Julia Durand, the president of NAGDCA and a director at CalSTRS, discusses the unique challenges facing public defined contribution plans with P&I online editor Matthew Wurtzel.. View more in this series

Law limits L.A. school district's efforts to simplify 403(b) plan

Los Angeles Unified School District executives are pinned between Internal Revenue Service rules requiring greater responsibility for monitoring and administering the district's $2 billion 403(b) plan and a state law they say makes it more difficult and expensive to meet the IRS standards.

IRS rules require executives of 403(b) plans to act more like those of 401(k) plans in for example, creating plan documents and monitoring investment options. Many 403(b) plan officials have cited the regulations as the impetus for consolidating the number of providers and investment options.

Los Angeles school district officials want to follow suit, but California is one of a handful of states that has an “any willing vendor” law. That law effectively blocks attempts at consolidation in the name of providing “open access” for participants to choose providers and investment options. The law affects all K-12 school districts and community colleges in the state.

Supporters of the current system include the American Society of Pensions Professionals and Actuaries and the National Tax-Sheltered Accounts Association, both of Arlington, Va., and the California Teachers Association, Burlingame. They say the law allows greater choice for participants and prevents large providers from dominating the 403(b) market.

Critics of the law, which was enacted in 1954, say the Los Angeles school plan and others in California are stuck with too many providers, too many high-fee investment options and too big an administrative headache. They include TIAA-CREF, New York, and the $146.8 billion California State Teachers' Retirement System, West Sacramento.

'Change will come'

070912 otter
Demanding: Dan Otter called the California system 'outrageous' and said it has to change.

“The current system is outrageous. It prevents competitive bidding,” said Dan Otter, owner of 403(b)wise, an Albuquerque, N.M., firm that provides education and research about 403(b) plans. “The status quo cannot stand: Change will come.”

For the Los Angeles school district's 403(b) plan, the status quo represents 27 providers and an estimated 1,300 investment options, said Barbara Healy, a Scottsdale, Ariz.-based consultant with SST Benefits Consulting, the plan's investment consultant.

“We need to end the discrimination of preventing school districts from taking competitive bids for vendors,” said Ms. Healy, who supports changing the state law.

The school district's 403(b) plan oversight committee has argued the law creates a “negative impact” on school districts and community colleges.

“We believe that the "any willing provider' model increases the complexity of the plan, making effective oversight of the program and compliance with the new (IRS) regulatory requirements a real risk to LAUSD and ultimately to the participants in the plan,” George Tischler, the school district's chief risk officer, wrote in a May 2011 letter to state Insurance Commissioner Dave Jones.

In an interview, Mr. Tischler, now retired, disputed the argument by supporters of the law that more products lead to lower costs. “There are upfront charges, back-end charges and surrender charges” to many of the products, he said. “Many employees believe that if a product has been allowed, then it has been vetted. It has not.”

The legislative staff of the $146.8 billion California State Teachers' Retirement System, West Sacramento, issued an analysis in February, saying the law had evolved from “a goal of providing a level playing field for vendors ... into an unwieldy disarray of multiple products and fee structures.”

In an interview, Ed Derman, deputy CEO of CalSTRS, said: “We support any effort to get better products and lower costs” into 403(b) plans. “There are so many choices; people don't know what to do.”

CalSTRS offers 403(b) plan investments to schools districts through its Pension2 plan. Authorized in more than 1,000 school districts, Pension2, with a total of $375 million in assets, is now available in about 800 districts. Pension2 officials choose the products, and TIAA-CREF is the record keeper.

The current system is “complex, confusing and costly,” said Bruce Corcoran, managing director for the K-12 market at TIAA-CREF. “We support competitive bidding. In today's environment of open architecture, you can provide more options, more efficiently and at lower cost.”

Supporters of the law say it is fundamentally sound. “As long as you have a capable (third-party) administrator and an appropriate contract between the administrator and providers, school districts should be able to follow the IRS regulations,” said Christopher DeGrassi, executive director of the tax-sheltered accounts group.

California is one of a few states — the others are Ohio, Texas and Washington — that have “any willing vendor” or “any willing provider” laws, said Julia Durand, director of defined contribution solutions for CalSTRS as well as president of the National Association of Government Defined Contribution Administrators. She said NAGDCA doesn't take a position on “any willing vendor” laws because “we try not to get involved in state issues.”

In California, vendors must meet certain qualifications to be listed on 403bCompare, a non-profit program created by CalSTRS to provide “free objective information about 403(b) vendors and products they offer,” according to the 403bCompare website.

However, a listing on 403bCompare isn't an endorsement by CalSTRS — just an indication that a company has submitted the necessary information to qualify as a vendor, Ms. Durand said.

This article originally appeared in the July 9, 2012 print issue as, "403(b) plan between a rock and a hard place".