Spring 2009

The Model Plan

For almost two years, Creative Benefits for Educators has been in the forefront of activities putting Florida educators in position to benefit from coming changes in federal regulations regarding employee funded retirement programs. See the following questions and answers regarding the coming changes and how they will affect you and all members of FEA.

What is a Section 403b plan?
Also called tax-sheltered accounts, a 403b plan is a type of retirement plan for employees of tax-exempt organizations, including public schools. "Pre-tax contributions," are withheld from an employee's pay check and deposited directly into the plan. Additionally, employers are allowed to make direct contributions on behalf of employees.

What are the IRS reforms and how is IBC involved?
In 2007, the IRS established new regulations that hold school boards and other public employers more accountable for the operation of the 403b plans offered to their employees.

There are about 130,000 active 403b accounts in Florida K-12 today, with another 60,000+ dormant ones (no contributions are currently being made).

Under the umbrella of the Independent Benefits Council (IBC), the four major education groups - the Florida Education Association, the Florida Association of School Administrators, the Florida Association of District School Superintendents and the Florida School Boards Association - decided to develop a 403b Model Plan that could be recommended to all 67 school districts.

The IBC's objectives were to create a Model Plan that would:

  • Assist all 67 districts in complying with the new IRS rules, and
  • Utilize statewide purchasing power to negotiate the best possible combination of quality, service and pricing for employees throughout the state.

Has this effort been successful?
Yes! The four organizations launched a comprehensive process resulting in the adoption of the Model Plan, which meets the IBC's goal of delivering a plan to the districts that complies with the new IRS rules and provides significantly better pricing of high-quality 403b products available to employees.

The Model Plan was adopted on January 28, 2008 and implemented by most Florida school districts during 2008.

What was the process?
IBC organizations contributed the funding to hire an independent consultant to assist in developing the Model Plan.

None of the IBC's member organizations will benefit financially from the outcome of efforts to reform 403b program or implementation of the Model Plan.

The IBC's consultant in this effort, Gallagher Benefit Services (no relationship to former Florida CFO Tom Gallagher), in Boca Raton was selected from six companies that responded to a request for proposal (RFP) seeking companies interested in working on the project.

TSA Consulting Group, which provides independent compliance administration and educational services on 403b plans for 64 of the 67 school districts, also agreed to assist the IBC.

A work team of school district Risk Managers also worked with IBC throughout the process.

It was agreed that the Model Plan: whould be limited to at least three, but no more than five, companies in order to negotiate significant cost savings for employees; and the Model Plan would include three categories of investment portfolios to reflect the diverse needs of Florida's 350,000 teachers and professional staff. The three categories would include plans ranging from those offering a high level of personal service - at a moderate price - to a low/no-service approach with rock bottom pricing.

The three investment categories are:

  • Annuities (high service, moderately priced)
  • Multi-product custodial accounts (mid-level service; lower price)
  • Mutual funds (low/no service; lowest price)

All interested companies were invited to participate. Gallagher contacted all of the 90 companies currently providing 403bs in Florida K-12 and posted the RFP on an industry Web site to encourage interest from companies not currently operating in Florida.

How many companies bid?
24 companies submitted 30 proposals (some responded in more than one category).

After initial evaluation, the field was narrowed and 11 companies were invited to interviews in Tallahassee.

Additional drill-down occurred with follow up meetings at Gallagher's offices in Boca Raton.

On January 28, 2008, Gallagher presented its recommendations to the IBC.

What criteria were used in evaluating vendors?
Each of the plans was scored in seven categories:

  • Expense charges
  • Investment options
  • Participant services
  • Company experience
  • Conversion and implementation
  • Administrative services
  • Account administration services

Additionally, all vendors were required to provide full fee disclosure.

What did Best in Class companies promise to do?
Each of the five companies signed a Letter of Commitment agreeing to:

  • Certify that the plan proposed for IBC is the best it currently offers in any Florida K-12 district.
  • Offer favorable rates to all districts regardless of their size.
  • Automatically upgrade plans when newer, more enhanced products become available.
  • Ensure that its representatives agree to sell only the product bid for the Model Plan (no bait and switch).
  • Provide a detailed plan to convert its existing contracts to the Model Plan, thereby creating immediate benefits for their current participants.
  • Reduce its fees to all adopting school districts as statewide assets under the Model Plan grow.
  • Guarantee rates for three years. IBC's consultants will review financial data from years one through three and, if they find that a company's proposed fees for subsequent years are excessive, may eliminate them from the Model Plan.

How will the Model Plan benefit employees of the 67 school districts?
This is the first significant statewide reduction in pricing since 403bs were established 50 years ago.

The approved plans are the best offered in Florida K-12.

The Model Plan companies will offer these improved, lower priced plans to employees throughout the state, regardless of the size of the districts that employ them. Small and medium-sized districts will stand to benefit the most from participation.

Companies in the Model Plan will reduce their pricing even further in the future, as their assets grow - and these reductions will apply to everyone, no matter how large or small the district.

How do we know that school system employees want this?
A Mason-Dixon poll of FEA members, commissioned by the IBC, was conducted to measure attitudes toward retirement and financial matters. The survey results strongly support the IBC's efforts to initiate reforms in the 403b industry. Among the results:

  • Nearly 9 out of 10 are concerned about their ability to meet financial needs after retirement, with the same number concerned that Social Security may not be available to them when they retire.
  • 8 in 10 say they are not entirely satisfied with the financial results from their current tax-deferred investment plan.
  • 8 in 10 say they do not have a good understanding of the fees they are being charged by the companies that manage their investment plans.
  • 9 of 10 say it is important for them to know they are getting the best deal for their investment dollars.
  • 3 out of 4 say they are willing to pay more in fees in return for plans offering either some personal service or full service.
  • Most importantly, 8 in 10 say that if the state's four major education associations got together to evaluate all of the plans and negotiated the best service and lowest fees for school employees, it would be very important that these plans be available to them through their respective school districts.

What happens to those who have an existing investment account with a company that's not authorized by the school board?
The new IRS regulations became effective January 1, 2009. After that date, 403b contributions can be made only to companies that have been authorized by the school board and that meet the new IRS requirements.

Individuals who have existing accounts with companies that are not authorized by the school board may leave their funds in their accounts, but they may not make new contributions to these accounts.

Teachers and education staff professionals who have existing accounts with companies not authorized by the school board may choose to transfer their assets to one of the authorized companies; however, this decision should be made after carefully considering the impact of any surrender fees or termination charges, based on the terms of the existing contracts.

What options do school boards have?
They must adopt new procedures regarding 403b plans.

Approved provider companies must comply with the new IRS regulations.

Each school district may adopt the Model Plan or develop its own slate of "authorized" provider companies.

If a school district would like to add other providers in addition to The Model Plan, every effort should be made to require that any companies added to the Model Plan meet the higher standards--and fee reductions--agreed to by the companies selected by IBC to participate in the Model Plan.

Dollars invested in 403b accounts are not school board funds... they are retirement investments made by employees, themselves.

With school funding projected to be very tight for the foreseeable future, adoption of the Model Plan may be the best opportunity to put money in teachers and education staff professionals members' pockets, and it won't cost taxpayers - or the districts, themselves - a penny!

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