403(b) advisers disappointed with TIAA, but say other providers are 'way worse'

Financial incentives and poor products run rampant in the non-ERISA 403(b) realm, especially for educators teaching kindergarten through 12th grade, according to advisers

Nov 20, 2017 @ 2:00 pm

By Greg Iacurci

Financial advisers were surprised to learn of TIAA's alleged shady dealings with retirement savers, but say its practices pale in comparison to some of its peers.

Recent reports in The New York Times detailed conflicts of interest in TIAA's retirement business, including monetary incentives paid to the firm's advisers to sell proprietary products, even though they purport to act in participants' best interests. That led the New York attorney general to subpoena the insurance company to gather information about its sales practices.

However, advisers working with 403(b) plans, a type of defined-contribution plan for nonprofit organizations such as schools and hospitals, say other providers act more egregiously than the outlined allegations against TIAA, especially for educators teaching kindergarten through high school.

Advisers argue that such companies, often insurance companies, use aggressive sales tactics and incentives to peddle products that aren't in participants' best interest.

"It's night and day, in my opinion, between what TIAA did versus what AXA, Voya and MetLife do in the K-12 market," Kenneth Ford, president of Warwick Valley Financial Advisors, said.

Advisers also mentioned insurers National Life Group, The Legend Group, Americo Life Inc. and Midland National Life Insurance Co. as others they frequently see using such tactics.

Not only does their conduct go unnoticed by regulators and the broader public, but, worse yet, these schoolteachers have seemingly few avenues to improve their situation, advisers said.

Much of the problem lies in the legal status of different types of 403(b) plans. Some, such as private university retirement plans, are covered by the Employee Retirement Income Security Act of 1974, similar to 401(k) plans.

The law grants a level of federal protection to retirement savers, and allows participants to bring class-action lawsuits against employers and other retirement-plan fiduciaries if they feel they've been wronged. More than a dozen lawsuits were filed against prominent private universities last year for alleged 403(b) fiduciary breach under ERISA.

However, plans for public entities such as K-12 school districts aren't covered by ERISA. School districts often adopt a laissez-faire attitude concerning their 403(b) plans; their non-ERISA status means the school district doesn't have a fiduciary responsibility relative to the plans' investments, creating an environment where abuses can thrive, advisers said. And participants can't bring ERISA-type lawsuits to right any perceived wrongs.

"What TIAA's doing, I don't like it," Scott Dauenhauer, principal of Meridian Wealth Management, said. "But compared to what goes on in non-ERISA 403(b) every day, on a relative scale it's not the same. Relatively speaking, I'd rather have someone form TIAA than National Life Group. The stuff that goes on [elsewhere] in 403(b) land is still, way, way, way, way worse."

Many providers adopt incentivessuch as lavish trips for meeting a certain threshold of insurance sales.

National Life Group, the marketing name for The National Life Insurance Co., is sending producers who sell a certain amount of product issued by Life Insurance Co. of the Southwest, an affiliate, to Buenos Aires, Argentina, according to a brochure.

One telling note in the brochure: Sales into ERISA-governed qualified plans after June 9, 2017, the date the Department of Labor fiduciary rule went into effect, "will not count towards the qualification criteria established for certain incentives."

That rule requires brokers and agents to give retirement savers advice in their best interest, but only covers ERISA plans. Read another way: these agents are allowed to sell insurance products to non-ERISA participants that aren't in their best interests.

Annuities dominate 403(b) plans — fixed annuities make up 43% of plan assets, variable annuities 33% and mutual funds 24%, according to consultancy Aon Hewitt. Financial incentives to sell the annuity products run rampant in the K-12 market, advisers said.

Insurance agents in this market contract with individual employees, in one-off transactions, as opposed to interfacing with employers as one would do to get an investment on a 401(k) menu.

Some of these 403(b) products can be of fairly dubious quality, too. One adviser pointed to long surrender periods on some annuity contracts sold to teachers.

Life Insurance Co. of the Southwest, for example, has a 15-year lockup period on its SecurePlus Platinum fixed indexed annuity; Midland National, owned by Sammons Financial Group, has a 14-year surrender period on its Capstone 14-year indexed annuity.

That means that participants have to wait about a decade and a half to withdraw money from the investment without penalty.

Spokespeople for AXA, Voya and MetLife declined to comment. Spokespeople for National Life, Americo and Midland National didn't return requests for comment.

Ed Forst, president and CEO of Lincoln Investment, which owns The Legend Group, said its advisers "operate in accordance with Finra and SEC regulations and strive to achieve industry best practices ... We are consistently monitoring and reviewing our operations to ensure that we quickly can identify issues and address them with integrity."

TIAA spokesman Chad Peterson said the firm always puts its clients first and operates "in a highly transparent and ethical way." Because TIAA doesn't have public shareholders, all company earnings are returned to participants or are invested in its business, Mr. Peterson said.

Unions, groups which are supposed to look out for their teachers, are sometimes incentivized by financial services companies to maintain the status quo in a school district.

Take the National Education Association, the largest labor union in the U.S. One of the union's wholly owned subsidiaries, Member Benefits Corp., has a service agreement with Security Benefit Corp. and its affiliates whereby the company pays several million dollars in annual fees to distribute and market the NEA Retirement Program.

A spokesperson for Member Benefits Corp. didn't return a request for comment.

"If TIAA was in the non-ERISA arena, they wouldn't even be getting in any trouble. They're getting subpoenaed for things that are common practice and worse in all 50 states in the non-ERISA market," said Tony Isola, head of the 403(b) division at Ritholtz Wealth Management. "Where's the justice there?"

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