Despite what you've been told (in all likelihood by your compliance administrator) you ARE a fiduciary in regards to the 457(b) plan you offer your employees. You don't have to take my word for it, one of the nation's top ERISA attorneys made the case...back in 2006. Yes, you were warned over a decade ago.
It's been over a decade since Fred Reish co-authored a white paper titled "Fiduciary Duties and Obligations in Administering 457(b) Plans under California Law" and almost nothing has changed in California public schools, in fact, in many instances it has gotten worse. The paper is embedded below.
I'm often tasked by new public education clients to perform due diligence on their available 457(b) options with their employer and in most cases i'm horrified by what I find, it's a wasteland. It's also very likely a violation of California law.
Before I go further, I urge you to goto www.457bwise.com to learn more about the unique defined contribution plan available in public schools, commonly referred to as a 457(b) or a Deferred Compensation plan.
I recently began reviewing the plan options at one of the largest school districts in the state and what I found was horrifying. It was a who's who of terrible investment options, none of which were vetted by the school district. Perhaps if the school district understood their responsibility, they'd do a better job. That's what this post is about.
In August 2006, the above mentioned white paper was released to "thunderous applause and its effect was immediate and far reaching, completely altering the landscape of school district retirement plans for decades to come" said no one. In reality, the paper had a small impact among a few consultants (myself included) and a few school districts, otherwise it went completely unnoticed.
I'm not going to summarize the paper for you, you can read it in the embed or download it yourself, but here is the major take away:
Under the Internal Revenue Code, 457(b) plans can be sponsored by governmental entities and by tax-exempt entities.2 ERISA provides a statutory exemption for government plans, including governmental 457(b) plans, from its fiduciary and prohibited transaction provisions.3 As a result, state law governs the fiduciary requirements for the operation and investment of 457(b) plans sponsored by governmental entities.
While ERISA does not regulate the conduct of fiduciaries of government plans, it is the most detailed, comprehensive, and developed body of law concerning the management of retirement plans. As a result, courts often look to ERISA authorities for guidance on fiduciary issues. Further, the California Constitution and Government Code place duties and obligations on fiduciaries (e.g., retirement boards) that are virtually identical, in both concept and wording, to those in ERISA. Thus, to the extent the state law is not well-developed or particularly informative, this White Paper discusses guidance under ERISA.
Subsections (a), (b) and (c) of Article XVI, §17 of the California Constitution contain the provisions governing the fiduciary duties for the administration of public pension and retirement systems.4 One obvious question is whether 457(b) plans are subject to these provisions. This is answered in Section 53609 of the Government Code, which provides that deferred compensation plans are “public pension or retirement funds” for purposes of Article XVI, §17 of the California Constitution. In particular, Section 53609 provides:
“Notwithstanding the provisions of this chapter or any other provisions of this code, funds held by a local agency pursuant to a written agreement between the agency and employees of the agency to defer a portion of the compensation otherwise receivable by the agency's employees and pursuant to a plan for such deferral as adopted by the governing body of the agency, may be invested in the types of investments set forth in Sections 53601 and 53602 of this code, and may additionally be invested in corporate stocks, bonds, and securities, mutual funds, savings and loan accounts, credit union accounts, life insurance policies, annuities, mortgages, deeds of trust, or other security interests in real or personal property. Nothing herein shall be construed to permit any type of investment prohibited by the Constitution. Deferred compensation funds are public pension or retirement funds for the purposes of Section 17 of Article XVI of the Constitution.” [Emphasis added.]
Thus, if a plan includes deferred compensation funds, section 53609 would apply the requirements of Article XVI, §17 to the fiduciaries of the plan. Since 457(b) plans are deferred compensation plans for state and local governments, 457(b) plans satisfy the definition of public pension and retirement funds for purposes of the California Constitution. This means that the retirement boards, and their members, who are responsible for 457(b) plans (for ease of reference, we refer to retirement boards, committees or other responsible fiduciaries of 457(b) plans as the “board”) are fiduciaries subject to the duties and obligations under Article XVI, §17.
There you have it, don't take my word for it, take Fred Reish's word. I realize the above might sound like another language, but the bottomline is that you ARE a fiduciary, whether you like it or not and you better start acting like one before an employee realizes that they are being ripped off (and trust me, they are being ripped off big time).
Please read the paper and learn what your duties are and then go and improve your plan. If you are looking for an example of how to run your plan, look no further than the Los Angeles Unified School District, you can view their plan and website here. If you are looking for an entity that you can trust to run your 457(b) in a fiduciary manner, the California State Teachers Retirement System can accomplish this for you here (full disclosure, I do consulting work for CalSTRS).
It's time to take this responsibility seriously for two reasons: one, it's the law and two (more importantly), it's the moral and ethical thing to do.
Feel free to e-mail me with any questions.
Scott Dauenhauer, CFP, MPAS, AIF