Benefit Consortium subsidiary is responsible
Disclosure: I work for the non-profit 403bwise.org as the Director of Research.
The San Diego County Office of Education (SDCOE) sponsors the Fringe Benefit Consortium (FBC), which recently issued a Request for Information (RFI) to replace their longtime Program Manager for the 403(b) and 457(b) retirement plans they manage. The result was a contract awarded to PlanMember Services (PMS), a little-known company with ownership ties to the infamous 403(b) vendor, Equitable, a company fined $50 million by the SEC for masking some fees. PMS specializes in selling financial products to public school employees; these products are often high-cost. On the low end, this contract could be worth $30 million to PMS over the next ten years and $100 million if allowed to operate for more than 15 years. There was no RFP.
The FBC is a government consortium sponsored by the SDCOE that uses the collective buying power of many member school districts that, in theory, lowers the cost of common employee benefits. When run correctly, consortiums can save school districts and employees substantial sums of money. Emphasis on the word can.
The FBC started offering 403(b) and 457(b) retirement products in 2001. According to the RFI issued in April, the assets have grown to nearly $800 million. The fees on the program have fallen as assets have risen, and the investment options have mostly gotten better. Until recently, 403bwise.org rated the FBC Mutual Fund program as a Green-rated vendor (Green is the highest rating; see here for background). The FBC partnered with a 403bwise.org Red Minus-rated vendor, National Life Group, to distribute indexed annuities to compete with some of the worst players in the 403(b) world. This and other questionable decisions lowered the FBC rating to Red (the lowest of three ratings: Green, Yellow, and Red).
According to the RFI issued in April, the position of Program Manager is a fiduciary. As a fiduciary, the Program Manager is always required to place the interests of the participants first. The FBC acknowledges this fiduciary status on page 4 of the RFI:
“The Program is a voluntary benefit program and managed by the Deferred Compensation Program Manager (hereafter referred to as “Program Manager”). The Program Manager reports to the Executive Director of the FBC. The Program, as part of the FBC, is the ultimate responsibility of the FBC Executive Committee and Board of Directors. All three above mentioned positions are fiduciaries of the program. It should be noted that the Program Manager will be retiring in the next 8 to 12 months.” (bold added)
Given the significant number of conflicts of interest, it doesn’t seem reasonable to believe PMS can always act in a fiduciary capacity. PMS is so conflicted that its most recent Reg BI disclosure document is 23 pages long. While everyone has conflicts, the numerous conflicts that plague a company like PMS should have disqualified them as an option very early on.
How lucrative will this plan be to PMS?
I decided to run a basic analysis using conservative assumptions to determine how much money this contract could bring PMS over various periods; you can see the model here. The seven assumptions are:
1. PMS reps move only 5% of current FBC assets each year into their “professionally managed” solutions; fees are earned for only half the year on assets moved in that year.
2. The FBC base program (low-cost option) grows by 10% yearly between contributions, exchanges-in, and market growth.
3. PMS reps place assets only into the fee-based option, not indexed or variable annuities.
4. The assets moved into PMS fee-based accounts experience zero net growth.
5. No custodial fees, loan fees, or account closure fees are included.
6. No earnings from selling ancillary financial products like life insurance, IRA rollovers, IRAs, Roth IRAs, brokerage accounts, and non-qualified annuities.
7. PMS receives no income from the core FBC program, currently with Empower.
I can’t stress how conservative I believe these assumptions are. PMS will be able to earn revenue selling ancillary products; they will also have the option of taking over the core program and earning additional fees.
It’s entirely possible that PMS could collect over $7.5 million in fees from professionally managed accounts in just five years. This number rises to north of $30 million over ten years and exceeds $100 million by year 17.
The FBC had a choice to go in a different direction. They could have hired a professional, not a vendor, to manage the program, and they could have used the vast asset base to hire more salaried financial representatives to continue growing and servicing the program. If they managed this process well, they could easily have a dozen or more salaried financial representatives within five years. The program could remain reasonable in cost, provide excellent service, and be a beacon of how consortium plans can be managed. It’s unclear why this route was not taken; the Executive Director and the Board have a lot of explaining to do.
The current FBC Progam Manager has been invited to explain this decision on the Teach and Retire Rich podcast (produced by 403bwise.org and in which I am a co-host) but has thus far declined. The offer still stands for the outgoing Program Manager to appear on the show, but the Executive Director and the FBC board are also welcome to appear on the podcast and explain this contract. The member districts and participants deserve an explanation.