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| Fiduciary Focus: Fleecing 403(b) Plan Participants (Part 8) |
| by
W. Scott Simon
| 06-05-08 |
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In my November column, I gave fair warning that it would "be the last (for now) of my seven-part series on 403(b) plans." But "for now" was then; this month's column is, well, now.
School districts and nonprofit entities such as hospitals are now attempting to come to grips with regulations promulgated by the Internal Revenue Service that will govern 403(b) plans as of Jan. 1, 2009. Administrators at some school districts have taken my seven-part series on 403(b) plans to heart and are now seeking to emulate the model 403(b) plan that I set forth in those columns.
These administrators are to be commended for a number of reasons. First, their actions in implementing the model show that they are truly dedicated to the well-being of participants (and their beneficiaries) in their respective 403(b) plans. These actions indicate that they have assumed the mindset of fiduciaries. Second, they are exhibiting great courage in bucking the old, established 403(b) system which is dominated by insurance companies and their costly and poorly diversified investment products which, largely for those very reasons, often generate lousy returns. This system is, fundamentally, a goofy one and for that reason will slowly die out.
I've seen requests for proposal issued by some of these courageous and leading-edge school administrators seeking to implement 403(b) plans that emulate the model 403(b) plan that I set forth in the aforementioned seven-part series. These requests, on the whole, are excellent but they reveal some misunderstanding about three crucial issues which I believe requires some correction. These issues include fiduciary duties, deceptive cost structures and irrelevant requirements in request for proposal templates.
How to Avoid Becoming an Ostrich about Fiduciary Duties
All retirement plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) are governed by fiduciaries with distinct responsibilities (and corresponding liabilities) to plan participants (and their beneficiaries). The new IRS 403(b) regulations make clear that school districts aren't subject to ERISA. School administrators in some states, however, will find, post-Jan. 1, that they've become fiduciaries under their respective state fiduciary laws with respect to the 403(b) plans they administer.
In some other states, though, school administrators are told by legal counsel that there are no state fiduciary laws to govern their conduct with respect to the 403(b) plans they administer. As a result, administrators in these states state confidently that they will not assume any fiduciary responsibilities for their respective 403(b) plans. This reaction, it seems to me, is a bit like an ostrich that sticks its head in the sand, thinking it has avoided all danger.
No doubt the advice rendered in such situations by legal counsel is correct - as far as it goes. Yet, I fear that it verges on the kind of legal advice that my little brother used to jokingly accuse me of giving him at times: "I have no doubt that your advice is 100% correct (if, on the one hand, then.but, if, on the other hand, then.) and 100% useless (if, on the one hand, then.but, if, on the other hand, then.)." Given the creativity of the plaintiff's bar in raising exotic legal theories against defendants (including school administrators) on statutory, case law, common law or even constitutional bases, the ostrich defense may not be such a good one.
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| W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing. Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals. For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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