NTSA Goes Cherry Picking

May 31, 2023

By Scott Dauenhauer, CFP®

Recently, the NTSA (The National Tax-Deferred Savings Association, a division of The American Retirement Association) released another in a series of misleading papers arguing that there is nothing wrong with public K-12 403(b) markets. They've been feeling the pressure surrounding their continued support of a marketplace that has failed educators for over 60 years. NTSA's absurd paper Apples and Oranges: Why K-12 403(b)s Work takes their disinformation campaign into overdrive.

I annotated the paper and provide proper context to expose what I believe are the lies at the heart of Apples and Oranges. You'll find each paragraph quoted, followed by my opinion.

403(b) and 401(k): Apples and Oranges?

"Comparisons between public and private sector benefits are understandable — indeed, such comparisons are often a large factor in employment decisions. But the variety and types of employers – and workers — covered by programs that operate under the auspices of 403(b) plans — are extraordinarily diverse. So much so that viewing 403(b) plans as a monolithic entity generally produces misleading results, despite the commonality of the Internal Revenue Code that supports their foundation. Like apples, 403(b) plans come in many varieties. However, to compare a 403(b) plan to a 401(k) plan is comparing apples and oranges."

I agree that 403(b) plans cover various entities, but so do 401(k) plans. The NTSA claim that 403(b) and 401(k) plans are like Apples and Oranges are not supported by the data; in fact, you might say it's cherry-picked. While the plans do have differences, there are not enough to say the two should be operated different.

401(k) and 403(b) plans operate under incredibly similar rules, and many aspects of these plans can AND should be compared. The NTSA doesn't like the comparison because it's generally favorable to the 401(k) and makes the 403(b) look inferior, especially in public K-12 education.

So Maybe Apples and Apples? 

"For example, programs sponsored by non-profit associations and hospitals are, in fact, often quite comparable to 401(k) plans in design, operation and focus. They share similarities in terms of the typicality of matching employer contributions, investment menu size and construction. Programs sponsored by the nation's universities share many of those attributes as well, though they tend to make available investment menus that are considerably more complex, and sometimes make available multiple recordkeeping platforms to support access to that wider variety of options — alongside coverage by traditional defined benefit pension plans — an option rare among private sector employers these days, and one that both simplifies and complicates retirement planning. Education workers — those in the K-12 market — also typically are covered by a traditional defined benefit pension plan, and frequently rely on multiple providers to extend choice access — but also have attributes unique to that market that will be addressed below. These are all examples of the different types of employers and workers that may have access to 403(b) plans."

The NTSA cites three types of employers typical of a 403(b).

1. Non-profit organizations and hospitals
2. Universities, and
3. Public K-12

You can see where the NTSA is going here. They attempt to justify why the public K-12 education market generally has multiple vendors while other parts of the 403(b) do not. They purposely provide no context for why universities or public K-12 employers might have multiple vendors. For example, they imply that it's normal for universities to have multiple recordkeepers while ignoring that most universities are moving toward a single recordkeeper when they can. 

The NTSA fails to mention that some universities maintain multiple vendors because they don't have a choice. TIAA is one of the oldest recordkeepers for university 403(b) programs. The legacy product(s) available often have significant assets that cannot be moved to another vendor. In addition, TIAA is so entrenched within the university system that it's nearly impossible to move to a single recordkeeper unless it is TIAA. Many universities aren't happy with TIAA but want to avoid dealing with unhappy employees, so they offer another vendor as an option. Thus, many universities provide a handful of vendors even though they'd prefer just one. I'm not saying TIAA is a terrible recordkeeper, simply that they are entrenched. What else is missing here is that almost all universities offering multiple vendors do so via a Request For Proposal process and provide high-quality options.

When the NTSA addresses the public K-12 market, they indicate that the presence of a defined benefit plan should impact the quality of the defined contribution plan. They even make up terminology - "extend choice access" when discussing the failed multiple vendor system that currently exists. This attempts to prime the pump and move you to the conclusion they want you to draw; multiple vendors are normal, natural, and needed in public K-12. A multiple-vendor system is not typical, nor should it be tolerated. 401(k) plans are not multi-vendor, public K-12 403(b) generally is, but it doesn't have to be.

Teachers Have Pensions So Bad 403(b) Plan Are Okay with the NTSA!

"According to the U.S. Bureau of Labor Statistics' (BLS) most recent Annual National Compensation Survey (released March 2021), public sector educators are well-served by employer-sponsored retirement plans. At least 94% of teachers have access to a retirement plan at work, and 99% of primary, secondary, and special education teachers have access to such a plan.This compares quite favorably to private industry, where just 68% of workers have access to a retirement plan."

The NTSA attempts to find ANY statistic that supports their weak hypothesis that somehow 403(b) plans are better (or at least just as good) as 401(k) plans. The survey measures access to any retirement plan, including a defined benefit plan, which most in education have. 

It's important to note that having access to a retirement plan and having access to a quality retirement plan are two different things. The BLS does not assess quality.

Access to water is not the same as access to clean water.

NTSA Cherry Picks Some Apples and Oranges

"Likewise, in the BLS' most recent Employer Costs for Employee Compensation survey (December 2021), retirement and savings costs represent 13.5% of public school teachers' compensation, which again compares quite favorably to private industry where 3.5% of compensation is related to retirement and savings."

When I read that compensation related to retirement and savings in the private sector was only 3.5%, I knew something was off. The employer contribution to Social Security alone is 6.2%. You cannot tell me that Social Security is unrelated to "retirement and savings" with a straight face. It turns out the survey separates types of retirement contributions into two categories: "Retirement and Savings" and "Legally Required Benefits."

"Retirement and Savings" covers defined-benefit and defined-contribution costs, while "Legally Required Benefits" contains Social Security and Medicare.

If you compare education employees to the overall private sector, you should combine those two categories. It would also be wise to use the numbers for all education employees, not just teachers, as the NTSA did (we believe all education employees matter).

Doing the above changes the comparison (it's a bad comparison, but that's another story) so that the combined category for education employees cost is 18.4% versus the private sector at 11%. In the NTSA example, teachers cost nearly four times their private sector counterparts. In the new comparison, it's less than two times.

The survey states, "Compensation cost levels in state and local government should not be directly compared with levels in private industry. Differences between these sectors stem from factors such as variation in work activities and occupational structures."

The NTSA is cherry-picking data. They knew in advance that education employees are much more likely to be in defined-benefit plans, thus, would have a higher cost than their private sector counterparts where access is rare. Instead of comparing total compensation to a group of private sector employees (with similar education), they looked for the statistic that would make educators look like an outlier.

NTSA Really Likes Cherry Picking

"Due in no small part to their prevalence, it has long been standard practice by some to look to the design, operation and oversight of 401(k) plans as an appropriate model for that of the 403(b) programs available to workers in the governmental and non-profit sectors. However, and specifically regarding the programs available to workers in the K-12 education sector, those comparisons are ill-informed."

The NTSA conveniently leaves out the fact that there are several states where 401(k) plans are available to public school employees. Colorado, Idaho, Kentucky, South Carolina, and North Carolina are a few examples. They are good programs and, in every case, better than the average 403(b) plan in those states. The comparisons are only ill-informed when you compare how the typical 401(k) currently operates (single vendor, fiduciary duty) to how 403(b) plans typically operate (multiple vendors, no fiduciary duty). There is no good reason a 401(k) model would not work in public schools. It just doesn't make NTSA constituents money.

Here is an excellent table to compare defined-contribution plans.

NTSA: When 403(b) is a Supplemental Plan Who Cares About Quality?

"First, and in sharp contrast to those in the private sector, the 403(b) plan provided to education sector workers is nearly always a supplemental arrangement — one offered in addition to a traditional defined benefit pension plan. Said another way, education sector workers still have available to them the traditional three-legged stool of retirement funding, whereas most in the private sector now must rely significantly, if not solely, on their 401(k) and Social Security alone."

It seems the NTSA believes if you are not offered a defined-benefit plan (a pension), you are more deserving of a high-quality defined-contribution plan (401(k), 403(b), or 457(b)). This is the only conclusion I can draw from their 401(k) comparison.

The subtle argument the NTSA seems to be making is that if educators have access to a defined-benefit plan in addition to Social Security and they also are provided a defined-contribution plan, they are unique and no longer deserving of a high-quality 403(b) option. While this argument might be valid in explaining lower participation and contribution rates, it should not affect the quality of a 403(b) option.

It's also strange to act like 401(k)s are not supplemental after arguing a few paragraphs earlier that almost a third of private sector employees lack access to one.

Did NTSA Just Call Educators “Dumb”?

"This disparity has two foreseeable outcomes. First, individuals covered by those 403(b) plans are much more likely to assume that their pension alone will provide sufficient resources in retirement, though aspects such as tenure and vesting may well undermine that assumption. In fact, research shows that state DB plans generally only covers 50% to 75% of a teacher's salary at retirement. While that is significantly better than that available to the vast majority of private sector workers, it still leaves a retirement funding gap."

In this paragraph, the NTSA makes a claim ("individuals covered by those 403(b) plans are much more likely to assume that their pension alone will provide sufficient resources in retirement") without providing evidence and then debunks their claim while hinting that the educator is too dumb to figure this out. If individuals covered by 403(b) plans are "more likely to assume that their pension will provide sufficient resources in retirement," citing a study to support the claim should not be difficult. The NTSA likes to make claims without providing evidence. I agree that defined-benefit plans are unlikely to be sufficient for most employees in education. Still, I need to see evidence that educators are unaware of this. 

The NTSA isn't even cherry-picking data here; they are just making it up.

Let Teachers Eat Cherry Picked Cake?

"Secondly, they may well assume that they will obtain Social Security benefits, though some programs preclude that access as a trade-off with their pension contributions. For example, in the state of Texas, teachers do not pay into Social Security and thus do not have access to Social Security benefits. Even if a teacher earns credits from another job, the offset provisions of the state plan may effectively eliminate the social security benefits."

Fifteen states do not participate in Social Security for at least some of their public employees. While I agree that the 403(b) is essential for these uncovered employees, is it more important than a 401(k) to a private sector employee with access only to Social Security? Probably not, but this is a silly thing to argue about; the "supplemental" retirement plan offered by either employer is essential to both.

If the argument is that the 401(k) is more critical to the private sector than the 403(b) is to the public sector (which appears to be the argument), then we should conclude what? The importance of one plan (if that is even possible to be measured) should somehow affect its quality? 

This isn't an Apples to Oranges comparison to me. Both groups of employees need access to a quality "supplemental" retirement plan to meet their goals. Arguing who needs it more isn't a good use of time.

An adult and a child both need water to survive. One may need more than the other, but at the end of the day, they both need access to clean water. Arguing who needs more of it is not apples and oranges. 

NTSA: K-12 403(b) Plans Are Awful. Also Don’t Fix Them. And Don't Mention the TSP!

"Finally, and most significantly, their awareness of, and enrollment in, their 403(b) account often requires the assistance of a trained financial advisor, as they must navigate the complexities of defined benefit plan structure and benefits alongside their decision to participate in the supplemental 403(b) plan at appropriate levels and choose and monitor investments commensurate with that goal."

This is the most absurd argument in this entire opinion piece. There is nothing special about a 403(b) or about being a government employee that requires a specially trained financial advisor to enroll. Millions of government employees have defined-benefit plans and single-vendor retirement plans that are simple to enroll in. In addition, very few salespeople in the 403(b)industry are specially trained or "advisors" in the legal sense.

The irony of this argument is that it ignores that the Federal government offers its employees a pension and social security while managing to enroll them at high rates into their supplemental plan, the Thrift Savings Plan (TSP). There is no need for a "trained financial advisor" who will act as a middle person, just a simple enrollment procedure and investment menu. Participation rates are in the 80-90% range for FERS employees and now exceed 50% for the military.

Educators do not need a specially trained middle-person to siphon off their future retirement dollars to enroll in their 403(b) or 457(b). They aren't less able to contribute because they have a pension plan; the existence of the TSP dispels this. It's insulting to the intellect of all educators to suggest otherwise.

Suppose the 403(b) world followed the TSP and did the following. In that case, you'd likely see participation in the 70% and probably higher range:

1. Single vendor program (one recordkeeper)
2. Auto-enrollment into the program
3. A match, even if just 1% of compensation
4. A simple investment menu using low-cost index funds

NTSA "Research" is the Pits

The NTSA did not make a single argument that would justify the high-cost, low-quality nature of most 403(b) products. Having a defined benefit plan doesn't make saving so tricky that you must pay 2% more in fees annually than someone who works in the private sector. Why should the private sector get the cherry, while educators are left with the pit?

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The owner of Meridian Wealth Management, Scott Dauenhauer, CFP® is the director of research for the non-profit 403bwise.org and writes the Teacher's Advocate blog. 

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