Pinellas County Schools

History of the IBC Model Plan

New IRS Regulations……. School Boards must Act:

The Internal Revenue Service issued new regulations governing the administration of voluntary supplemental retirement plans, also known as Tax Deferred Annuities or 403b plans. The regulations are effective January 1, 2009. All school districts must adopt new policies to be in compliance. If not, employees risk the loss of their favorable tax benefit. The new IRS regulations place additional requirements on school districts and increase their fiduciary responsibility.

IBC Steps in to help the School Districts:

In 2007 the Florida Education Association, the Florida Association of School Administrators, the Florida Associations of District School Superintendents and the Florida School Board Association, created a not-for-profit corporation, the Independent Benefits Council. The IBC was formed to create a “Model Plan” that eliminated the inequity in fees and leveled the playing field for employees, while ensuring access to high-quality retirement investment products.

IBC develops Model Plan

The 4 organizations decided to fund the development of a Model Plan that could be offered to all 67 school districts in Florida. They also guaranteed that none of the member organizations would have a financial stake in the development or implementation of the Model Plan. The process included the following steps:

  • The IBC retained an independent consultant to assist in the development of the Model Plan.
  • The IBC met with Florida Chief Financial Officer Alex Sink and her staff to review the overall objectives – CFO Sink stated that the IBC’s efforts would have a significant impact on retirement savings for school employees. In order to achieve meaningful price reductions, the number of provider companies would have to be reduced. CFO Sink’s Office recommended “as few as possible”.
  • A team of school district Risk Managers worked with the IBC to issue an RFP for the selection of the independent consultant.
  • Gallagher Benefit Services of Boca Raton, Florida was selected as the unanimous choice. They are a division of the national consulting firm, Arthur Gallagher Company.
  • Gallagher developed an RFP and issued an open invitation for companies to compete. Over 90 companies currently offering 403b plans in Floridawere contacted directly. Notice was also posted on industry web sites to attract all interested companies. In order to achieve the best combination of quality service and the most competitive pricing, the RFP stipulated that at least 3, but no more than 5 companies would be selected for the Model Plan
  • 24 companies submitted 31 proposals – some bid in more than one category.

Company/Product Evaluation

Throughout the evaluation process, Gallagher involved TSA Consulting Group (which works with 62 of the 67 school districts on 403b plans) and a team of School District Risk Managers.Each of the plans submitted was scored in seven categories:

  • Expense charges
  • Investment options
  • Participant services
  • Company experience
  • Conversion and implementation
  • Administrative services
  • Account administrative services

In addition, all vendors were required to provide full fee disclosure, broken down by proposed investment, as well as disclosure of any pending legal actions.* The vendors were urged to offer their best possible pricing, but had to be willing to make the same pricing available to employees in all districts, regardless of size.

The Finalists:

After an initial review, 11 companies were interviewed several times by the Consultant, Risk Managers and TSA Consulting Group. Once the interviews were complete Gallagher entered into final negotiations with the vendor companies. The final companies were recommended to the IBC for its consideration.

On January 28, 2008, the IBC named the following 5 companies as “Best in Class” for inclusion in the 403b Model Plan:

Annuities: AIG Retirement and AXA-Equitable

Custodial Accounts: Plan Member Financial

Mutual Funds: American Century and Waddell & Reed

The 5 Model Plan Companies sign Letters of Commitment

Each of the five companies selected by the IBC signed a Letter of Commitment agreeing to the following:

  1. Certify the plan proposed for IBC is the best it currently offers in any Florida K-12 district.
  2. Offer favorable rates to all districts, regardless of size.
  3. Automatically upgrade plans when newer, more enhanced or lower priced products become available.
  4. Ensure that its representatives agree to sell only the product bid for the Model Plan (no bait and switch).
  5. Provide a detailed plan to convert its existing contracts to the Model Plan, thereby creating immediate benefits for their current active and retiree participants.
  6. Reduce it fees to all adopting school districts as statewide assets under the Model Plan grow.
  7. 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.

Benefits to teachers and other employees:

  1. Currently, the inclusion of so many 403b companies makes it difficult to vet them along the lines of investment options, customer service and fees. IBC’s Model Plan companies have been thoroughly vetted. They are the best of the best.
  1. The Model Plan assures that employees have a wide range of choice includinghundreds of investment options.
  1. All 5 Model Plan companies have signed a Letter of Commitment guaranteeing they will sell only the product bid for the Model Plan – no bait and switch. They also guarantee that they will bring fees charged in existing contracts into compliance with fees charged under the Model Plan and will automatically upgrade plans as newer, better and lower priced products become available.
  1. The biggest advantage for teachers and other school personnel is that projections show that the Model Plan has the potential to put billions of dollars that would otherwise have been lost or paid into fees to vendors into their 403b accounts over the course of the next 20 years. On average, over the span of a 30 year career, an employee may expect his or her investment account to accumulate 1/3 more assets from the Model Plan than from existing contracts. The accumulation of $450,000 under an existing plan might be worth $600,000 under the Model Plan. If an employee used the lowest priced plan, the gains could be even greater.

Benefits to the District:

  1. In adopting the Model Plan the heavy lifting has already been done. Adoption of the Model Plan ensures compliance with the new IRS regulations that become effective January 1, 2009.
  1. The new regulations require greater oversight and recordkeeping on the part of the district. The provider companies included in the Plan will pay districts that adopt the plan $12 per participant per year to offset additional administrative costs associated with the new IRS regulations.
  1. The district has the comfort of knowing that the Model Plan contains the best of the best 403b provider companies. This is important because the monies used for 403b investments are all employee dollars – no district funds are involved.

The process used to select the Model Plan companies is an open book. There are no secrets – no surprises. Vendor companies may be dissatisfied if they were not selected, but the evaluation process was comprehensive and fair. Development of the Model Plan had the oversight of not only the 4 major education groups – FEA, School Administrators, Superintendents and School Boards, but a second consulting firm, TSA Consulting Group and a team of Risk Managers from FERMA.

TSA Consulting Recommends Adoption of the Model Plan

TSA Consulting Group was commissioned by the IBC to present the Model Plan to all districts throughout the state. Some districts wanted to consider the viability of adopting the Model Plan, plus on or two other companies. Since TSA Consulting Group is under contract to over 60 of the districts to assist with their 403b plans, an RFI was conducted by TSA Consulting Group in July so they could advise their school district clients. After evaluating nearly 30 other vendors, TSA Consulting Group issued the following statement:

TSA Consulting recommends adoption of the IBC Model Plan as presented by the IBC. The benefits of the Model Plan will be best realized by participants of all school districts, large and especially small due to the distribution of highly competitive products to all districts regardless of size and the reduction of fees as statewide assets grow. It should be stated that, while each school district will make final decisions regarding authorized providers in their plan(s), the inclusion of providers outside the Model plan will have a dilution effect on these specific Model Plan benefits. In our opinion, the products and services included in the Model Plan represent an excellent array of options available to participants.”

Footnote

*One major provider company, ING, was eliminated due to a pending class-action suit brought on behalf of K-12 educators over excessive fees. Two of the Plaintiffs’ lawyers are located in South Florida. Upon further investigation it was determined the suit (and more may be filed) probably will not be resolved for several years. IBC was concerned that the credibility of the Model Plan might be undermined by unfavorable media attention the class-action suit is likely to receive since K-12 educators are initiating the legal challenge.

Risk Management & Insurance

October, 2008Page 1