Attention California School Districts: You ARE Fiduciaries For Your 457(b) Plans

This isn't the first time I've written about this topic and it won't be the last...unfortunately. If you are a board member or a district administrator for a California public school, it's highly likely you are ignoring a significant responsibility and this leaves you open to lawsuits.

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

Are you 403(b) Wise? 403bwise.org is the place on the internet to learn, advocate and build community.

Reish White Paper by Scott Dauenhauer, CFP, MSFP, AIF on Scribd

More 403(b) Vendor Shenanigans & Trips...Those Amazing Trips

This past week I've come across several instances of what I consider improper marketing efforts by insurance agents for 403(b) vendors. 

As best I can tell, this week it's LSW and Midland, two of the worst 403(b) vendors in the industry in my opinion. 

I also found where LSW is having their Conference of Champions trip and have posted the details.

LSW Agent Violated District Rules?

The first issue is with an LSW representative, as reported to me:

The email was originally sent out to our principal (name redacted). In the email it states that he (the LSW insurance agent/salesperson) had:

"nominated our school for our 'sports equipment giveaway' program on numerous occasions in the past." 

It goes on to state:

"As you know, we are (an) approved 403(b) advisors with the district as well as the TPA (third party administrator) and we conduct retirement updates at numerous schools functions including staff/professional development meetings." 

The letter goes on to state that:

"we have 2 sets of sports equipment available to be donated in March that are being funded by one of our agents out of his own pockets with no corporate money involved."

So what's the problem? Several.

First, the rep is essentially bribing the school official with sports equipment in order to gain a quid pro quo of access to "staff/professional development meetings." This is unethical in my opinion. If you want to give the school equipment, just give it.

The bigger problem is that in this particular school district agents are prohibited from being on campus for any reason (other than if their child attends, of course). Yet the rep is attempting to gain access even though the rep new it was not allowed. I know the rep knew it wasn't allowed because the rep is listed as an LSW rep on the active agent list that LAUSD collects.

It gets worse. The agent represents that he is an "approved 403(b) advisor(s) with the district as well as the TPA". This is a misleading claim. The district doesn't approve agents and the Third Party Administrator doesn't either. The district simply makes all agents and brokers who sell products complete information so that they can track who is selling in the district and ensure they are following the rules. The list has not been vetted. You can read all the documents that LAUSD requires agents to sign here. LAUSD has not approved this salesperson in any fashion, simply required that they adhere to LAUSDs guideline if they wanted to sell in the district, to indicate otherwise seems quite dishonest to me.

To give you an idea of what the solicitation agreement entails, here are a few of the key points:

SECTION I – RULES AND PROCEDURES

1. Agent must sign the Rules of Solicitation Agreement and file with TSA Consulting Group, Inc., Plan Administrator, prior to working with employees of Los Angeles Unified School District.
   
2. Any Agent working in the district must be listed as an agent with at least one of the companies on the authorized investment provider list.
   
3. Agent is responsible for updating TSA Consulting Group Inc. of any changes in company/companies represented and any change in business contact information such as address, email and phone contact.
   
4. No agent may solicit employees or distribute promotional materials for the purpose of obtaining contracts for tax‐sheltered annuities, 403(b) voluntary retirement savings or similar benefits on District property.
   
5. Agents may not ask employees to utilize District facilities (fax machines/telephones) to arrange appointments or send materials related to 403(b) voluntary retirement accounts.
   
6. Agents are not permitted to meet with employees on District property for any reason related to the soliciting or servicing of an employee 403(b) Tax‐Sheltered Annuity.
   
7. Interference in any way with employees daily period of service will not be tolerated.
   
8. Agents may not for any reason sign‐in to the ART System for, or on behalf of the employee, to process any
   transaction or make changes to Salary Reduction Agreement information. Accessing ART utilizing someone else’s credentials is considered fraudulent activity and is grounds for immediate termination. 

The agent is listed with LAUSD which indicates he signed this agreement (note: I've not independently verified he signed the agreement, this is an assumption based on the process in place to get on the agent provider list). Notice Rules 4 - 7....the above e-mail seems to be looking to violate all of those rules. It's going to be hard to claim ignorance.

The second solicitation issue happened in the same city and same district and the rep involved is also listed several times on the districts agent provider list.

LSW/Midland Appointed Agent Represents As CalSTRS?

In this situation an agent who is appointed with LSW and Midland (and who has won awards apparently with both for selling their products) represents himself as being affiliated with CalSTRS, a common trick of insurance agents selling 403(b) products.

I don't know how the individual received the document below, but you can see that it asks questions related to the California State Teachers' Retirement System (CalSTRS) pension plan. But more importantly, the e-mail address literally starts with "calstrs". I've blocked out any identifying information.

LSW Advisor Resources by Scott Dauenhauer, CFP, MSFP, AIF on Scribd

This is another case of misleading solicitation. Even if the agents didn't mean to mislead, he used the name of CalSTRS in his e-mail address...that's a no-no. The agent brags on his website that "Since 2012 (name of agent) has reached the President’s and Platinum club levels with several nationally recognized Premier Retirement Planning and Insurance Carriers." If you are not aware, this is not a trait a consumer should look for in a trusted advisor - it simply means he sold enough of that company's products to achieve a certain level (which normally leads to trips similar to the ones below).

Bottomline - solicitation by reps of insurance companies that are bad for consumers continue to be a problem. Be careful out there.

Just so you understand what is driving these solicitations, I'm including below the trips that these types of agents might qualify for if they submit enough business to National Life Group/Life of the Southwest:

LSW 2017 by Scott Dauenhauer, CFP, MSFP, AIF on Scribd

LSW 2018 by Scott Dauenhauer, CFP, MSFP, AIF on Scribd

It's time this kind of stuff stopped.

Scott Dauenhauer, CFP, MPAS, AIF

Are you 403(b) Wise? 403bwise.org is the place on the internet to learn, advocate and build community.