403(b) Commissions: In Defense Of (Reasonable) Compensation

Written by: Bob Toth

With all the focus being paid these days to those "evil" 403(b) commissions, we think it's time to present an argument in defense of reasonable compensation.  It is true that, because of the commissions that are paid some 403(b) products charge fees that are higher than others.  And it is true that the prospectuses and other sales material which purport to disclose sales commissions aren't always the model of transparency. It is also true that some salespersons are less than upfront with their sales practices. But, as is true in every other profession, there are good 403(b) salespeople and bad 403(b) salespeople.

So let's, just for a moment, speak of the good sales folks and financial planners who sell 403(b) annuities.  Last year, I mentioned to a DOL lawyer who was speaking to a trade group in D.C.  that it doesn't matter how many laws, rules or incentives you pass in order to convince small employers to adopt retirement plans. You really will have no success increasing employer coverage in that market unless you have someone knocking on those employers' doors and helping them adopt retirement plans -- as has happened over the decades in the 403(b) market.  Regulators should not expect these folks to do this gratis any more than any government staffer should be expected to work for free. 

Most of the 403(b) sales professionals I know are very interesting people, with particular connections to the 403(b) market.  Many of them are former teachers, coaches and nurses (and so 403(b) participants themselves).  Many are passionate about their work, and spend long hours traveling long distances to enroll employees in 403(b) plans.  I even have a few agent friends in Alaska who are bush pilots who fly to distant villages to enroll employees.  Many also have a high degree of technical competency in  retirement plan consulting in order to help small employers deal with the myriad of technical issues which arise on any given day. They often act, in effect, as an extension of the charity's or school's HR department, for which the tax-exempt need not pay.

Think of the typical enrollee -- a teacher, nurse or employee of a charity -- whose pay is often modest. There are not large dollars at stake, and the commissions earned on any typical policy is, commensurately, not large.

I do not argue in defense of those unethical salesmen who sell the wrong product at the wrong fee to the wrong person.  There are employers and employees for whom some of the products are unsuitable.  But, as we issue new RFPs to support the new regulations, we are finding that there are very real services being provided in this market. As commissions are cut out of the new 403(b) products, it is also a choice to cut out a level of plan services. And some of the services, such as bush pilots performing enrollment services, will not be able to be replicated.