I Want My NEA Direct Invest 👊🏻
January 25, 2022
Older readers may recall MTV's early 1980s campaign to gain cable subscribers. Called “I Want My MTV” the full throated plea featured era icons The Police, Pat Benatar, Cyndi Lauper among many others. It was catchy, and it worked.
I Want My NEA Direct Invest?
We are no fans of the National Education Association’s financial entanglement with the firm Security Benefit. The pay-to-endorse a high-cost 403(b) scheme has been a disaster for teachers. So much so that the union was actually sued for its endorsement. The suit claimed that since 1991 “N.E.A. members have invested more than $1 billion in the Valuebuilder plan” and that “fees levied in the Nationwide and Security Benefit annuities ‘far exceeded’ those of comparable retirement vehicles available elsewhere. The fees in one of the annuities recommended for the Valuebuilder plan reached 10.62 percent, according to the suit, making it exceedingly difficult for investors to make money in the plan” .
The suit was ultimately dismissed because the K-12 403(b) falls outside of ERISA fiduciary oversight. Around the time of the lawsuit Security Benefit created what we have dubbed “the lawsuit protection product” — the low-cost NEA Direct Invest 403(b). But there are two problems: (1) Security Benefit doesn’t promote it (not a big revenue generator); (2) Too many school districts offer Security Benefit high-cost products but not NEA Direct Invest.
Access to NEA Direct Invest
If your school district offers Security Benefit, you have access to the NEA Direct Invest product. Unfortunately, too many schools are blocking participation. It’s often due to ignorance. Which unfortunately is all too prevalent in the K-12 403(b) world.
My podcast partner fiduciary planner Scott Dauenhauer, CFP offers the following advice which comes from this article he wrote.
What should you do if your school district offers Security Benefit but not Direct Invest?
First, you need to determine the reason the product is not allowed. Note: It's rare for a district to approve a vendor then pass judgement on specific offerings. Once an employer adds a vendor, they don’t usually care which product your money goes into (as long as it meets 403(b) requirements).
The reasons I’ve heard for restricting access are:
1. We require an advisor on every account
A school employer refused to offer Direct Invest in one situation due to the lack of an advisor connected to the account. They required, without explanation, an advisor for any 403(b) product. The IRS has no rule or regulation that requires an advisor to be connected to a 403(b). There is no special fiduciary exemption the employer receives by having an advisor connected to the account (quite the opposite). The irony is that Security Benefit doesn’t employ any advisors, at least in the technical sense. Security Benefit contracts with Registered Representatives who may or may not also be registered as Investment Advisor Representatives (IAR). Even if the rep is an IAR, they are likely prohibited from acting in that capacity when representing the Security Benefit products. So the employer, in this case, was violating its unwritten policy.
It’s a challenging situation if this is the reasoning. One approach is to ask the district to define the policy in writing, explicitly describing what the term advisor means and the reasons for such a requirement. Suppose the purpose is to relieve the district of an administrative burden. In that case, you are unlikely to make progress (though suggesting a competent third-party compliance administrator might be a good idea). Suppose the reasoning is to protect the employee from unscrupulous sales practices. In that case, the employer might realize they’re doing the opposite. Few of their employees are working with a fiduciary. The employer could require all advisors to act in a fiduciary capacity when recommending a 403(b) to the employee.
2. The Security Benefit representative appointed to our school employer says we can’t
This is the most common complaint I’ve heard or read about in message forums. Some representatives have close ties to the school employer, the local union, and the compliance administrator. The reps use those connections to mislead. Often, the Security benefit representative has the relationships they have because of their ties to the NEA Retirement Program. Using this connection to deny employees the right to the NEA Direct Invest product, they abuse their power.
Unfortunately, suppose the rep is so close to the employer that the district takes the representative’s word over yours. In that case, you are going to have issues. Telling your employer that the rep is taking advantage of their position won’t likely win you.
Suppose your employer is willing to make a call to NEA Member Benefits. In that case, they will find that Direct Invest was always intended to be offered alongside the other options. Member Benefits can be reached at 1-800-637-4636.
3. It’s an administrative burden
While I can understand the objection here, there isn’t an additional administrative burden on the school district. They have already approved Security Benefit as the provider. They do not need to do anything different when processing your contribution to NEA Direct Invest than they do with any other Security Benefit product. If they can send money to Security Benefit, they can offer NEA Direct Invest.
4. The compliance administrator won’t allow it because they can’t make money
This objection is rare. Selling financial products is an obvious conflict. Some smaller compliance administrator firms make their money by selling products for fees and commissions. They restrict vendors based on whether they can get paid from the vendor. If this is your issue, you have to convince the school district of the conflict and hope they can use their leverage with the compliance administrator to force the change.
5. Misunderstanding of how vendors are approved (usually the vendor, not the product)
Traditionally, it’s the vendors that get approved, not the vendor’s products. The IRS cares about both.
Every product that 403(b) money flows into must meet specific regulatory requirements. Often, the compliance administrator will not verify each product is qualified; they will make the vendor sign an agreement stating such.
Once Security Benefit becomes an approved vendor, there is no reason to restrict money going to any Security Benefit product that is IRS qualified. The NEA Direct Invest is an IRS eligible product. It’s literally the only Security Benefit product with a reasonable fee structure (in my professional opinion). If the school employer prohibits which products 403(b) contributions should go to, it’s not the Direct Invest option that should be restricted.
I realize this is not necessarily an argument. Still, Direct Invest is an eligible 403(b) option; not offering access to it when offering access to other Security Benefit products is bordering on the cruel. It’s compliant, available, doesn’t add to costs or administrative burdens, and is likely the only reasonably priced option available.
6. There is no fiduciary on the NEA Direct Invest product
One objection I’ve encountered is that allowing participants to invest in the NEA Direct Invest will increase the school district’s liability. This is not true. If anything, the school district increases its liability by NOT offering Direct Invest.
Suppose a school employer restricts access to certain vendors they are taking an active role in the 403(b) program. In that case, this may mean they could be held liable for the outcomes (this is dependent on state law). High-cost products are cannon fodder for plaintiffs’ attorneys. Even if we haven’t seen high-fee lawsuits come to school districts yet, it’s not impossible to imagine they could. When an attorney realizes that the school employer actively restricted access to a low-cost vendor in favor of a high-cost vendor, the plaintiff’s attorney might have a case.
The school district should also understand the representatives are not acting in a fiduciary capacity at all times (sometimes ever) when distributing Security Benefit products. In fact, the NEA Retirement Specialists contracted by Security Benefit are only allowed to offer Security Benefit products. Restricting what a representative can sell to a single company precludes that “advisor” from being a full-time fiduciary to participants.
“NEA Retirement Specialists, when making recommendations to an NEA member, offer only Security Benefit products.” (NEA Member Benefits website on 1/18/2022)
7. No employees have expressed interest, so we don’t offer it
I’ve heard this objection a few times. When I’ve spoken to employers with this objection, I ask them what additional time and resources would it take to offer it anyway? Since Security Benefit is already a vendor, the answer is always none. It costs the school employer nothing to add the product. At worst, it’s a phone call or an email, but that takes less time than responding to the employee begging for Direct Invest to be added. Usually, the light goes on at this point.
Often, the employer will spend more time and resources fighting to add the Direct Invest product than if they just added it. It shouldn’t matter that only one person is asking for it. By making it available, others might use it in the future, and since it costs nothing, the district has nothing to lose.
If you are a district benefits official reading this, add Direct Invest and get on with your day! You have an essential job; this shouldn’t take up your time. It’s a quality product, and it’s already available from the vendor, give the green light and move on! Be a hero for an employee.
Thanks to Scott for this excellent advice.
Stay wise and well (and click on that MTV link at the top of the blog for a trip down memory lane).