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THE “FREE” FALLACY
Why “Free” 403(b) Third Party Compliance Administrators Are a Bad Idea
Meridian Wealth Management & SST Benefits Consultingtelephone: 949.916.6238•fax: 831.300.3028•www.meridianwealth.comhttp://themeridian.blogspot.com
 
The Free Fallacy
With the release of the Final IRS 403(b) regulationsschool districts across the country are and should be asking themselves many questions.
 
How do Icreate a plan document? How do I ensure I don'trun afoul of Universal Availability rules?
 
Whatthe heck is “meaningful notice”? How do I knowwhen to approve or not approve loans, hardships,transfers, rollovers, and distributions?
 
Do wehave the resources to handle these new require-ments? Can we hire someone to do this work forus?These are all good questions, especially the lastone.
 
With the increased administrative burdenplaced on school districts due to new 403(b) regu-lations it might now be prudent to think about hir-ing a Third Party Administrator (TPA) to ensureyour school district (community college, CountyOffice of Education, non-profit, or church organi-zation) doesn't run afoul of the new rules that willsoon apply (1/1/2009) in the 403(b).
 
Many schooladministrators are now fielding calls from TPAservice companies across the country who want toprovide compliance.
 
In fact, these companies arecalling and offering their services for free.
 
That'sright, no cost to the school district.
So What's The Catch?
As the old saying goes – “There ain’t no suchthing as a free lunch” – you should be wonderingwhat the catch is. The catch is that these com-pany’s primary business (where they earn the ma- jority of their revenue) does not come from pro-viding compliance services, it comes from pushing403(b) and 457(b) products.
 
These companies will use "compliance" services asa loss leader in order to get into a school districtand sell high cost 403(b) and 457(b) products.
 
Usually the requirement for free compliance serv-ices is that the company’s 457 plan must be offeredand be the sole offering.
 
Companies that offer freecompliance services in conjunction with a 457(b)plan are almost always more expensive in terms of the cost of the 457(b).
 
Here is the scheme from theviewpoint of the company trying to get your busi-ness:1.
Approach employer and scare them about
403(b) compliance (usually by using some lettersent by the IRS)2.
Tell the district they (the company) can
help and will do it for free, the district need onlymake them the sole 457(b)
provider
Meridian Wealth Management & SST Benefits ConsultingThe Free Fallacy1
 
3.
Once approved by the board (who willrarely do any due diligence on the 457(b) plan andits expenses – mostly because they don’t knowhow or where to look to see the cost) start doingeducation work shops on 457(b)4.
At the education workshops they recruit
teachers into their 457(b) plan and use the work-shop as a way to talk about 403(b) products5.
Use the district endorsement at the work-shop to get employees comfortable with the com-pany, then get employees to transfer all their403(b) products to them.The real money is not in 457(b); however, by beingthe 457(b) provider the company gets to put onworkshops "educating" the employees, the realgoal is to entice them to switch all their 403(b) ac-counts over to new 403(b) products that generaterevenue for the TPA.The real money is in selling and transferring403(b) accounts.
 
As you can see, the whole pointof providing compliance for a school district forfree is solely to generate revenue through highcost 403(b) products that are sold to the employ-ees. Even if the entity is forbidden from selling403(b) products, the cost of the 457(b) plan will innearly all cases be significantly higher than a457(b) plan that is not subsidizing a complianceservice.To prove our case about 457(b) plans that requirecompliance services being more expensive, wecompiled some statistics from a few of the 457(b)plans available in California for Public Schools,those who require the 457(b) as a condition forproviding compliance are starred (*):As of November 2008:
Provider AccountFeeAverage Cost
CalPERS$00.63%CalSTRS$00.63%VALIC LAUSD*$00.91%VALIC San Diego*$01.12%OCTFCU*$01.24%FBC - San Diego*$ 421.31%Envoy/Keenan*$ 392.47%TDS Group*$202.29%
As you can see, nothing is free.
 
A company thatprovides "free" compliance is making its moneyelsewhere, by charging a higher fee on the 457(b).
 
Keep in mind that in most districts the 457(b) pro-vider is allowed to sell 403(b) products and thoseproducts may be even more expensive, they cer-
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