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Innovator Winner

State-backed program helps teachers keep more savings

Concerns over high fees spurred Janet Cowell’s centralized program.

North Carolina State Treasurer Janet Cowell's battle to help teachers hang on to more of their hard-earned retirement savings led to her being honored as a 2015 Innovator.

Teachers “are working hard and trying to do the right thing by saving for their retirement,” said Ms. Cowell, whose own mother was a teacher. “I want as much of that money to go into their own pockets and not into bad (investment) products with unusually high fees.”

Ms. Cowell fought to introduce and then implement legislation creating a centralized state-backed 403(b) program to improve fiduciary scrutiny and gain economies of scale. The legislation, passed in 2011, was heavily opposed by existing 403(b) providers eager to maintain the status quo.

“There were multiple options with no central oversight,” Ms. Cowell said. “It was really the Wild West in terms of what was being offered to teachers.”

As a result, some teachers were enrolled in deferred compensation plans in which their assets were subject to such fees as front-end and back-end loads that significantly increased asset management cost, Ms. Cowell said. In addition, they were tied to surrender fees that made it difficult to switch their assets to other plan providers with more favorable terms.

While most teachers already are enrolled in defined benefit pension plans, many also choose to supplement their retirement savings through a defined contribution plan. “There are no guarantees for cost-of-living adjustments in the DB plan,” Ms. Cowell said. “To truly have retirement security, (teachers) really should also be saving on their own.”

So five years ago after overhearing a conversation about the confusion teachers in her state had about their retirement investment options, she leapt into action. What began as an initiative to simplify the supplemental defined contribution plan offerings available to the state's teachers led her into political minefield.

DC participants facing higher asset-based fees could lose out on as much as $4,000 in annual retirement income, assuming a 30-year career, according to a 2010 study by Robert Clark, an economics professor at North Carolina University, and David Richardson, a research fellow at TIAA-CREF Institute.

“Fees, particularly viewed from a long-term perspective, can have a dramatic impact on retirement savings,” said one Innovator Award judge, who applauded “the efforts to provide a low-cost plan to the teachers in the state.”

North Carolina isn't the first to attempt to update its 403(b) program, but it is notable for its “comprehensive effort, especially considering the political climate,” said another judge. Aside from more competitive fees, participants should also gain improved fiduciary oversight, Ms. Cowell said. As part of the program, the North Carolina Supplemental Board of Trustees will be monitoring such issues as asset-based fees and product menus.

Since the program launched in March 2014, 43 out of the 115 school districts have adopted the plan, mostly offered as one of several options. “I didn't feel that requiring the plan to be an exclusive option would be politically feasible,” Ms. Cowell said. “Having it as an option made a big difference in successfully getting the legislation passed.”

Nevertheless, three school districts already have chosen the state-backed 403(b) program as an exclusive option for their employees.

This article originally appeared in the November 2, 2015 print issue as, "State-backed program helps teachers keep more savings".