Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 6)

Over the last 40-plus years, the Internal Revenue Code section 403(b) regulations have not been enforced to any great degree. This, combined with the fact that school district 403(b) plans are not subject to ERISA, has made the officials at these schools think that they have no fiduciary responsibilities. Yet many of these same officials are terrified of the liability they may incur if they do anything in connection with the 403(b) plans at their schools.

This concern with liability and denial of responsibility reveals a basic disconnect in the thinking of many such officials. Now, it's been some time since I was bored to tears in my remedies class in law school but I do seem to remember that in cases such as this, you cannot have any liability if you have no responsibilities. To put it another way: only if you have responsibility can you incur liability.

Fiduciary Duties under ERISA and State Law
In fact, school districts have plenty of responsibilities (known as "duties" in trust law) to participants in 403(b) plans - and therefore the possibility of plenty of liability. The astute observer will reply, of course, that school officials have no ERISA fiduciary duties to their teachers invested in 403(b) plans because such plans are not subject to ERISA. While that's true, in many states there are laws on fiduciary duties that apply to the conduct of officials in school districts.

Many state fiduciary laws incorporate the "sole interest" and "exclusive purpose" duties of ERISA. These two duties together express the duty of loyalty - first appearing in eleventh century England - which underlies all trust fiduciary law. The paramount duty of fiduciaries of 403(b) plans where state-level fiduciary law applies to their conduct, then, is to operate such plans solely in the interest of members and beneficiaries for the exclusive purpose of providing them with benefits. In these states, this requires such fiduciaries to place the interests of members (teachers, in this case) and their beneficiaries ahead of any others. This requirement seems to be violated in cases where:

• The interests of insurance companies are placed before those of teachers because the 403(b) investment options provided by such companies are comprised of high cost annuities invested in risky and poorly performing mutual funds.


• The interests of mutual fund companies are placed before those of teachers because the 403(b) investment options provided by such companies are comprised of high cost, risky and poorly performing mutual funds.


• The interests of teachers' unions are placed before those of teachers because the unions are paid by insurance companies to endorse their (mostly) junky, costly products - thereby helping to contribute to a total cost hurdle of 200-500 basis points that must be cleared by such teachers before they can even begin to accumulate a nest egg in their 403(b) retirement plan - at the same time that such unions make available to their own staffs lower cost investment products.


• The interests of teachers' unions are placed before those of teachers because the unions are simply asleep at the wheel and don't protect their membership (even in cases where the unions don't receive payments from insurance companies).


• The interests of school districts are placed before those of teachers because the districts have decided that they owe no fiduciary duties to such teachers, yet the teachers reasonably believe that the (mostly) junky, high cost 403(b) investment options offered to them have been vetted fully by the districts and are being overseen by them.

The Unconscionable Three
There are a few states such as my own state of California, Washington and Texas, where officials at school districts with 403(b) plans have painfully few fiduciary obligations - even under state law (and none, as noted, under ERISA).

The law in these three states such as California Insurance Code section 770.3 removes the discretion of such officials to screen, limit, reject or terminate relationships with service providers such as insurance companies that provide annuity contract investment options to school district 403(b) plans. In other words, such laws require schools to give access to any retirement firm licensed to sell a product. No discretion, Jack, no duty.