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More Adventures in Bad K-12 403(b) Policy as Texas Tells Pennsylvania: “Hold My Beer.” 🍺

July 29, 2019

Illustration by Benjamin Otter of Loose Chaos

It was only a month ago that we learned the state of Pennsylvania had passed anti consumer 403(b) legislation. It's like states are at a keg party sponsored by the insurance industry and its lobbyists. Texas has had a few beers and it sees what Pennsylvania has done, and it’s like “I can so top that.” And so it did. Which is both disappointing and not all that surprising.

Texas Once Tried to Do the Right Thing

Back in the early 2000s Texas tried to do the right thing and contain K-12 403(b) costs. It put reasonable price caps on products sold by 403(b) vendors and required that they register with the Texas Retirement System of Texas (TRS). Last minute insurance lobbying drastically watered down the protections. The final guidelines, listed below, were laughable.

  • Must register products with TRS
  • Max front end and/or back end charge of 6%
  • Surrender charges cannot exceed 10 years.
  • Annual fees cannot exceed 2.75% per year.

Wrote Dallas Morning News columnist Scott Burns at the time: After offering new rules for teacher 403(b) plan investments that would have cut expenses dramatically, the TRS suddenly reversed itself in late February. It restored annual contract charges, high front and rear loads, and allowed annual expenses as high as 2.75 percent — even though Watson Wyatt, a national benefits consulting firm, had suggested the original reductions after a consulting study.

6% Load Just Too Restrictive for the Insurance Industry

The already weak protections were just too onerous for the industry. It got state representative Dan Flynn, a Republican from Canton, Texas …, err, let me rephrase: State representative Dan Flynn, a Republican from Canton, clearly saw the injustice of only being able to charge 6% so he introduced HB 2820 on on March 1, 2109 eliminating oversight and fee caps except on the 10-year surrender period. The legislation was signed into law on May 24, 2019 and will go into effect on September 1, 2019.

Flynn told the National Tax-Deferred Savings Association NTSA), insurance industry lobbyists, that “limiting fees may not only reduce product offerings, but also limits a company’s ability to offer services that provide valuable advice and educational tools that can assist teachers in making appropriate choices for their retirement income. Further, focusing only on fees ignores product performance and could deny teachers access to products that may have higher returns.” 

Stunning but not surprising. I wonder what Mr. Flynn pays in investment fees? I am going to make a wild guess that it’s a whole lot less than 2.75%.

It's also not surprising who testified for the bill. It's a who's who of insurance companies and their lobbyist arm the NTSA

My podcast partner and fiduciary advisor Scott Dauenhauer, CFP®, may have put it best: “The original provisions were abusive, but not abusive enough for the insurance industry.”

It’s All About Selling Indexed Annuities

“This legislation is about one thing: Indexed Annuities,” says Dauenhauer. “It also helps the variable annuity companies because their surrender charges usually exceed 6%, but it really helps indexed annuities. We are about to witness a dramatic increase in the amount of indexed annuities sold in Texas K-12 403(b) plans.”

Buckle up Texas teachers. 

More on Texas Law

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