403bwise Remarks on Illinois Single Vendor Legislation
February 27, 2024
Like so many others, Illinois legislator Karina Villa was burned by a unvetted, high-cost annuity product. But it didn't happen in the legislative halls of Springfield, Illinois. It didn't happen while working at an employer who offered a 401(k). She, like so many others, fell for the non-fiduciary sales rep pitch in the teachers lounge while she worked in education. Now as a state legislator she is determined to fix a problem unique to K-12 employees: unvetted, exhorbitantly priced multi-vendor 403(b) products sold by an army of sales agents with zero fiduciary duty. She has introduced legislation (co-sponsored by Robert F. Martwick) to require K-12 403(b) plan in the state be put out to bid. The bill would forbid the sale of products with loads and surrender charges.
Usual Opponents
Who could be against such a common-sense measure? Two main groups: 1) The NTSA (of course), a lobbying organization that consistently works against the best interest of educators, and 2) Those who confuse bad choice with good policy. By now it's almost comical to hear this as a reason to keep the unvetted, multi-vendor K-12 403(b) environment in place.
403bwise.org Remarks Read to Illinois Legislators
We were honored to speak to Illinois legislators last week about the merits of this bill. Here are our remarks which I read.
My name is Dan Otter. I am a former elementary school teacher and professor, whose doctoral work looked at financial literacy and how best to teach it. I am the executive director of the non-profit 403bwise.org. We are a K-12 403(b) education and advocacy website. Our work has been featured in The Wall Street Journal, The New York Times, and Kiplinger Personal Finance. Money Magazine named me a Money Hero for my advocacy work on behalf of teachers. I am joined today by our Director of Research, fiduciary advisor Scott Dauenhauer, CFP®, a nationally recognized expert on the 403(b) plan who is married to a middle school science teacher.
403bwise.org receives zero funding from the financial services industry. We do not represent financial companies. We do not sell financial products. We are a non-profit whose goal is to fix the broken K-12 403(b).
Unvetted, multi-vendor 403(b) plans cost educators hundreds of millions of dollars in lost retirement savings. How? In three distinct ways:
#1 Commission based sales agents with zero fiduciary duty flood school lunchrooms and educator email inboxes with a dizzying array of complex products and sales pitches. Educators assume that because these sales agents are on their campuses, they and their products have been vetted by their school district or the state. Nothing could be farther from the truth. It is truly the Wild West. Except it’s not just in the West. It is also in the East, the South and the North. It is a nationwide problem. The 403bwise Facebook Group has close to 15,000 members. One of the most popular comments is: I thought my school district was looking out for me. Why would they allow this company to sell these products to me and my colleagues?
#2 Investment costs. Quick math lesson: Two teachers contribute $500 a month to a 403(b). Both invest in a target date fund. Both earn 7% annual return. Both contribute for 30 years. Teacher #1 accumulates $200,000 less. Why? Teacher #1 worked in an unvetted, multi-vendor 403(b) Illinois school district and signed up with the non-fiduciary sales agent in the staff lounge. Teacher #2 worked at Chicago Public Schools which has one vetted, low-cost vendor.
#3 Choice. The financial services industry and its lobbying arm will state that choice is of utmost importance and will cite non-peer reviewed “research” they funded. They will tout disclosure as the solution. Just two years ago Equitable Financial was fined $50 million by the SEC for misleading statements and fee omissions.
The dirty little secret is that the financial services industry and its lobbying arm are protecting bad choice. They fear competitive bidding.
New York University professor Scott Galloway put it best: "People don't want unlimited choice. They want confidence in the choices available."
Too many products with front-end loads, back-end loads and surrender charges are being foisted on educators. Right now, educators should have zero confidence in the overwhelming majority of products sold in unvetted, multi-vendor K-12 403(b) plans. The State of Illinois has an opportunity to give educators confidence. We hope you take it.
Status
Following remarks and questions by legislators, supporters, and opponents, the bill moved forward by a vote of 12-4. Promising progress but never underestimate the power of the financial industry and the NTSA to fight for their naked self-interest, educators be damned.
Stay wise and well (here's to hoping all Illinois educators get what Chicago educators have).
