Connecticut governor signs bill to improve 403(b) plan fee transparency

Some believe the Connecticut law could be a springboard to reform among other states

Jun 30, 2017 @ 1:56 pm

By Greg Iacurci

Retirement plan providers servicing some 403(b) plans in Connecticut will be required to disclose investment fees and compensation paid to those giving participant investment advice, courtesy of a new law signed by the state's governor this week.

House Bill 7161 mandates companies administering municipal 403(b)s, a type of defined-contribution plan not covered by protections in the Employee Retirement Income Security Act of 1974, to disclose to each retirement-plan participant the fee ratio and net return for all plan investment funds.

The bill, which Gov. Dannel Malloy signed into law June 27, also requires disclosure of fees paid to individuals receiving compensation for investment advice provided to participants "either directly or through publications or writings."

"[The law] really impacts positively public school educators, K through 12, more than anybody else," said Joshua Gottfried, a partner at Gottfried & Somberg Wealth Management who is based in Connecticut and works with teachers in the state.

Public school teachers, especially those teaching kindergarten through 12th grade, have notoriously poor retirement plans, due in large part to a sort of laissez-faire environment that contributes to poor plan oversight and structure, high-fee investment products and a dynamic in which investment brokers are free to hang out at schools and solicit business.

Connecticut is the first state to try tackling 403(b) reform for public school teachers by applying 401(k)-type disclosures to non-ERISA plans. Some believe the Connecticut law could be a springboard to reform among other states.

Tony Isola, a former teacher who heads the 403(b) division at Ritholtz Wealth Management, is using passage of the law to start a grassroots campaign among schoolteachers. He is starting in the New York area by sending teachers a letter identifying 403(b) issues, discussing Connecticut's approach to tackling the problems, and asking for help initiating a similar conversation with state politicians.

"I think this is a really good beginning," said Mr. Isola, a former teacher. "This could be the catalyst."

Matthew Lesser, chairman of the Connecticut House of Representatives' Banking Committee who wrote the bill, said teachers in Connecticut need more information about fees and conflicts of interest.

"There have been a number of reforms to defined-contribution plans over the last few years, particularly 401(k)s," Mr. Lesser said, adding that the 403(b) industry has not received a similar amount of attention. "We wanted to address that lack of parity."

Mr. Lesser said service providers will be deemed to be in compliance with the new disclosure rules if they model the disclosures after participant disclosure requirements under ERISA, although they don't have to. Starting Jan. 1, 2019, disclosures would need to be made each year and when a participant first signs up for the plan.

The only fee disclosures typically available to these 403(b) participants are fund and annuity prospectuses, which can run into the hundreds of pages, Mr. Gottfried said.

Observers noted there there are impediments to change 403(b) plans. Unions, for example, can have lucrative contracts with investment companies, whereby the latter pay unions large sums of money to market and distribute certain products to teachers. These arrangements provide a financial incentive to maintain the status quo.

And, because municipal 403(b)s are non-ERISA plans, they're not touched by the fiduciary rule, which went into effect in June and seeks to tamp down on conflicts of interest for those providing investment advice in retirement accounts.

Further, some 401(k) observers question how much of a positive impact fee disclosure has really had in the past five years. Many don't read the disclosures, observers say anecdotally.

"I think the question becomes: 'Are you taking a hop toward something better or a leap toward something better?'" Mr. Gottfried said. "In either case, it's an improvement."

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