San Diego's Fringe Benefit Consortium's Math Doesn't Math In District Group E-mail

An awkward email that I annotate feels like gaslighting

Fringe Benefit Consortium Email to School Districts, Annotated

The Fringe Benefit Consortium in San Diego recently approved a controversial contract to allow a 403(b) vendor to take over the Deferred Compensation program (which includes a 403(b) and a 457(b)). You can read my commentary on the topic here and here. The San Diego Union Tribune also wrote an article that you can read here.

Due to the controversial nature of the awarded contract, the FBC received a lot of questions from member school districts. The retiring program manager sent out an email recently to address those questions. The answers were less than satisfying.

Below is the email, to the right is my annotation of the answers. You may find many of the answers troubling, especially when you realize that the people who are making decisions on your behalf are making simple math mistakes in official emails.

Until this contract was awarded 403bwise.org had rated the FBC program Green, one of the highest possible ratings. We now rate it Red, one of the lowest.

The following email was sent by Dan Puplava to FBC member districts, my comments are in the purple indents:

Hello, 

I wanted to take the time to write to you and clarify some questions that have come up. While only a couple of districts and charters have inquired, I want to take a moment to ensure all our members stay informed with accurate information.  

Q: WHY IS THERE A CHANGE AT ALL?  

A: I have been the manager for the FBC Deferred Compensation program for over two decades and would like to retire this year (some of you may have heard that before). In that time, the program has grown from a few districts and a couple hundred participants to over a hundred districts and charters in three different counties. Yet the goal of the program has remained the same, to provide the lowest cost program and to help the education community plan and prepare for retirement. The program has grown in scope and size such that hiring one person to replace decades of experience could prove detrimental to the program.

“There are programs much larger than this one that have a single person as the overall Program Manager, in fact the overwhelming majority do. In every instance, that person is an employee of the government entity, not an employee of a vendor.”

A Request For Information (RFI) was issued to solicit feedback on how the program could work, being professionally managed while keeping the founding goals intact. There were several responses to the RFI. 

“An RFI is NOT an RFP. This is not a typical process for awarding a large contract for such an important position. This is abnormal in government. Notice how the RFI was issued to "solicit feedback"? It wasn't supposed to award a contract, that's what an RFP is for.”

PlanMember’s response offered the most collaboration, expertise, and resources to manage and market the program with the least disruption to service and a commitment to our founding goals. While Empower chose not to respond to the RFI to manage and market the program, they elected to remain the record-keeper, a preferred provider, and a strong partner for the plan.

Q: WILL PARTICIPANTS HAVE TO PAY FOR PLANMEMBER SERVICES? 

A: Participants will continue to have the ability to select financial services from any approved vendor, just as they always have. They will also have the ability to take a “DIY” or, Do-It-Yourself approach, just as they always have.  

“Notice they didn't answer the question? 

The answer is yes, those who want to use PlanMember's services will have to pay a fee. 

“That fee was "negotiated" by the FBC, but not within a Request for Proposal process and the fee is not insignificant, it's very high at 1.50%. You must pay a 1.50% annual fee to PMS to use their services. This is on top of any additional products they may sell you.

We are not saying PMS shouldn't be compensated for their services, simply that this fee was not negotiated within a typical government RFP process. 

In addition, there is no indication that PMS reps will be required to act in a fiduciary capacity at all times when dealing with participants or potential participants. 

They will have to act as a fiduciary when selling the fee accounts, but that doesn't preclude them from taking off the fiduciary hat and putting on a sales hat to sell other products.”

Q: WILL THERE BE NEW SERVICES ADDED THAT PARTICIPANTS HAVE TO PAY FOR? 

A: There will be new services and products added that participants can elect to pay for, but there will be no hidden fees, no surprises. For example, currently with Empower, participants can elect to pay for a “Managed Account” but do not have to and are not automatically enrolled in a managed account.  

Under the prior service model, if a participant needed help that went beyond the scope of basic 403b/457b help, such as help with aging parents, or preparing for kids to go to college, they would have to seek professional advice outside of the program. While some participants have outside resources to turn to, this would present a challenge for others. Under the new model, FBC-trained representatives are available for those who would like to work within their district’s plan. People who would like professional help with these matters can pay for help outside of the plan as they have done in the past, and now they can also pay to get help from someone that has been trained and vetted from within the program as well.

“Again, no mention of the 1.50% fee or the fact that PMS may sell ancillary products or services to you.”

Q: IS THE DISTRICT GOING TO BE FORCED TO USE PLANMEMBER SERVICES? 

A: PlanMember has been contracted to manage and market the program. Districts will not be forced to use their ancillary services, just as they are not forced to use Empower’s ancillary services, such as managed accounts, or any services or products provided by any of the 40-approved vendors already working with participants. 

“No one has claimed that participants will be forced to use PMS. 

What we are saying is that the new program is much more expensive than the Empower program. Those promoting the PMS program don't get paid to promote the Empower program and are not required to act as Fiduciaries 100% of the time they are making recommendations. 

Worse, the incentives in place may lead to PMS pushing those who they don't want to work with (those who they can't make enough money on) into the Empower program and only working with those who have the assets or the willingness to purchase other products from them. This is the opposite of what the FBC is promoting - financial advice for all.”

Q: HOW CAN WE BE SURE PLANMEMBER WON’T TRY TO GET PEOPLE TO MOVE THEIR MONEY? 

A: The FBC is so committed to ensuring the founding goals remain the guiding principles for the program, that we have contracted with Innovest Portfolio Solutions to serve as a fiduciary for the plan and provide governance and oversight.

“This is new and added likely as a result of our complaints about how the Empower program could be used to market for clients to move to PMS. 

Originally, the Innovest contract was set to expire and the payments for Innovest's 3(21) service were to be made directly to PMS (Section 2.02(d) of the August contract).

One must ask however why would Innovest need to be added as a fiduciary if PMS has "no conflicts?"”

They will monitor accounts, vendors, provide general oversight and counsel.

“We are fans of Innovest and are happy that their services are being employed in this situation. 

So far, this is the most positive development that has come from our criticism. Whether it will be enough to prevent the movement of participant money out of Empower remains to be seen.”

The FBC is also committed to maintaining strong working relations with our partners at PlanMember, Empower Retirement, National Life Group, and SchoolsFirst Plan Administration; all of whom have demonstrated a dedication and commitment to FBC members. A house divided will not stand and it will not serve its members, so we have gathered a collaborative group of leaders in their fields to work under one roof.  

“National Life Group is our lowest rated vendor and does not work on a fiduciary basis. They are Red Minus rated and it's our opinion that the FBC has made a mistake in working with them.”

Q: IS PLANMEMBER INCREASING THE FEES TO 1.5% ON EVERYONE’S ACCOUNT? 

A: Absolutely not, PlanMember is not increasing everyone’s fees to 1.5%. The only way that one member will pay more for their account than another member, is if they elect to do so. Fee disclosures, explained to and signed by participants who elect to pay for such services, will be well-documented and tracked.

“At no point in time did anyone claim that everyone's fees would be going up by 1.5%. 

In fact, the opposite was claimed and a model created and made available to everyone to demonstrate how the Empower product might be raided by a program manager who is also a vendor.

The FBC stated in the meeting where the new contract was approved (January 12th, 2024) that PMS will not be allowed to market to existing participants in the Empower plan or move those assets. This is not stated in this document and this is something that we are waiting to see if it's in the updated contract.”

Q: WHAT DO YOU GET FOR A 1.5% CHARGE FROM PLANMEMBER? 

A: Most CFP’s will charge roughly 1% to manage your money, some will charge more if the account is small; however, this fee is not all-inclusive.

“If the FBC is indicating that you will have access to a CFP through PMS, this is not in the contract and not all PMS reps are CFPs.”

They must find a platform to use as a 403(b) that will also serve as a custodial account.  One that is used quite often is ASPIRE (see 403bCompare.com for ASPIRE with all fees disclosed). ASPIRE charges 15bps to use their platform with an average mutual fund cost of 45bps, plus a $40 annual fee, and a $3 monthly fee. If you add all this up along with the CFP’s fee, and now your cost is now a total of 1.62% which is more than the cost of PlanMember.

“This is a highly misleading example. 

Aspire charges 0.15% as an asset based fee and $40 per year as administrative fee. Of the $40 annual administrative fee they rebate up to $20 per year to the compliance administrator to help offset compliance costs. Aspire does not charge a $3 monthly fee, this is likely a reference to the compliance fee that the FBC charges (via the compliance administrator Schools First Federal Credit Union). Of course Aspire has not been allowed to be in most FBC districts, so it's not a fair comparison anyway. 

Aspire allows you to purchase Vanguard and Fidelity Index funds which have expense ratios as low as 0.02%. Thus your all in cost with a CFP advisor as presented by the FBC is 1.00% plus 0.15% plus 0.02%  (or 1.17%) plus a net $20 net admin fee (or $40 if no compliance fee). 

The FBC apparently has a problem doing math as the fees they use in their example add up to 1.60% (1.00% for the CFP + 0.15% platform + 0.45% average mutual fund cost), not the 1.62% in their example. 

In addition, the dollar based fee is represented as a total of $76 when the true amount is no more than $40 and possibly $20. Any additional compliance fees are passed on to Aspire by the FBC (or the underlying plan sponsor). At least this is my assumption, I can’t figure out what other fee they could be referring to.

The FBC needs to do a better job of proofreading their materials and get the math correct. They are also dramatically misrepresenting the fees of a competing product (which is exactly why a vendor should not be running the program). 

Note: After writing this I learned that Aspire is not an available option in most FBC school districts (which appears to be a violation of the state's insurance code). Why Aspire is being used as an example is beyond me.”

What do participants get for the 1.5% charge?

“Is the FBC saying that PMS will not have to pay the compliance fee that all the other vendors are required to pay? Why is this fee left out?”

They get full service from a representative who can handle all their financial questions, including their spouse’s account, even if they do not work for a school district. This includes, but is not limited to, college funding, IRA and Roth accounts, estate-, tax- and insurance-planning, STRS or PERS pension calculations, and outside funds that are not invested in a qualified account. To reiterate, this charge only applies to participants seeking this kind of support.  

“In other words, they've partnered with a vendor that they will allow to market products and services to you outside of the 403(b). 

No mention that they are not required to be a CFP or act in a fiduciary capacity at all times. 

They do not explain what full service means or what the effect on your account of a 1.5% fee will be. Our colleague at Personal Finance Club has a great infographic showing how fees affect your money over time.

They also failed to mention the average cost of a PMS mutual fund, which according to 403bCompare is 0.23% in the Elite product. If we are comparing a CFP that charges 1.00% in the previous example using Aspire, the total asset based fee is 1.17%, with PMS it would be 1.54% (if we use the lowest-cost index fund). 1.50% is not a discounted fee, no matter how the FBC tries to sell it as one.”

Q: WILL PLANMEMBER TALK PEOPLE INTO MOVING THEIR MONEY INTO A PLANMEMBER ACCOUNT? HOW CAN YOU ENSURE THIS WON’T HAPPEN? 

“This provision was added due to the work 403bwise did in pointing out how the Empower program would be a huge target to move assets onto the PMS platform. 

What is left out in this scenario is that PMS is going to be given free reign in the districts that adopt them to poach assets from other vendors and will have the advantage of being endorsed by the FBC. This is a huge strategic advantage for a vendor to have, yet there was no RFP process.”

A: First, PlanMember has an excellent reputation and a presence in over 4,000 districts across the country. They were chosen over other RFI respondents because of their willingness to collaborate with our existing partners and work with our districts and charters. Their mission aligns with our founding goals. Other responders were more interested in “taking over” the plan from Empower. PlanMember was interested in building on our current partnerships and growing the plan.  

Second, rest assured, both Innovest, our fiduciary, and Empower Retirement, our record-keeper, are watching to ensure that people are not being persuaded to move their funds from wherever they are currently, into a PlanMember account. We are so committed to this end, that we have an agreement with Empower stating they can raise the fees if this kind of activity takes place. The FBC Board (made of our member districts and charters) and our fiduciary will also be closely monitoring

“Maybe I'm confused, but if the FBC and Innovest are watching to ensure that funds are not moved to PMS from Empower, then why is it necessary to have an agreement in place for Empower's fee to rise if it happens? 

How could it happen in the first place?

Also, the penalty for PMS poaching assets from Empower will be felt by those who remain...with Empower? How is that fair?

If the fiduciary is monitoring closely, how could it happen? What process is in place and why is a fee arrangement needed if it's a process that works?

In addition, if the PMS services are so great, why are Empower participants prevented from moving their assets? Do you see the conflicts here?

I thought PMS would have no conflicts as a governing advisor? It was in their RFI. I can provide you a copy.”

www.403bcompare.com

Finally, there are roughly over 150,000 potential participants across the FBC. Empower currently has about 13,000 of those participants. PlanMember has committed to increasing participation levels at districts, increasing attention to locations and populations that have been underserved. Our goal is to create a culture of saving within our member districts and charters. Focusing on the 13,000 participants who are already saving for retirement with Empower would be counterintuitive. Instead, in the coming months you will see a focus on the development of a program that works with your site and for your staff. 

I want all of you to know I am committed to this program. This program was established with the goal of educating and changing peoples’ lives for the better by offering the best voluntary retirement plan possible. The goal has always been to grow the program, because growing the program means more people, who have dedicated their lives toward the education of others, can retire with peace of mind. That’s what it’s about. We recognize that change can be scary, and fear is often borne from assumptions. I want to remind you, the FBC is the member districts and charters that comprise it. You are receiving this email because you are the FBC and your input is valuable and we welcome your questions. Every decision made, is made in the best interests of our participants with the watchful eyes of our board members, our fiduciary, and our record-keeper.

“This program was developed in a manner outside the normal channels of government (an RFP at a minimum should have been issued). The decisions being made do not pass fiduciary muster in my opinion as a long time fiduciary. This program is designed to enrich one vendor over the other vendors. 

In my opinion, the FBC abandoned a good program with Empower to focus on a program that would benefit a vendor, not the participants.”

If you would like to meet to discuss any of this information, or how you think the program might work best for your site, please let us know.

“My suggestion is that all school districts that are part of the FBC should reject this program and ask for something that is much more objective and less conflicted.”