Teacher Fights for Fee Disclosure in New Jersey
by Bernard Olsen
As an educator working in a public school district in New Jersey, my schedule is very busy from September to June. The summer provides a good time to review my finances, so in July of 2016 I finally decided to give my 403(b) account a thorough checkup. I was invested in AXA Equitable’s Equi-Vest Series 201 Annuity Contract. This contract is a variable annuity product, and the experience I have had in this investment, as described below, supports the call for a requirement to have 403(b) investment providers in public school district plans disclose their fees and returns on client statements.
I had been invested in this particular contract for 6 years, since July of 2010. During the prior school year, when I had just a little time to glance at my account, it seemed the performance of my AXA portfolio was lagging. Now that I had more time, I decided to drill-down on the holdings in my portfolio. It didn’t take very long to confirm my observations were right – the funds in my portfolio were underperforming when compared to their corresponding indexes and Morningstar categories (used as benchmarks over the same time frame). I began to research why.
Poor AXA Returns
The AXA Aggressive Allocation Fund was a holding that represented 45% of my portfolio. On their website, AXA lists the S&P 500 TR USD Index as the prospectus benchmark for this fund. In July of 2016, I was using the 6/30/16 return data, and I reviewed the 1, 5 and 10 year rolling average returns for this fund and compared these figures to the S&P 500 Index over the same time frame. The AXA fund performed -4.09%, 4.51% and 2.56% for the 1, 5 and 10 year rolling average returns, respectively, while the S&P 500 Index performed 3.97%, 11.98% and 7.31%, respectively, for the same time frame.
Since there was such a noticeable difference favoring the index vs. the AXA fund, I wanted to make sure my comparison was a fair one, even though AXA’s website identifies the S&P 500 Index as the prospectus benchmark for the fund. I therefore looked at Morningstar as a resource that would provide me independent and reliable information. Instead of using the S&P 500 Index as a benchmark, Morningstar used the index “Morningstar Aggressive Target Risk Index” listed as “Morningstar Agg Tgt Risk TR USD”. The rolling average returns for this index over 1, 5 and 10 years as of 6/30/16 were -1.70%, 6.87% and 5.75%, respectively, vs. the AXA funds’ performance of -4.09%, 4.51% and 2.56%, respectively, over the same time frame.
No Expert But Know Indexes Are Tough to Beat
Although I am not an expert when it comes to investments, I know enough to understand the phrase, “indexes are tough to beat over time.” What this means is that most funds that have an active fund manager do not beat the performance of their corresponding index benchmarks over long periods. However, the difference in returns between either index, the S&P 500 or Morningstar’s, and the AXA fund was large enough to motivate me to continue my research.
I then used Morningstar to compare how the AXA Aggressive Allocation Fund’s returns compared to other funds in its’ Morningstar category, or its’ peers, over the same time frame (Allocation – 85%+ Equity). With 1 being the highest percentile and best ranking for returns of annuity funds within this category, and 100 being the lowest and worst, this AXA fund ranked in the 47th percentile for the 1 year returns, and in the 88th percentile for the 5 year returns average and 89th percentile for the 10 year returns average. Clearly, based on this data, the annuity funds that were peers of the AXA fund not only were performing better than the AXA fund, but also performing near or better than the funds’ index and category benchmarks.
In looking at the other 5 variable investment options in my 403(b) account, 4 of these funds (the EQ/Large Cap Growth Index, EQ/Large Cap Value Index, Ivy Funds VIP Energy, and the MFS Utilities) which represented 40% of my portfolio, also significantly underperformed their corresponding index and category benchmarks over the 1, 5 and 10 year time frames. The only variable fund that out-performed its’ index and category benchmarks over these periods was the EQ/GAMCO Small Company Value fund. However, this fund only represented 8% of my portfolio.
I realized there had to be a common denominator as to why the consistent underperformance of 5 of my 6 variable fund holdings. Common sense told me there must be some type of information I could find on the funds. Rather than request sales literature, I decided to find something more detailed, something that AXA was required to distribute. I therefore looked at the prospectus for the annuity product I was invested in. On page 11 – 13, there was a “Fee Table,” which listed the fees I was being charged in my annuity. What I took notice of was the “Separate Account Annual Expense,” which totaled 1.20% per year. This fee was applied to the variable investment options, the funds, in my account. Then I saw the next page, which listed another range of fees titled “Portfolio Operating Expenses.” In order to determine what these fees were, I read the fine print below this section and noticed they pertained to the underlying portfolios in the contract.
There is additional information specific to each underlying portfolio, or variable fund, in the prospectus, so I found each fund section in the large document. In each fund section, there is a table on the fees titled “Annual Portfolio Operating Expenses.” Above this table it states the fees listed below do not include any fees and expenses associated with variable annuity contracts, which would increase overall fees.
Separate 1.2% AXA Charge
Using my AXA Aggressive Allocation fund as an example, there is the Separate Account Annual expense of 1.20%, which is the fee associated with the variable annuity contract, then an Annual Portfolio Operating Expense of 1.19%, both of which are listed in the prospectus as stated above. The total fee for this fund, then, is 2.39% annually.
I wasn’t really sure what this actually meant, and of course I would have rather have the fee expressed as a dollar amount. I noticed in the fund section in the prospectus below the “Portfolio Operating Expenses” title, it states these are the expenses you pay each year as a percentage of the value of your investment. Therefore, if an AXA client had $50,000 balance in this fund on average throughout the year, he or she would be paying $1,195.00 per year, or 2.39% of $50,000 annually. Now I clearly saw the connection between the underperformance of my AXA funds and the expenses, since the returns that are posted are always net, after expenses have been deducted.
In dollar figures, hypothetically, for a 45-yearold teacher that has a current 403(b) portfolio of $50,000 and is contributing $200 per pay, the difference between averaging 6.39% each year and 4% each year until age 65 is $102,058. I have always been an advocate of paying for sound advice and service, but for a teacher to give up $102,058 at retirement to the investment provider in a 403(b) is ludicrous. There is no amount of quality of advice and service that can justify this excessive fee.
This revelation naturally prompted me to check my wife’s 401(k) account statement and make some comparisons. Checking her statement, I immediately noticed the expenses of the funds she invested in were listed, expressed both in annual percentages and actual dollar figures per quarter, as it pertained to the fund balances in her account. The returns of the fund options were also listed on the statements. What was most noticeable was the expenses she was paying were far less than what I was paying. After doing some research similar to the one I did above on her 401(k) funds’ returns, I found the performance of her investments were significantly higher, near or better than all of her funds’ corresponding indexes and Morningstar categories. Again, this confirmed the connection between investment expenses and the returns an investor actually receives.
Vaguely Familiar With Fiduciary Rule
I was pretty upset that I could not see the expenses I was paying in the investments on my 403(b) account statement, as compared to my wife’s 401(k) Plan. This motivated me to research why this was the case. I had vaguely heard of the “Fiduciary Rule” discussion in investing, but did not have the time to research it. What I learned is that Advisors that provide investment advice or manage assets in 401(k) Plans are held to a fiduciary standard, and part of this standard is a requirement is to disclose fees. Advisors that offer 403(b) products or investments in a public school district plan do not have to hold themselves to a fiduciary standard, and therefore do not have to disclose fees. I found it absurd that it was this difficult to determine the fees I was paying. Obviously, if the specific fees had been disclosed and explained to me prior to entering the contract, as well as appeared on my quarterly statements, I would have been able to make an informed decision about where to invest my money. It is difficult, if not impossible, to know what questions to ask when important information about a major financial decision is being withheld from you.
Connecticut 403(b) Fee Bill
Early the following Summer, in 2017, I noticed a New York Times article that reported a Bill in the State of Connecticut that would require all 403(b) retirement plan providers to disclose fees and compensation to plan participants. I was happy to see that state legislation could be enacted to provide public educators the protections of fee disclosure requirements in their retirement plans. Although 403(b) plans for public school districts are not covered under the federal laws of ERISA (Employee Retirement Income and Security Act), state legislation could rightfully require important fee information to be disclosed to employees in schools. This would enable educators to make informed decisions on significant investment matters. On June 27, 2017, this Bill was signed into law by the Governor of Connecticut.
For me, the next step was an easy choice to make – in the Summer of 2017, I contacted the state assemblywoman who represents my district – the 13th legislative district in NJ (Monmouth County), Ms. Amy H. Handlin. Ms. Handlin met with me to discuss the Connecticut Bill. Within a few weeks, a draft Bill had been made that required investment providers of retirement plans to public school districts in NJ to disclose fee ratio, returns and fees to each participant. In January of 2018, the Bill was introduced to the New Jersey State Legislature. Please see the link at the end of this article to view the official Bill.
Unfathomable Lack of Protection
As an educator in NJ public schools for 25 years, I find it unfathomable that public school district employees in NJ do not have the protections inherent in legislation that requires fee disclosure of investment providers in these defined-contribution, employer sponsored retirement plans. The laws of ERISA have been around since 1974, protecting investors in the for-profit workplace by requiring important and necessary information to be distributed to them. Over that 44 year time span, a large industry of teachers and school district employees nationwide have been left completely in the dark about significant information that is needed to make the right decision concerning their retirement investments. One would think it would not take 44 years for someone to come up with a plan to protect this large class of investors.
In the mortgage and banking industry, there are fee disclosure requirements in place so the purchaser of property knows exactly what expenses he or she is paying. In the auto-sales industry, the consumer must know what interest rates and fees he is paying when buying a car. In the real estate industry, in NJ, dual fee and commission disclosure requirements for both the buyer and seller have been in place since the early 90’s. This Bill will provide public school district employees in NJ with the basic information that is absolutely essential in order for a 403(b) plan participant to make an informed decision regarding his or her investments. The difference for these people at retirement could be life changing.
Bernard Olsen is a public school teacher in New Jersey.