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Revisiting K-12 School District 403(b) Agreements

Prudent Investor Advisors' W. Scott Simon analyzes a series of agreements between a large insurance company and a K-12 school district.

W. Scott Simon, 01/08/2015

W. Scott Simon is a principal at Prudent Investor Advisors, a registered investment advisory firm. He also provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. Simon is the recipient of the 2012 Tamar Frankel Fiduciary of the Year Award.

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Once an individual retail investor signs an account application agreement with a provider of investment products and services such as a stockbrokerage firm, that person enters into a world in which the deck is largely stacked against him. The vast asymmetrical information advantage enjoyed by such firms in these agreements and the valuable business practices they are able to secure as a result can have a significantly harmful impact on investors. It's just not a fair fight.

It's bad enough that many individual investors are woefully ignorant about the possible ramifications that may befall them as a result of entering into such agreements. Any harm that ensues, however, will have an impact only on each investor and its family. But when decision-makers--gate-keepers--for a retirement plan are woefully ignorant (or are lazy or just don't care) about the possible deleterious consequences that may impact hundreds, thousands, tens of thousands, perhaps even hundreds of thousands of participants in retirement plans over which such decision-makers hold sway, that, as they say, is a whole different kettle of fish. 

Background
Back in the "olden days" (a phrase often used by the great pool hustler Minnesota Fats) of 2007-08, I wrote an eight-part series of columns on the fleecing of participants in 403(b) plans. A 403(b) plan, like a 401(k) plan, is a tax-deferred retirement plan. It is available to employees of educational institutions (e.g., public school districts for grades K-12), such as teachers, school administrators, custodians, and librarians. Many of these employees contribute to a defined benefit plan over their careers and in return receive fixed periodic payments (often indexed for inflation) during retirement. In this arrangement, then, 403(b) plans are a supplement to traditional pension plans. By law, school districts ordinarily have no fiduciary responsibility to ensure that their employees receive the kinds of protections afforded participants in 401(k) plans.

In that multi-part series of columns, among other things, I proposed what a model 403(b) plan should look like for K-12 school districts. At least one large consortium of school districts took notice and incorporated the following language into its Request for Proposal to describe its vision for offering a single vendor 403(b) plan:

"During the process we used to develop this request for proposal, we began to form a vision for what our new 403(b) plan might look like. The vision was very different from the traditional 403(b) plans that currently exist in public schools… The essence of what we believe to be in the best interest of our Districts' plan participants is that the ideal 403(b) plan should be a single vendor model that (1) operates solely in the interest of plan participants and their beneficiaries for the exclusive purpose of providing them with retirement plan benefits, (2) has transparent costs, each of which is reasonable versus the service provided in return, and (3) features broadly diversified investment options designed, within a portfolio context, to reduce risk and increase return. Our beliefs were developed from what we believed to be right and affirmed by a series of articles "Fiduciary Focus: Fleecing 403(b) Plan Participants (Parts 1-7 [part 8 appeared in 2008 after the RFP])" by W. Scott Simon (Morningstar Advisor Edition, 4-5-07 thru 11-11-1-07). These articles will give you a real sense of our vision."

Agreements Between an Insurance Company and a K-12 School District for a 403(b) Plan
I have had the opportunity to review and analyze a series of agreements between a large, well-known insurance company (Big Insurance Company) and a K-12 school district (School District). These agreements--services agreements and trust agreements--pertain to each of three kinds of retirement plans authorized under the U.S. Internal Revenue Code (IRC) that the School District offers to its employees: an (1) IRC section 403(b) retirement savings plan, (2) IRC section 457(b) deferred compensation plan, and (3) IRC section 401(a) money purchase retirement savings plan. In the interest of limiting the subject matter of this column and any subsequent ones to a total length of something less than 1 million words, I will cover only the 403(b) plan's services agreement and trust agreement.

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 Understandingis 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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