If you, or your spouse, are employed by a public school district, or a charity, or a foundation, or a church based enterprise, you need to read this.
First, a 403(b) plan is a defined contribution retirement plan established and maintained for employees of certain governmental employers (hospitals, public schools, etc.), churches, and 501(c)(3) tax-exempt organizations. Money goes in before tax when it’s withheld from your paycheck, it grows tax deferred inside your account, and then gets taxed as income when you take distributions.
Most defined benefit and defined contribution plans are subject to the Employee Retirement Income Security Act (ERISA). Among other things, ERISA plans subject those who control plan assets to fiduciary standards and responsibilities.
A fiduciary standard means that any action or advice must be in the clients best interest. Absent a fiduciary standard, advisers are free to recommend stuff that might or might not be appropriate. It’s a much lower standard.
Under the Obama administration, rules from the Department of Labor (DoL) were proposed that imposed a fiduciary standard on any individual or company engaged in advice with respect to ‘retirement plans’.
As you might expect, Wall Street companies, insurance companies and Broker/Dealer organizations were opposed to this from the beginning. They didn’t and don’t want to be held accountable for bad behavior by their agents.
The rule was supposed to go into effect nationally April 10, 2017. However, the Trump Administration said the rule was onerous and would be delayed if not removed.
While my comments here are focused on 403(b) plans, it should be remembered that participants in 401(k) plans, 457 plans, and the Thrift Savings Plan, the defined contribution plan for government employees, both civilian and military, are subject to ERISA.
Despite all this, a little known feature or exemption to the DoL rule was that it didn’t apply to certain 403(b) accounts. 403(b) plans sponsored by governmental and public education employers are exempt from ERISA. 403(b) plans sponsored by religious organizations are also exempt but may elect ERISA coverage.
Why I’m telling you all this is because some of you may be participants in a 403(b) plan. There is no overt reason for you to be suspicious of either your employer or whomever they have chosen to administer your plan, or interact with you as a participant.
But as a financial planner who has embraced the idea that all of us in financial services should be held to a fiduciary standard, it would be awkward if something bad happened and you failed to better understand the rules that apply to your retirement accounts.
As someone who actively teaches retirement planning to those with limited financial literacy, to me this is a red flag. It may turn out that your advisor is only incidentally involved in your 403(b) plan. It’s established case law that anyone who asserts they are a fiduciary will be held to a fiduciary standard.
Know that your advisor may claim to be a fiduciary and acting in your best interest. And as such, that makes him/her a fiduciary. But also know his/her employer may NOT be, and if you subsequently have a problem, you may have to collect proven damages from the agent, because his/her employer may not be bound to a fiduciary standard.
Contrary to all this, many in the industry are pushing for everyone operating in financial services to be held to a fiduciary standard. After the Department of Labor proposed rules were withdrawn, there were arguments made that the Securities and Exchange Commission, the SEC, should come forward and be responsible for creating and articulating fiduciary standards for Broker/Dealers and Registered Investment Advisory Firms. It has not happened yet and is unlikely to happen anytime soon.
At one point I owned my own RIA firm, in my case under rules created by the State of Florida, that imposed a fiduciary standard on my behavior as an Investment Adviser. But if my firm had grown large enough to become supervised by the SEC instead, that would have been OK.
All of this is to remind you that we still live in a buyer beware world. There is no expectation you will educate yourself to the extent you fully understand all the ins and outs that I’ve spent 43 years learning. But if you choose to find someone to work with, one of the questions you must ask them before you agree to have them as your advisor, is whether they, and their employer, are fiduciaries.
Tony Kendzior, CLU, ChFC
March 28, 2019