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  • Home>Practice Management>Fiduciary Focus>A Way Around Costly 403(b) Plans

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    A Way Around Costly 403(b) Plans

    In so-called 'open vendor' states, high-cost 403(b) plans may be side-stepped by turning to 457(b)s, explains plan-participant advocate Steve Schullo.

    W. Scott Simon, 06/10/2015

    W. Scott Simon is a principal at Prudent Investor Advisors, a registered investment advisory firm. He also provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. Simon is the recipient of the 2012 Tamar Frankel Fiduciary of the Year Award.


    This month's column continues my interview with Steve Schullo that began in last month's column. Schullo, now a retired elementary schoolteacher who taught in the Los Angeles Unified School District (LAUSD) for nearly 25 years, has been active in attempting to reform K-12 403(b) plans and the investment options that are offered to plan participants such as teachers, psychologists, counselors, substitutes, custodians, nurses, et al.

    In retirement, Schullo has just published another book titled "Fighting Powerful Interests: Educators Challenge Tax-Sheltered Annuities and WIN!" which can be downloaded (as a PDF) for free. He is also a blogger at Late Bloomer Wealth

    The following interview was conducted via email and has been edited.

    Scott Simon: You've noted that, at least in states like California as well as five or six other such "open vendor" states, purportedly a school district must allow a vendor--an insurance company or mutual fund company--to sell its products to participants in a 403(b) plan, as long as the vendor agrees to comply with the 2007 IRS regulations.

    Steve Schullo: Yes, that's right. In the LAUSD, that has resulted in something like 125 insurance company vendors selling high-priced annuities and around 25 mutual fund company vendors primarily selling funds with commissions and excessive advisory fees sold by broker/dealers. That's all courtesy of how California Insurance Code section 770.3 has been interpreted by insurance companies in their own favor. For the record, only 27 vendors remain today as the rest quit the LAUSD 403(b) plan once the new IRS regulations were issued in 2007. But that's still too many.

    But isn't it good to provide school employees with a lot of investment choices?
    Well, it's good if the costs of the vendors' products are fully disclosed so that teachers can make an apples-to-apples comparison. But they never are, so teachers rarely get the full horrible story about high and hidden fees and costs.

    W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understandingis the definitive work on modern prudent fiduciary investing.

    Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

    For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

    The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.