Firm to disclose savings plan fees

Times Staff Writer

Under pressure from teachers, an insurance company that sells individual retirement plans to Los Angeles school district employees has agreed to disclose the fees it collects from the mutual funds it offers as investment options.

The fees, known as revenue-sharing payments, are common in retirement funds, including 401(k) plans. They are intended to cover the expense of marketing the plans, among other costs.

Critics, however, contend that the payments also serve as a kind of kickback, one that funds are willing to pay in return for getting “shelf space” in the marketplace.


Industry experts say the push by Los Angeles teachers and others for better disclosure will help build public awareness of how revenue-sharing fees take a hidden toll on retirement nest eggs.

“This level of disclosure is unusual today, but I think it will be common in two to three years, if not before,” said Fred Barstein, president and chief executive of 401(k) Exchange, a retirement-plan consulting firm based in West Palm Beach, Fla.

Under the agreement reached last week, a unit of insurance giant American International Group Inc. agreed to disclose its revenue-sharing arrangements for a new 457 retirement plan it is offering through the Los Angeles Unified School District.

Similar to 401(k) plans in the private sector, 457 accounts allow public-sector workers to set aside a portion of their salary and not pay taxes on it until they begin withdrawing it in retirement. Starting this month, the Los Angeles school district is for the first time making a 457 plan available to its teachers.

In meetings this summer, teachers serving on an advisory committee learned that the funds in the district’s 457 plan would assess an average annual fee of 0.27% on account balances for revenue sharing. For someone with a $10,000 balance, that’s an average fee of $270 a year.

The 457 plan provider, AIG VALIC (which stands for Variable Annuity Life Insurance Co.), had no intention of disclosing this fee to teachers, said Steven Schullo, who served on the advisory committee.


Instead, the revenue-sharing money would have been an undisclosed component of the investment management fee charged by each fund.

Schullo and others objected, contending that revenue-sharing fees are often inflated. Full disclosure, they said, would allow teachers to choose funds in the 457 plan with lower revenue-sharing fees or opt out.

“The revenue sharing gets hidden in the cost of the funds,” Schullo said. “You wouldn’t even know that you could have been offered a lower-cost fund if it hadn’t been for the revenue sharing.”

In response to the criticism from Schullo and others, school district benefits manager David Holmquist pressed AIG VALIC to fully disclose the revenue-sharing fees.

“The committee wants full disclosure,” Holmquist told AIG VALIC Vice President Ron Gatti at a meeting in the district’s offices last week.

Gatti resisted, saying that disclosing general administrative fees of 0.15% and fund management fees, which will average 0.72%, would be sufficient.


“I’m afraid the revenue sharing would just confuse people,” Gatti said.

Teacher Alan Warhaftig countered that the district might find itself liable for failing to disclose the fees. He cited lawsuits recently filed against sponsors of big-company 401(k) plans over failure to disclose similar revenue-sharing payments.

The district’s teachers union, United Teachers Los Angeles, also threatened to withhold its support for the 457 plan unless full disclosure was made.

“There is no way that UTLA could have anything to do with any plan that doesn’t have complete disclosure of fees,” union Treasurer David Goldberg said at the meeting. “Our members trust us to look out for their best interests.”

In response, Gatti said the company would create a separate page in marketing presentations that would spell out the portion of the fund management fee that was paid to AIG through revenue sharing.

The district’s decision to endorse a 457 plan comes in the wake of a Times story April 25 that described the role of prominent teacher unions, including UTLA, in promoting 403(b) annuity plans, a type of investment that typically has higher fees than comparable mutual funds.

The 403(b) accounts are for teachers only and are also similar to 401(k) plans. Although private employers are obligated to screen 401(k) providers and ensure that fees are reasonable, school districts are under no obligation to review or oversee 403(b) accounts.


In response to the Times story, which was part of a “Retirement at Risk” series, UTLA quit endorsing 403(b) plans. It also began working with the school district in reviewing investment choices for the 457 plan.

Holmquist notes that 457 plans have a big advantage over 403(b)s, because the district can screen investment options and offer a 457 plan with just one provider -- which allows the district to negotiate fees and costs and act in the best interest of its employees, just like companies in the private sector.

As the result of the compromise to boost disclosure, the teachers withdrew their objections, although they remained critical of the revenue-sharing provisions in the funds.

“Even if you have to hold your nose while this is going on, it seems like recommending the 457 plan might be good advice for somebody who is stuck in an annuity,” Warhaftig said. “They just need to be very cognizant of the fees.”