Do Texas legislators read what they vote for? Do they do their homework?

The passage of House Bill 2820 gives us reason to doubt.

Written by Rep. Dan Flynn, R-Van, and sponsored by Sen. Bryan Hughes, R-Mineola, the bill repealed the requirement for financial product sellers to register with the Teachers Retirement System. It also eliminated the already catastrophic 2.75% annual expense ceiling on products sold to teachers in their 403(b) accounts.

Basically, the new law declared open season in Texas. It put a target on the backs of 635,000 public school teachers and employees. It made Texas safe for investment predators. The likely result will be poorer retirements for teachers and a multitude of lawsuits that may eventually cost Texas taxpayers hundreds of millions.

Isnt this odd?

Nope. Its business as usual.

This isnt the first time Texas has refused to regulate financial products offered to Texas teachers. Seventeen years ago, another bill attempted to rein in the high expenses for teacher 403(b) products. An early version of that bill put limits on expenses and charges.

The limits never made it to the final bill. At the last minute, the Texas State Teachers Association objected to the changes. Hard to believe, but the organization did.

So vendors had to register, but expense charges werent reduced. Front- and back-end commissions werent eliminated. Surrender charges werent eliminated on most options. The only limit was a sky-high annual expense of 2.75%.

Now the requirement to register products has been removed. Even the very rich limitation of 2.75% in annual charges has been removed. The only good news is that teachers arent required to save through a 403(b) plan. They can invest elsewhere with better results.

Has something happened to make offering punitively high-cost retirement products in 403(b) plans (or anywhere) a good idea?

No. If anything, tolerance for consumer abuse has been disappearing everywhere but Texas. Beyond that, workers with 401(k) plans have enjoyed major improvement in plan menus and a long trend to lower expenses. We might ask, for instance, how Exxon Mobils 17,000 employees enjoy a 401(k) plan with expenses of 0.01% to 0.04%, while 635,000 Texas teachers and school employees must choose between thousands of options, many priced over 2% a year?

Beyond the 403(b) plans of Texas, the entire securities industry competes to lower costs. And I mean really lower them. It is now possible for consumers to buy exchange-traded index funds commission-free on platforms like Vanguard, Schwab and Fidelity. So while savers are in a new age of no-commissions and 0.05 percent annual cost IRAs, Texas teachers are corralled in 403(b) plans dominated by high-cost choices.

Some readers may be skeptical of reduced tolerance for consumer abuse. So consider this: Earlier this month, the Securities and Exchange Commission began an investigation into the sales practices for 403(b) plans in school districts. AFTER a recent SEC meeting, Dan Otter, the founder of 403bwise.org, told me: The SEC is really on this issue.

More recently, the New York State Department of Financial Services announced that it, too, is going to investigate sales of annuities to 403(b) accounts.

In fact, two research studies demonstrate that Texas legislation favoring unregulated vendors is exactly what should not be done. Both studies are public information. They are readily available as quick downloads, even to Texas legislators.

In 2010, the TIAA-CREF Institute published a paper comparing what it called open-access states (like Texas) to controlled-access states. In controlled-access states, providers must bid for access. The researchers found that expenses in the controlled-access states were half as high as in open-access states. They also said that long-term outcomes for teachers were likely to be massively better.

While open-access Texas had 54 providers, 172 products and 3,367 investment options in 2009, controlled-access Arizona had one provider, three products and 22 investment options. Iowa, another controlled-access state, had five providers, 10 products and 135 investment options.

Texas had an average expense of 1.75% a year. Thats double the 0.88% average expense in Arizona and the 0.85% average expense in Iowa.

The TIAA-CREF researchers calculated that the difference would materially improve the retirement income for teachers in lower-expense states.

Aon Hewitt, an investment-consulting firm, came to similar conclusions in a 2016 study, How 403(b) Plans are Wasting Nearly $10 Billion Annually, and What Can Be Done to Fix It. Its study suggested using controlled access and avoiding choice overload by having a limited menu of options in the plan. It also suggested an emphasis on target date and low-cost core index funds.

Texas is a poster child for choice overload, confusion and deceptive sales practices. The TIAA-CREF Institute found 3,367 investment options in 2010. Today the number of options is three times larger at 10,112.

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Bill declares open season on Texas teachers' retirement funds - The Dallas Morning News