The Coming Storm: Fundamental Retirement Fairness for Educators

In the world of pension investments, TIAA-CREF is generally acknowledged as the “600 pound gorilla,” at least with regard to universities and other higher education institutions. So I was somewhat surprised when a colleague sent me an article, written by university educators, raising questions about TIAA-CREF and asked me to read it.

if all TIAA-CREF participants were restricted to only TIAA-CREF over a forty-year time horizon, out estimate of the terminal wealth loss is between $700 billion and $4.2 trillion, depending on the mix of investor sophistication level.

access to a set of equity indexes in addition to the TIAA-CREF menu would have increased the value of terminal wealth by more than 100%.

Numbers like that obviously gets an ERISA attorney’s attention. My colleague asked me if I would perform a forensic fiduciary prudence analysis on the 403(b), 457(b) and Optional Retirement Plan (ORP) investment options for a major Southern university, focusing on three of the vendors in such plans: TIAA-CREF, Valic, and Fidelity Investments. The plight of educators with regard to pension options is well documented. Even so, the findings of my forensic fiduciary prudence analysis surprised me.

The ORP is an retirement savings option that has been gaining in popularity on universities and other higher education institutions. Unlike the traditional defined benefit retirement plan, the OPR is a defined contribution plan that theoretically gives educators and other plan participants the option to have greater control over their account, and, hopefully, the opportunity for greater returns.

I focused my forensic fiduciary prudence analysis on the core equity-based investment options for each of the three plans, a total of 86 mutual funds. I did not analyze any variable annuities offered by the three vendors, as the inequitable and high fees charged by such investments basically resulting in such investments being imprudent on their face.

While I performed a comprehensive forensic analysis of the 86 funds, I wanted to focus on one of my proprietary metrics, the Active Management Value Ratio 2.0™ (AMVR), a simple cost/benefit metric, due to its simple nature and easy to understand calculations. I calculated both a simple AMVR and an adjusted AMVR, which factored in a fund’s R-squared rating and the potential impact of a fund’s “closet index” status.

The forensic analysis showed that only 18 of the 86 funds would pass the simple AMVR screen, with only 2 of the 18 being able to pass the adjusted AMVR screen as well. Of the 18 passing the AMVR screen, 4 would have been subject to disqualification based on fiduciary issues such as 12b-1 fees and questionable share classes.

So why do I bother to mention these findings? Because plaintiffs’ attorneys are going to devoting even more attention to the area of pension plans, including 403(b) and 457(b) plans. In 2007 the IRS implemented new rules for 403(b) and 457(b) plans, arguably making more of such plans subjects to the fiduciary requirements of ERISA. Even if such plans are not subject to ERISA, the plans should be subject to potential liability for breach of fiduciary duties under both federal and state common law, particularly under principles of trust and common law.

The issues involving the fundamental fairness of educator-based retirement plans have been well documented. It was not until the LaRue decision in 2008 that the Supreme Court recognized the fundamental difference between defined benefit and defined contribution plans, thus allowing for better protection of employee’s retirement financial security.There is no justifiable reason for  not allowing educators, at all levels, to not have the same rights to protect their retirement financial security by recognizing a similar right to redress similar breaches of fiduciary duties by universities and the investment committees that chose the investment options available within 403(b), 457(b) and ORP plans.

Expect to see the plaintiffs’ bar actively seek to obtain these basic and fundamental investment rights for educators at all levels. Just since last week, when news of my study leaked out, I have received over a dozen request for additional forensic fiduciary prudence analyses on other universities and state university systems.

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