Close-Up on Annuities
Which Investment Companies are Loyal?
by Gina Duryea

Some major changes in the 403 (b) industry need to be understood. One of the main ones is in the lack of loyalty some investment companies have been showing to their representatives. I won’t bore you with the 100+ page IRS document. In short, the new IRS regulations implement the following changes to 403 (b)s:

• Employers must establish a plan document.
• Any investment company that accepts contributions from the employer must provide information for certain transactions, such as financial hardship withdrawals, loans, and transfers between carriers. (They must sign an information sharing agreement stating that they will do so.)
• Full regulations go into effect January 1, 2009 (with some exceptions).
• We must wait to find out who the players are until information-sharing agreements are signed. Which companies will stand by their representative and clients? No matter what anyone tells you, the new regulations do not make 403 (b)s just like 401(k)s for the following reasons:
• No testing is required except for the rare ERISA 403 (b) plan.
• Investment companies have no legal requirements to provide values.
• Enrollment in most states (and especially in California) is more similar to writing an IRA application. There are no employer backing or group sign ups, only one- on-one presentations with the prospect or client.
• Employers may leave their architecture open, providing as many options as desired. Many have hundreds of options.
• Accounts may still be issued as individual accounts rather than group accounts. Fund companies are forcing clients to go the R-share route because they want to, not because they have to. It is the same case with annuity carriers going the group contract route.
• Although employers may decide to have TPAs, they will have limited functions, like keeping track of hardships, loans, and transfers
Now for the loyalty test: Investment companies have to sign an information sharing agreement. In most cases, they can meet this sharing by changing their hardship, loan, and transfer forms to include sign off by the employers. This is a simple feat, so why are some companies that are big in 403 (b) now deciding to stop taking contributions in A-shares or with individual account status? You didn’t read that wrong. They stop even their current clients from making payroll contributions into their open accounts. This is a clear lack of commitment and lack of loyalty to the representative who makes their business possible and to the client who trusts them with their money.
The only possible reason for this change is for the investment companies to save on their bottom line. By forcing group type commissions, such R-share compensation and group annuity commissions, investment firms can reduce their costs and increase the percentage of the fees that they keep from what the client pays.
They want you to believe that their costs would go up with information sharing if they stayed with individual type products. But, in the information age, how hard could it be for a larger firm to meet the new regulations? Assuming that there is some small investment on their part, we have an even more important question: Do the investment companies think that you and the client are worth the investment?
Here is where it gets broader than the 403 (b) industry: which IRS change is next and will your book of business be betrayed by it? I urge you to ask your favorite wholesaler what their position is on 403(b) and the changes. Are they standing by the representatives and clients who entrusted them with their accounts all these years or are they making a fast break for bigger profits? Their attitude towards 403(b) may point to their attitude in general. Find out where they stand before you entrust them with one more penny of your clients’ money.
Here is what it would mean to you if you had been loyal to one of the companies that ended up pulling out:
• Tremendous loss of income during the repapering period. You have to go back and find another investment option for all the clients.
• Hundreds of meetings since 403 (b)s are typically smaller accounts.
• Loss of credibility with your clients since you chose a company that was not committed to them.
• Loss of credibility when you have to explain to your clients that they are losing the breakpoints they earned from being a regular investor over the years.

The investment companies know this full well. How would it feel if you were one of these representatives? “Betrayed” is the only word I can think of. It is time for a wake up call to the investment companies. They need to be reminded of who sends them the business and where their loyalty should lie. Have you found a company that had been committed to 403(b), but has pulled out of the market or changed from individual to group products? Stop investing your clients’ funds with them now in all types of accounts. They could betray your business model next. Don’t take their word for it when they say the representative is their client; they have to prove it to you.
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Gina Duryea is CEO of Pension Planners Securities Inc., a Sacramento based broker dealer. She has been in the investment industry as a corporate executive and a registered principal for more than 17 years. To find out which companies are no longer committed to the 403 (b) industry, call her at 800-722-2999 or e-mail her at ginad@askpensionplanners.com.