CEO Roger Ferguson Asks California State Legislature to Bring Competitive Bidding for Retirement Plans to Local School Districts
In a July 25 op-ed piece in The San Jose Mercury News, Roger Ferguson says “The Legislature can take a much-needed step to help ensure that educators achieve the secure retirement they deserve by authorizing school districts to select financial companies for their supplemental 403(b) retirement plans via competitive bidding. This could encourage other states to take similar steps.”
Read the article below:
Opinion: Competition will cut costs for teacher retirement plans
California's 800,000 educators deserve a dignified retirement.
Several recent reports show the California State Teachers' Retirement System defined benefits for K-14 educators replace about 62 percent of their final income. This means California's supplemental 403(b) retirement plans play an important role in a holistic retirement system to achieve a 70 to 80 percent ratio, which most experts say is needed for a comfortable retirement.
The Legislature can take a much-needed step to help ensure that educators achieve the secure retirement they deserve by authorizing school districts to select financial companies for their supplemental 403(b) retirement plans via competitive bidding. This could encourage other states to take similar steps.
As it stands, the supplemental plan can be a bad deal for participants. To sign up, educators must slog through more than 3,000 investment options, all with detailed descriptions and varied costs. Not surprisingly, only about a third of eligible participants sign up, and the ones who do pay much higher fees than teachers in states that allow school districts to select pension providers in a competitive bid.
A new report by the TIAA-CREF Institute finds the average annual fee on investments in California's teacher retirement 403(b) plan is 2.11 percent, more than double the fee on comparable investments in controlled-access states like Iowa or Arizona and equivalent to thousands of dollars of additional retirement income.
Fifty years ago, California passed a so-called open access law aimed to prevent favoritism from influencing selection of financial companies in the plan. The law essentially allows any company to offer retirement services directly to teachers. Though well-intended, there are two major consequences.
First, California's teachers are potentially losing a considerable amount of money.
The report found a quarter of the investment choices in the state's 403(b) plan pay commissions to agents and brokers that are deducted from the investment amount. In all too many cases, these payments aren't accompanied by a fiduciary duty to put the needs of the educator first. Also, about 80 percent of the fixed-rate annuities and 97 percent of the variable annuities in the 403(b) plan charge surrender fees for early termination. Teachers in Arizona, Iowa and other controlled-access states pay no commissions or surrender fees.
Second, it's possible to offer too much choice. Columbia University professor Sheena Iyengar, a leading expert on choice in retirement planning, has found that 401(k) plans offering fewer than 10 funds have significantly higher participation rates than plans with between 10 and 30 funds, and participation worsens as options increase.
Like all workers today, teachers must supervise their own retirement planning. But most Americans have limited financial expertise. To counter this, employers have learned to design investment lineups to nudge workers in the right direction among fewer choices. Also, when it comes to saving for retirement, do-it-yourself cannot substitute for objective advice.
There's precedent for action. Both the University of California and the California State University systems use competitive bidding for their retirement plans, providing cheaper and more manageable options. Private school teachers enjoy the protections of federal pension law, putting responsibility for managing retirement plan choices squarely on the employer. California's public school districts alone are bound by an archaic law that forces educators to pay some of the highest investment fees in the nation.
Teachers need a strong defined-benefit pension. But we also should be doing more to make the 403(b) program easier to administer and more cost-efficient for participants. As California's public schools are learning the hard way, it makes no sense to present educators with a bewildering array of expensive choices.
ROGER W. FERGUSON JR. is president and CEO of TIAA-CREF, a financial services organization, and a former vice chairman of the U.S. Federal Reserve. He wrote this for this newspaper.
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TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., distribute securities products.