Illinois 403(b) Reform Bill Falls Just Short
June 4, 2024
"What a long strange trip it's been." - The Grateful Dead
Jerry Garcia's iconic American rock band captures well the story of a K-12 403(b) reform bill in Illinois this year. Created and championed by educator-turned legislater Senator Karina Villa — who was sold a wholly unsuitable annuity product while working in education — the bill fell just short of success this legislative session. 403bwise.org had a front row seat to this effort (see our remarks to the Illinois legislature on the initial verson of the bill). And wow has has this process motivated us to push even harder to fix the broken K-12 403(b).
How the Legislation Would Have Saved Educators Tens of Thousands and Even Hundreds of Thousands of Dollars
Among other attributes SB2568 would have:
- Eliminated front-end and back-end sales charges
- Limited asset-based admin fees to 0.50%
It would have required all vendors to make available:
- Target-date index funds with an expense ratio that is less than or equal to 0.25%
- Broad-based domestic index fund with an expense ratio that is less than or equal to 0.10%
- Broad-based bond index fund with an expense ratio that is less than or equal to 0.10%
- International index fund with an expense ratio that is less than or equal to 0.10%.
Additionally, advisors would have been limited to charging 0.50% annually.
Lies. Damn Lies and The K-12 403(b) Industry That Profits Off of Educators
We knew there would be major pushback by the National Tax-Deferred Savings Association which never misses an opportunity to make saving for retirement more onerous and expensive for educators. We knew that other lobbyists and many of the high-cost firms would join the fight. What I think my partner, Scott Dauenahuer, CFP®, and I found most surprising was the outright lies told by this Axis of 403(b) Evil.
Lie 1 — A local lobbyist who helped the NTSA pass anti-consumer 457(b) legislation in 2023 told state unions that 403bwise was anti-union. His evidence? Our critique of the unholly alliance between the National Education Association and the high-cost firm Security Benefit. See podcast below on our attitude towards unions.
Lie 2 — A red-rated vendor (one of the worst of the worst) said in a Zoom call that they represented teachers. When challenged that their products were toxic and only permitted because governmental 403(b) plans fall outside of federal fiduciary protection enjoyed by the 401(k) they reacted with shock and outrage ("I'm shocked! Shocked to find that gambling is going on in here."). Watching these out-of-touch men fat-on-onerous fees and dubious business practices whine and protest was something.
Lie 3 — Perhaps the biggest lie, which was told in the aformentioned Zoom call, and in remarks by the "Axis" to Illinois legislators was that educators already enjoyed protection via the National Association of Insurance Commissioners (NAIC) Model Suitability in Annuity Transactions Model Regulation (275-1).
One big problem. And it can be found beginning at the bottom of page 1 of this document which reads...
"Section 4. Exemptions Unless otherwise specifically included, this regulation shall not apply to transactions involving:
A. Direct response solicitations where there is no recommendation based on information collected from the consumer pursuant to this regulation;
B. Contracts used to fund:
(1) An employee pension or welfare benefit plan that is covered by the Employee Retirement and Income Security Act (ERISA); Suitability in Annuity Transactions Model Regulation 275-2 © 2020 National Association of Insurance Commissioners
(2) A plan described by Sections 401(a), 401(k), 403(b), 408(k) or 408(p) of the Internal Revenue Code (IRC), as amended, if established or maintained by an employer;
(3) A government or church plan defined in section 414 of the IRC, a government or church welfare benefit plan, or a deferred compensation plan of a state or local government or tax-exempt organization under Section 457 of the IRC; or
(4) A nonqualified deferred compensation arrangement established or maintained by an employer or plan sponsor.
What's Next for 403(b) Reform in Illinois?
Senator Villa has zero interest in backing down. That much is clear from our recent podcast interview with her (see below). The fact that forces against reform have to resort to lies tells me that the reform movement is winning the war.
Stay wise and well (and know 403(b) reform is coming along with more industry lies).
Related Podcast:
The Brave Legislator Who Took On K-12 403(b) Reform Illinois educator-turned state legislator Karina Villa — who was sold an unsuitable, high-cost 403(b) — proposed a K-12 403(b) reform bill that would have ended front-end and back-end loads. It would have capped advisor fees and administration fees at 0.50% respectively, and it would have required vendors to offer low-cost index funds and low-cost target date funds. Of course, the bad actors in the industry hated it. And of course they flooded the zone with money, lobbyists, distortions, and outright lies. Senator Villa discusses the legislative process, the pushback from high-cost vendors, high-paid lobbyists, and the National Tax-Deferred Savings Association, and how close the bill came to becoming law. She also shares what's next for 403(b) reform in Illinois. Listen Now »
Related Podcast:
Is 403bwise Anti-Union? We address anti-union charges leveled at 403bwise.org Listen Now »