Texas 403(b) law causes adviser concern over investor protection

Law taking effect Sept. 1 eliminates fee caps in place on some retirement products for teachers

Aug 8, 2019 @ 5:04 pm

By Greg Iacurci

A Texas law taking effect next month is causing concern among some retirement plan advisers who are worried that the legislature has weakened investor protection for public schoolteachers in the state.

The law — HB 2820, sponsored by Rep. Dan Flynn, a Republican — eliminates price caps on investment products such as annuities sold to employees in the state's kindergarten through 12th grade school system who participate in a 403(b) plan. Current rules stipulate that products have a maximum front-end or back-end commission of 6% and that product fees can't exceed 2.75% a year.

"This is about charging higher fees to teachers," said Scott Dauenhauer, an adviser at Meridian Wealth Management.

"These are pretty liberal fee caps," he added. "If you can't design a product that's under 2.75%, I mean c'mon, that's pretty high. Still, that was not good enough for the [insurance] industry."

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Many indexed and variable annuities don't fit within the current fee framework and therefore can't be sold to Texas 403(b) participants, Mr. Dauenhauer said.

A rule stipulating that surrender periods on annuities can't exceed 10 years remains in place.

Many advisers who work with K-12 school districts and their 403(b) participants call this part of the retirement market the Wild West, plagued by high-fee investment products — typically annuities — and brokers who can camp out in a school cafeteria to try to make a sale.

"There are products available in 403(b) that would never pass muster in the 401(k) realm, and if they did, the plan sponsor would be sued into oblivion," said Mike Cochran, chairman and co-founder of consulting firm TCG Group Holdings in Austin, Texas.

Jennifer Cawley, executive director of the Texas Association of Life and Health Insurers, who testified before the Texas legislature in favor of the new law, said fee caps imposed by the Teacher Retirement System represented an unnecessary layer of regulation. Other regulators at the state level, such as the Texas Department of Insurance and the State Securities Board, and federal level such as the Securities and Exchange Commission and Financial Industry Regulatory Authority Inc. already oversee 403(b) products.

"There was an artificial market for school employees, who were missing out on being able to purchase many products that may have been beneficial to them," Ms. Cawley said.

Also, no other state with an open retirement system — whereby the number of vendors able to offer products to 403(b) participants isn't limited — have fee caps, she added.

Representatives from the Texas chapter of the National Association of Insurance and Financial Advisors and the National Tax Deferred Savings Association also testified in favor of the bill.

As part of the new law, which takes effect Sept. 1, financial firms also no longer have to register their 403(b) products with the Teacher Retirement System of Texas. School districts had only been allowed to use products and vendors that were registered, said Mr. Cochran of TCG Group Holdings. He laments this rollback because it provided good protection from "unscrupulous companies," he said.

Other states have tinkered with their 403(b) rules recently, too. A law that took effect in Pennsylvania in July requires school districts to use at least four service providers, which advisers believe will result in higher costs for investors since districts can't leverage one provider to gain economies of scale.

A 2017 Connecticut law boosted 403(b) fee transparency by requiring disclosure of investment fees and compensation paid to those giving investment advice to participants.


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