What is the IBC Model Plan?
It is a program designed to help Florida K-12 employers meet the new IRS regulations governing the operation of 403b accounts. The state’s four major education associations – the Florida Education Association, the Florida Association of District School Superintendents, The Florida School Boards Association and the Florida Association of School Administrators – formed the IBC to negotiate the best possible deal for Florida’s 350,000 school employees. The result is the IBC Model Plan.
Which companies are included in the Model Plan?
The IBC established three different categories of pricing and service: annuities, multi-product custodial accounts and mutual funds. Five companies earned the “Best in Class” designation and are included in the Model Plan. They are:
Multi-product custodial accounts
PlanMember Financial Corporation
American Century Investments
Waddell & Reed
What makes the Model Plan better than what we already have?
Twenty-four of the 90-plus companies currently doing business with Florida’s school districts submitted proposals. The IBC’s independent consultant, Gallagher Benefit Services, conducted an extensive evaluation process to determine the very best combination of lowest price and highest service. The Model Plan represents a significant reduction in costs and fees charged by the 403b companies. The bottom line is that school district employees will get a bigger return on their 403b investment dollars in those districts that adopt the Model Plan.
How much of a difference will it make to me as an individual investor?
The amount of additional savings will depend on the product in which you are currently invested and the product you select in the future, the length of your investment and many other factors.
Will employees have enough investment choices if they are permitted to choose among only five participating companies?
There will be no lack of options. Because of the diversification of the products available, more than 600 different investment options will be available to teachers and education staff professionals (ESPs).
Why isn’t the company I currently use for my 403b investment included in the Model Plan?
All companies currently offering 403b products in Florida K-12 were individually invited to participate. Many companies have decided not to continue in the 403b business due to the new IRS regulations. Some chose not to bid because they didn’t want to offer programs statewide or felt their prices wouldn’t be competitive. Twenty-four companies submitted proposals. These were narrowed to five programs, which offered competitive products with appropriate services and pricing, within their chosen product category. These five “Best in Class” companies were adopted as part of the Model Plan.
Did all the Model Plan companies meet the required higher standards and lower pricing?
Yes. The five companies selected for participation in the Model Plan made written offers that represent the very best combination of low price and high service. Each company also agreed to meet a number of other higher standards. These were incorporated into Letters of Agreement and signed by officers of the companies.
I now have an agent I can talk to about my 403b account. Will I be able to do that with the Model Plan?
Yes. Several of the companies included in the Model Plan offer the availability of trained financial representatives to meet personally with employees in schools, offices or homes.
I don’t need help with my investments. I just want to get the lowest priced investment. Will I be able to do that with the Model Plan?
Yes. The Model Plan has been designed to offer as little or as much service as the individual employee desires. Pricing by various companies will vary depending upon specific products and services.
Under the Model Plan are new employees automatically required to invest a portion of their salary in a 403b?
No. The new IRS regulations do permit automatic enrollment, but this is not being recommended for any Florida school district.
I currently have a 403b with a mutual fund company that is not participating in the Model Plan. Is there a way I can keep using that company?
Yes. This is an important feature of the multi-product custodial account. PlanMember Financial Services offers hundreds of different mutual fund companies through its investment portfolio. Yours most likely is among them.
What process will be used in encouraging adoption of the Model Plan?
1. School Boards must implement changes before Jan. 1, 2009 in order to comply with the new IRS regulations. The status quo is not an option. So everyone starts with a clean slate – no old rules or companies. Everything is new.
2. TSA Consulting Group will meet with each school district. It will recommend adoption of the Model Plan and a specific plan document to comply with IRS rules. Since the Model Plan providers have been vetted and determined to be the “Best in Class,” they should be the first providers made available to school district employees.
3. Each district may then consider whether any other 403b companies need to be added to the “approved” list. A district might determine that one or two companies, in addition to the Model Plan companies, should be approved. Before approval, they should be required to meet the same pricing and standards agreed to by the Model Plan companies – and the commitments should be guaranteed by the company and signed by a company officer.
What’s so different about Florida’s school districts?
Unlike most states, Florida has a county system – each county is a single school district. With 67 counties, Florida has 67 school districts. Consequently, many of the largest school districts in the nation are located in Florida.
What is a Section 403b plan?
Also called tax-sheltered accounts.
A type of retirement plan for employees of tax-exempt organizations, including the public schools.
"Pre-tax contributions," withheld from an employee’s pay check and deposited directly into the plan.
Employers are allowed to make direct contributions on behalf of employees.
What are the IRS reforms and how is IBC involved?
In 2007, the IRS established new regulations that will hold school boards and other public employers more accountable for the operation of the 403b plans offered to their employees.
There are about 130,000 active 403b accounts in Florida K-12 today, with another 60,000+ dormant ones (no contributions are currently being made).
Under the umbrella of the Independent Benefits Council (IBC), the four major education groups – the Florida Education Association, the Florida Association of School Administrators, the Florida Association of District School Superintendents and the Florida School Boards Association – decided to develop a 403b Model Plan that could be recommended to all 67 school districts.
The IBC’s objectives were to create a Model Plan that would:
- Assist all 67 districts in complying with the new IRS rules, and
- (2) Utilize statewide purchasing power to negotiate the best possible combination of quality, service and pricing for employees throughout the state.
Has this effort been successful?
Yes! More than a year ago, the four organizations launched a comprehensive process resulting in the recent adoption of the Model Plan, which meets the IBC’s goal of delivering a plan to the districts that complies with the new IRS rules and provides significantly better pricing of high-quality 403b products available to employees.
The Model Plan was adopted on January 28, 2008.
What was the process?
IBC organizations contributed the funding to hire an independent consultant to assist in developing the Model Plan.
None of the IBC’s member organizations will benefit financially from the outcome of efforts to reform 403b program or implementation of the Model Plan.
The IBC’s consultant in this effort, Gallagher Benefit Services (no relationship to former Florida CFO Tom Gallagher), in Boca Raton was selected from six companies that responded to a request for proposal (RFP) seeking companies interested in working on the project.
TSA Consulting Group, which provides independent compliance administration and educational services on 403b plans for 60 of the 67 school districts, also agreed to assist the IBC.
A work team of school district Risk Managers also worked with IBC throughout the process.
It was agreed that the Model Plan: should be limited to at least three, but no more than five, companies in order to negotiate significant cost savings for employees; and the Model Plan would include three categories of investment portfolios to reflect the diverse needs of Florida’s 350,000 teachers and professional staff. The three categories would include plans ranging from those offering a high level of personal service – at a moderate price – to a low/no-service approach with rock bottom pricing. A third category would provide a middle ground of service and pricing.
The three investment categories are:
- Annuities (high service, moderately priced)
- Multi-product custodial accounts (mid-level service; lower price)
- Mutual funds (low/no service; lowest price)
All interested companies were invited to participate. Gallagher contacted all of the 90 companies currently providing 403bs in Florida K-12 and posted the RFP on an industry Web site to encourage interest from companies not currently operating in Florida.
How many companies bid?
24 companies submitted 30 proposals (some responded in more than one category).
After initial evaluation, the field was narrowed and 11 companies were invited to interviews in Tallahassee in December.
Additional drill-down occurred with follow up meetings at Gallagher’s offices in Boca Raton.
On January 28, 2008, Gallagher presented its recommendations to the IBC.
What criteria were used in evaluating vendors?
Each of the plans was scored in seven categories:
- Expense charges
- Investment options
- Participant services
- Company experience
- Conversion and implementation
- Administrative services
- Account administration services
Additionally, all vendors were required to provide full fee disclosure.
What did Best in Class companies promise to do?
Each of the five companies signed a Letter of Commitment agreeing to:
- Certify that the plan proposed for IBC is the best it currently offers in any Florida K-12 district.
- Offer favorable rates to all districts regardless of their size.
- Automatically upgrade plans when newer, more enhanced products become available.
- Ensure that its representatives agree to sell only the product bid for the Model Plan (no bait and switch).
- Provide a detailed plan to convert its existing contracts to the Model Plan, thereby creating immediate benefits for their current participants.
- Reduce its fees to all adopting school districts as statewide assets under the Model Plan grow.
- Guarantee rates for three years. IBC’s consultants will review financial data from years one through three and, if they find that a company’s proposed fees for subsequent years are excessive may eliminate them from the Model Plan.
How will the Model Plan benefit employees of the 67 school districts?
This is the first significant statewide reduction in pricing since 403bs were established 50 years ago.
The approved plans are the best offered in Florida K-12.
The Model Plan companies will offer these improved, lower priced plans to employees throughout the state, regardless of the size of the districts that employ them. Small and medium-sized districts will stand to benefit the most from participation.
Companies in the Model Plan will reduce their pricing even further in the future, as their assets grow – and these reductions will apply to everyone, no matter how large or small the district.
How do we know that school system employees want this?
A Mason-Dixon poll of FEA members, commissioned by the IBC, was conducted in December to measure attitudes toward retirement and financial matters. The survey results strongly support the IBC’s efforts to initiate reforms in the 403b industry. Among the results:
Nearly 9 out of 10 are concerned about their ability to meet financial needs after retirement, with the same number concerned that Social Security may not be available to them when they retire.
8 in 10 say they are not entirely satisfied with the financial results from their current tax-deferred investment plan.
8 in 10 say they do not have a good understanding of the fees they are being charged by the companies that manage their investment plans.
9 of 10 say that it is important for them to know that they are getting the best deal for their investment dollars.
3 out of 4 say they are willing to pay more in fees in return for plans offering either some personal service or full service.
Most importantly, 8 in 10 say that if the state’s four major education associations got together to evaluate all of the plans and negotiated the best service and lowest fees for school employees, it would be very important that these plans be available to them through their respective school districts.
What happens to those who have an existing investment account with a company that’s not authorized by the school board?
The new IRS regulations become effective January 1, 2009. After that date, 403b contributions can be made only to companies that have been authorized by the school board and that meet the new IRS requirements.
Individuals who have existing accounts with companies that are not authorized by the school board may leave their funds in their accounts, but they may not make new contributions to them after January 1, 2009.
Teachers and education staff professionals who have existing accounts with companies not authorized by the school board may choose to transfer their assets to one of the authorized companies; however, this decision should be made after carefully considering the impact of any surrender fees or termination charges, based on the terms of the existing contracts.
Why should local school districts adopt the Model Plan?
All of the heavy lifting has already been done for the school districts.
It provides the very best deal to teachers and education staff professionals
While the number of 403b companies will be reduced, employees will be able to select from 600 high quality investment options.
The new line-up of 403b offerings will be easier to understand.
There will be three different investment categories ranging from full-service, for those who want individual assistance and advice, to no-service, for those who prefer to handle their own investments.
All of the approved companies have agreed to pay the school board $12 per participant, per year, to offset additional administrative expenses associated with the new IRS rules.
What options do school boards have?
They must adopt new procedures regarding 403b plans.
Approved provider companies must comply with the new IRS regulations.
Each school district may adopt the Model Plan or develop its own slate of “authorized” provider companies.
A school district may adopt the Model Plan if it feels it needs to add one or more companies to the authorized list. In that case, it has the right to do so. In those instances, every effort should be made to require that any companies added to the Model Plan meet the higher standards—and fee reductions—agreed to by the companies selected by IBC to participate in the Model Plan.
Dollars invested in 403b accounts are not school board funds… they are retirement investments made by employees, themselves.
With school funding projected to be very tight for the foreseeable future, adoption of the Model Plan may be the best opportunity to put money in teachers and education staff professionals members’ pockets, and it won’t cost taxpayers – or the districts, themselves – a penny!