SEC probing compensation, sales practices in 403(b) plans for school districts

The SEC, in an atypical move, appears to be investigating third-party administrators affiliated with entities such as broker-dealers and RIAs

Oct 8, 2019 @ 4:35 pm

By Greg Iacurci

The Securities and Exchange Commission appears to be launching a broad investigation of compensation and sales practices in defined-contribution plans for school districts, an atypical move that targets a segment of the market frequently lambasted for high fees and deceptive practices aimed at winning the business of plan participants.

Regional offices of the federal regulatory agency have issued requests for documents and information to several third-party administrators and affiliates, including broker-dealers and registered investment advisers, that work with 403(b) and 457(b) plans, which are retirement plans available through nonprofit organizations.

"The staff of the United States Securities and Exchange Commission is conducting an investigation ... to determine if violations of the federal securities laws have occurred," according to one request, issued by the Division of Enforcement at the SEC's San Francisco regional office, a redacted version of which was viewed by InvestmentNews.

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Attorneys who have viewed such requests say they pertain to "producing TPAs," which provide brokerage services or investment advice in addition to retirement plan administration. The SEC would have jurisdiction over such firms because of their affiliations with securities-licensed entities.

The SEC requests focus on firms catering to school districts, whose plans aren't subject to the Employee Retirement Income Security Act of 1974, a federal retirement law that sets minimum governance standards.

"This is unusual. This is the first time I've seen the SEC engage in this type of activity," Bob Toth, an attorney at Retirement Law Group, said of the investigations into 403(b) and 457(b) plans.

Mr. Toth, who's familiar with at least two such requests from different SEC regional offices, said the letters look like a typical sweep the SEC might conduct of broker-dealers around their compensation practices and arrangements and how they're disclosed.

In the letter viewed by InvestmentNews, the SEC refers to its investigation as a "non-public, fact-finding inquiry." The agency asks for information from Jan. 1, 2017, to the present.

"That, to me, signals a sweep," Jason Roberts, CEO of the Pension Resource Institute, a compliance consulting firm, said of the SEC's language.

Judith Burns, an SEC spokeswoman, declined to comment.

The New York Department of Financial Services also recently launched an investigation into 403(b) plan costs and sales tactics. Last Tuesday, the state regulator issued requests to several insurance companies seeking information on their policies and procedures around 403(b) fees and how the retirement programs are being marketed to schoolteachers.

Defined-contribution plans available to teachers, especially those teaching kindergarten through 12th grade, "have for a long time been like the Wild West," said attorney Marcia Wagner, who had not seen one of the SEC's information requests.

"It wouldn't surprise me that the government is trying to crack down a little bit on the excesses I've seen in the industry," said Ms. Wagner, principal at The Wagner Law Group.

While corporate workers save for retirement in 401(k) plans, which afford them a relatively high degree of protection, many teachers don't enjoy such luxuries. They save in plans such as 403(b)s, which are offered by public schools and tax-exempt organizations and most of which don't fall under the purview of ERISA.

Although such plans must follow state fiduciary laws, those are much more lax than ERISA's standards — a dynamic that exposes teachers to shady sales practices and high fees, according to experts.

Investor advocates fear that recent laws passed by states such as Texas and Pennsylvania will further erode the system for 403(b) savers.

About 76% of assets in the 403(b) market are held in variable and fixed annuities, according to data from Aon Hewitt, with the remainder in mutual funds. In comparison, fewer than 10% of 401(k) plans even offer an annuity to participants, according to the Plan Sponsor Council of America.

Ms. Wagner said the SEC is likely focusing its investigation, at least initially, on TPAs because they are "often the gatekeepers to these plan sponsors."

The SEC request viewed by InvestmentNews seeks information and documents on a number of fronts, including: the firm's role in approving vendors to sell products in school districts; requests made by product providers to sell products in school districts and the reason for the approval or denial of the requests; gifts and compensation received from a school district or plan vendor; complaints against or involving the firm concerning the purchase, sale, transfer, exchange or holding of a financial product in 403(b) or 457(b) plans; investment counseling or education provided to plan participants; sales, advertising and marketing materials; and policies and procedures around conflicts of interest.

The SEC also seeks organizational charts showing affiliated entities under common control with the TPA, such as broker-dealers, investment advisers, insurance brokerages and service providers.

The SEC may be "starting with the TPAs and working backwards from there, moving to those affiliates or contractual relationships that were identified," Mr. Roberts said.


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