Tallahassee, Fla. - The feeding frenzy has turned into a food fight.
It began when Florida created a new defined contribution plan, scheduled to launch in June 2002 and attract $12 billion to $13 billion in its first nine months. It has turned into a war of sorts among service providers, money managers and politicians.
Some Florida state legislators are poised to file a bill as early as this week that could delay the launch of the plan and change the investment choices. Legislators also are expected to challenge a bill that was filed on behalf of the State Board of Administration, which is to administer the new defined contribution plan.
Meanwhile, the state faces three court challenges brought by TIAA-CREF, VALIC and a group of four public school teachers. Those challenges, scheduled to be heard by an administrative law judge late this month, are aimed at forcing the plan to include more than one bundled provider.
However, at the, Feb. 6 board meeting, SBA staff intend to propose that the trustees withdraw the investment policy statement, which lays out the plan's investment structure, said Tom Herndon, executive director of the State Board of Administration. SBA lawyers have said that withdrawing the policy statement would make the court challenges moot, he said.
How many cooks?
At the core of the controversy is whether the defined contribution plan should be serviced by several bundled providers - as is the case with many 403(b) plans - or run by an independent third-party administrator, with investment options provided by separate money managers - similar to corporate 401(k) plans. Under the current policy statement, the new plan, which will be open to all members of Florida's retirement system, would include a single bundled provider offering services and up to nine investment options, a third-party administrator and a set of 12 other institutional investment options to be run by independent money managers.
State Rep. Mike Fasano, majority leader, said he is preparing to file a bill within 10 days because he disagrees with the direction the defined contribution plan is taking. By hiring separate money managers for each asset class, he said, the SBA is, in effect, running an in-house mutual fund. His bill calls for at least five bundled providers.
"We want state employees to have a choice," said Mr. Fasano, whose proposal is backed by Tom Feeney, Speaker of the Florida House of Representatives.
But if a bill is filed requiring at least five bundled providers, Sen. Ken Pruitt, who wrote the bill creating the defined contribution plan, said he would speak out against it. "When we sat down and started going through the guiding principles, our No. 1 concern was not the providers; it was to give members the best offerings and the best products with the lowest fees," he said. "What I find incredible is the providers want the state to operate the plan the way they do business. If you want to do business with the state, you change the way you do business to the way we do business. We're the client."
In attempt to keep the plan launch on schedule, Mr. Herndon on Jan. 30 proposed a compromise: drafting a definition of bundled provider. Right now, neither the statute that created the defined contribution plan nor the investment policy statement defines "bundled provider."
Under Mr. Herndon's proposed definition, the bundled provider would offer customer service assistance and education directly to participants, including asset allocation models, risk-tolerance questionnaires, retirement income projections and distribution options. Mr. Herndon's compromise, however, does not recommend how many bundled providers should be hired. "SBA staff cannot pre-commit to selecting multiple bundled providers, but is willing to recommend those bundled providers and/or bundled products that are rated `best in class' based on the selection and evaluation measures adopted by the trustees," he wrote in his proposal.
At deadline, TIAA-CREF executives were examining the new proposal and had not decided whether to support it. The legislative challengers also were undecided at press time.
While Gov. Jeb Bush has not released a statement about where he stands on the issue, in a Jan. 4 meeting of the SBA he did voice some concerns about the multiple-provider scenarios.
"At least from my reading of the law, there was an intent to keep this as a third-party objective decision ... in terms of whether you wanted to stay in the defined benefit (plan) or move to defined contribution, then if you decided to go to defined contribution, what your options were," he said. "... If there's an effort to sell at the same time and, in the process of selling, you're not only just touting your investment product, but also bad-mouthing the others or whatever, that's a conflict to me."
Limits on providers
Addressing the SBA's concerns that too many choices could confuse employees, Mr. Fasano said his bill would limit each bundled provider to funds in nine different categories.
"The nine categories would be constant from one company to another and would cover the risk-return spectrum from conservative money-market type funds to more aggressive growth type funds," he said. "The specific funds offered by each provider would vary, but any particular category of funds from one provider would be easily comparable to the same category from any other provider."
Meanwhile, the SBA - whose trustees include Mr. Bush, Comptroller Bob Milligan and Treasurer Tom Gallagher - is backing a separate "glitch bill" that would create a trust fund for the defined contribution plan, Mr. Herndon said. (Employees from more than 600 state employers are eligible for the new defined contribution plan. The proposed trust fund would give the employers one central place to send contributions. The assets then would be disbursed to the appropriate providers.)
Legislative challengers say they would oppose the trust fund bill unless a settlement is reached with the SBA on the bundled provider issue.
As barbs fly around the SBA like so many ripe tomatoes, the board is trying to carry on with the searches that would allow the plan to be implemented on time. At its Feb. 6 meeting, trustees are scheduled to hire CitiStreet as the plan's third-party administrator. It is expected to begin searching for unbundled providers in February and a bundled provider in March.
Still, service providers are at odds as to how Florida should structure its plan and what lessons are being learned from Florida's experiences.
"I guess if I could have written the book on how the process could have worked in Florida, my only wish is the legislation would have been very short and to the point, and, beyond that, all the creative process of how it should work could be written outside the legislation," said Tom Hughes, senior vice president of Fidelity Investments Tax Exempt Services Co., Boston. "That way you can tweak and change the plan and do not have to go back to change legislation, which opens it up to the political process. Ultimately I would have hoped Florida would have been an example." Fidelity is one of three finalists in the search for third-party administrator.
However, Mr. Hughes declined to comment on charges that some service providers are trying to change the plan structure to fit the investment options and services they have to offer.
"To each his own. Different people have different service models in how plans should be best set up and, to their credit, they will try to make sure their model fits that plan," Mr. Hughes said.
However, Fidelity has problems with the multiple bundled provider approach. "Multiple vendors, where they are going after your participants, leads to an environment where participants are being sold, not educated," he said.