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Seeking Contract Clarity for 403(b) Decision-Makers

If investment experts cannot identify all the actual costs and beneficial relationships in a 403(b) contract, how can decision-makers at school districts ever do so?

W. Scott Simon, 04/09/2015

W. Scott Simon is a principal at Prudent Investor Advisors, a registered investment advisory firm. He also provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. Simon is the recipient of the 2012 Tamar Frankel Fiduciary of the Year Award.


This month's column is the second part of a multi-part series that examines the contents of an agreement between a K-12 school district (School District) and a large insurance company (Big Insurance Company) concerning the School District's 403(b) plan. The first part was interrupted for two months by fast-breaking (as it were) news in the Fiduciary Wars. I strongly urge readers to review my January column before reading this month's column to bring themselves up to date.

The insurance company-drafted agreement in question here is, yes, rather boring and generally quite difficult to understand. Indeed, in many parts it's impossible to understand. Such confusion can plague anyone who attempts to read the 15-25 mind-numbing pages of such an agreement. This often plays right into the hands of an insurance company. After all, few fiduciaries in charge of retirement plans will sit still and try to understand all the legalese in an agreement and the oftentimes sloppy drafting practices of the insurance company's legal department (or outsourced legal counsel). Even when fiduciaries outsource legal review of the agreement, it's often the case that their legal counsel are not well versed in retirement plans and how they actually operate. That shows up in awkward, unclear wording.

The usual upshot of this general confusion is a rubber-stamping of the agreement, especially in the area of costs, which, well, are simply undecipherable. They're opaque, of course, not because they're low but because they're high. After all, if you were a retirement plan provider like, say, an insurance company that truly offered low costs, wouldn't you be screaming about them from the rooftops, instead of rendering them undecipherable in an agreement?

It bears emphasizing that legal agreements--not oral or written marketing materials (which is usually how retirement plans are really sold)--are where the rubber meets the road in fixing fiduciary liability (or the lack thereof). So it's useful to deconstruct the agreements in an attempt to decipher their darker, innermost recesses.

Before getting on with the rest of this month's column, the comments received by an astute reader of January's column have required me to begin offering some clarifications. He notes: "In reading your first column, it surprised me that an investment manager under section 3(38) of the Employee Retirement Income Security Act (ERISA) was even involved since that is very rare." 

My reply: I agree that in such agreements this kind of language is rarer than hen's teeth. Nonetheless, the 3(38) language is there. Note, however, that no entity was actually appointed as a 3(38) in the situation at hand. This begs the question of why there's any reference to an ERISA section 3(38) investment manager in the first place since the agreement states that the K-12 403(b) plan in question is not subject to ERISA.

W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understandingis the definitive work on modern prudent fiduciary investing.

Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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