Connecticut increases fee transparency in 403(b) plans

A new Connecticut law will increase transparency on fees and potential conflicts of interests covering non-ERISA 403(b) plans, putting them closer in responsibility to their ERISA peers.

Industry experts say the Connecticut law — signed late last month by Gov. Dannel Malloy covering plans in K-12 school districts — appears to be the first in the country to require non-ERISA 403(b) plans and vendors to abide by rules similar to those of ERISA plans. The law, they add, could prompt action by other states.

"The K-12 plans need lots of improvements," said Dan Otter, co-founder and owner of 403(b) Wise, a website that tracks developments and provides information about 403(b) plans, including discussions of legislation and regulation throughout the country.

"The big difference is the much higher level of fiduciary standards for ERISA plans," said Mr. Otter, associate dean of the School of Continuing Studies at the University of Redlands, Redlands, Calif. Regarding the Connecticut law, Mr. Otter said: "I love it."

The Connecticut legislation was proposed by state Rep. Matthew Lesser, who said he was prompted to examine non-ERISA 403(b) plans after reading articles that described plan vendor practices and teachers' experiences.

"We heard concerns from teachers in Connecticut who invested in products that they regretted because they weren't aware of the fees and charges," said Mr. Lesser. The law takes effect Oct. 1 but gives plans until Jan. 1, 2019, to comply.

The law requires that a "political subdivision" — such as a school district in a town or city — that offers a 403(b) plan must disclose the fee ratio and return, net of fees, for each investment to each participant.

The law also requires that plans disclose "fees paid to any person who, for compensation, engages in the business of providing investment advice to participants in the retirement plan either directly or indirectly through publications or writings." It also requires that disclosure be made to participants when enrolling in plans and at least annually thereafter.

A major difference between ERISA and non-ERISA plans is that non-ERISA plans are exempt from filing a Form 5500 with the Department of Labor. Non-ERISA plans also aren't subject to the DOL's fiduciary rule or the DOL's fee transparency regulations.

Fee disclosure requirements of ERISA "have never been in the non-ERISA space," said Dan Pawlisch, associate partner and 403(b) practice leader for Aon Hewitt, Chicago. "Connecticut meant to get at this."

And with non-ERISA plans, "employer involvement is very limited," said Douglas Balsam, principal and director of institutional consulting for DiMeo Schneider & Associates, Chicago. "The employer has to be hands off. The employees are pretty much on their own. There are non-ERISA plan restrictions on employers' contributions, loans and administration."

Mr. Balsam predicted the "overall message" of the Connecticut law "will be evaluated by a large number of other states." The theme, he added, would be: "We want to protect our teachers."

Different states have different laws governing fiduciary responsibilities, and some state laws already mimic ERISA requirements regarding the monitoring of investments, Mr. Pawlisch said. He tells non-ERISA clients – including some public schools – "to look to ERISA" for best practices as a fiduciary.

Non-ERISA plans accounted for 24.1% of 403(b) plans in 2015, according to an annual survey by the Plan Sponsor Council of America, Chicago, and Principal Financial Group, Des Moines, Iowa, published in August 2016.

Survey data, based on information from 614 sponsors, showed that 38.8% of plans with 1,000 or more participants, the largest segment, were non-ERISA plans.

Among K-12 public schools, 25% of sponsors had non-ERISA plans, the survey said. Religious institutions had the largest percentage of non-ERISA plans (73.3%), followed by higher education plans (34.8%).

The Connecticut law should put closer attention on fees, said Barbara Healy, Scottsdale, Ariz.-based senior consultant for SST Benefits Consulting. "If you are not required to know fees, a lot of sponsors don't know about fees," she said.

However, Ms. Healy did raise one raised concern about the law. "Who will enforce it?" she asked.

Connecticut's Mr. Lesser said no state agency was listed as a regulator because it would have been an "awkward fit" for the several that he investigated. For now, enforcement will depend on lawsuits against vendors. Mr. Lesser said he would follow up if lack of compliance becomes an issue.His original bill had more requirements, including information about vendor services and a proposal for a state regulation using the DOL's fee transparency rules as a guide. In the end, "we wanted to keep it simple," Mr. Lesser said.The law doesn't cover participants in the non-ERISA, state-run 403(b) plan administered by the Office of the State Comptroller. The plan has $751 million in assets and covers 8,200 participants. Those eligible are employees of University of Connecticut, including the University of Connecticut Health Center; other state universities and community-technical colleges; the state department of higher education; vocational-technical high schools; and some state-run hospitals.

The comptroller's office has administered the state 403(b) plan since 1995. A 2007 law allowed the state plan to offer coverage to political subdivisions, but there was "limited interest," Tara Downes, a spokeswoman for Comptroller Kevin Lembo, wrote in an email.

One reason was that "many school districts have multiple 403(b) vendors and use different plan designs, such as providing for employer contributions which the state's plan does not," she wrote.

The comptroller conducted a "major outreach" to education organizations in 2007 and 2008, Ms. Downes wrote. If school districts wanted to join the state plan, "they had to adopt our plan document and make our plan the exclusive 403(b) option offered to their employees."

Due to IRS regulations, there are "many complexities in administering 403(b) plans (and) we did not want to jeopardize the favored tax status of the state's 403(b) plan by taking on responsibilities for other entities," she wrote.

Ms. Downes added that the comptroller's office has "actively encouraged political subdivisions to join the state's 457 plan, which has the same options as the 403(b) plan and provides for voluntary employee contributions only." The plan, established in 1974, has $2.9 billion in assets.