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SEC Launches Investigation of Practices in Retirement Plans for Teachers, Government Employees

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The Securities and Exchange Commission has sent letters to companies that administer retirement plans for teachers and other government workers, opening a probe of practices in a market that consumer advocates contend is subject to abuse.

The regulator “is conducting an investigation” to determine “if violations of the federal securities laws have occurred,” said an SEC document The Wall Street Journal reviewed.

Earlier this year, Jay Clayton, the chairman of the SEC, expressed concern about the prevalence of high-cost investment products in schoolteachers’ retirement accounts, said Michael Pieciak, commissioner of financial regulation for Vermont.

 

The agency is seeking details on how administrators—which often serve crucial roles in selecting investments for 403(b) and 457 retirement plans for employees including teachers and government workers—choose investment options and police themselves when conflicts of interest arise.

The agency also is requesting documents pertaining to any compensation the administrators have received since Jan. 1, 2017 for referring investors to specific investment options or companies.

It is unclear what triggered the investigation or how many 403(b) and 457 plan administrators have received similar letters. The SEC didn’t immediately provide a comment. The agency, which characterized the investigation as “a non-public, fact-finding inquiry,” has the authority to issue fines or even revoke licenses to sell the products it regulates, including mutual funds and variable annuities which are staples of these plans.

Sponsored by state and local governments, 403(b) and 457 plans are a variation of the better-known 401(k) programs in the private sector. As with 401(k) plans, 403(b)s allow workers to contribute up to $19,000 a year, or $25,000 for those 50 or older, to tax-advantaged investment accounts.

While state laws generally require government entities to manage their 403(b) and 457 retirement plans in employees’ best interests, they aren’t governed by the federal pension laws that privately sponsored 401(k) and 403(b) plans must adhere to. The enforcement and penalties for violations aren’t as stringent as with these federally regulated plans, said Bob Toth, an attorney in Fort Wayne, Ind., specializing in employee-benefits law.

Mr. Toth said that while “the SEC typically reviews broker dealers to make sure they are doing their job right and in accordance with regulations,” it is unusual for the agency to focus on 403(b) and 457 plans.

He added that many administrators of 403(b) and 457 plans fall under the SEC’s purview if they are also registered as broker-dealers or registered investment advisers, which the agency regulates. The SEC also oversees individual registered representatives of such companies, some of whom also work for 403(b) and 457 plan administrators which aren’t otherwise under the SEC’s purview.

The 403(b) plans held about $1 trillion in assets in 2017, the most recent year for which figures are available, according to sources including the Investment Company Institute, the mutual-fund industry trade group.

 

In its probe, the SEC also requests “information and documents” pertaining to how administrators provide investment counseling to investors. It asks for explanations of any gifts administrators have received from companies that sell investments. The agency also is seeking organizational charts that show companies that own or have ties or partnership with 403(b) or 457 plan administrators.

News of the SEC investigation comes after New York state’s financial-services watchdog last week opened a probe of insurance-industry practices in the 403(b) market. The New York Department of Financial Services has demanded that a dozen major life insurers detail how they market retirement-income products to teachers, in a bid to assess whether insurers or their agents are taking advantage of teachers in selling potentially high-cost and inappropriate retirement-savings investments.

Mr. Pieciak said the SEC’s San Francisco office has been scrutinizing accounts and the investment options available to teachers. He said 403(b) plans are on the radar for other state securities regulators as well.

Write to Anne Tergesen at anne.tergesen@wsj.com and Gretchen Morgenson at gretchen.morgenson@wsj.com

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Thanks Tony! 
This Investment News article seems more detailed and indicates the SEC letters were sent to some Third Party Administrators (TPAs). Maybe the TPAs will be required to include a low-cost custodial account vendor? One that offers competitive priced broad market index funds? It doesn’t look like all TPAs were sent letters?
Quote

 

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.


 

 

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This is great news for investors.

Early in my teaching career (early 90's) I was talked into contributing into an annuity product that I unfortunately can't remember the exact name of.  I only put in about a $100 per check for about a year.  I received a notice of a class action law suit against this company about a year later.  It stated that the insurance company was being sued for falsely representing itself as an investment product.  I signed up for the class action and got quite a bit of my contributions of the past year back.

That would be great if the SEC investigation opens doors to keeping these annuities out of our schools and maybe even suing these companies on the basis of falsely representing themselves.

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2 hours ago, MNGopher said:

This is great news for investors.

That would be great if the SEC investigation opens doors to keeping these annuities out of our schools and maybe even suing these companies on the basis of falsely representing themselves.

It  certainly would be great but keep in mind many people love their annuity product  (variable and fixed)because of the supposed guaranteed income even though they have no clue how much they are overpaying for it so eliminating them is not going to happen. But teachers don't even really need annuities at all  since most teachers have defined state pension plans. They are complex and not easy to understand. I still don't understand them.

It will be very difficult to prove that the salesman misrepresented the product to teachers on a person to person basis even though we know they do. Annuities are complex investments that often include a significant amount of fine print. When you sign the documents you pretty much waive your legal rights  to a certain degree but you can always stop contributing. (No fiduciary responsibly  on the 403b's salesman's part is required). I never even read the 5 pages of docs my annuity  salesman put in front of me and I felt somewhat hurried to sign the document quickly in my early years  of teaching.The only way to stop these sales IMHO is to warn teachers and administrators, educate them on the fine print, and hope teachers will be savvy enough to avoid them. BUT WHO DOES THAT?  EXCEPT US?  Districts can refuse to let these salespeople on school ground and that would help  but most don't. Despite class action suits  here and there, annuities remain a trillion dollar business and with that much money involved the insurance companies will find a  way around any regulations. and even price in the legal costs of being sued.  I doubt the SEC will do much to prohibit their sale to teachers but fee restrictions would be a start. But hey what do I know, anything is possible.

 

 

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The Commissioner of the SEC will be the Keynote speaker at a very rare meeting RISE (Retirement Investment Summit in Education). The SF and LA SEC offices have stepped in to help educate teachers (They read the NY Times series 3 years ago. And who would not be shocked by the annuity sales behavior?). I have posted their website with educational materials about a year ago. This meeting is a repeat of what they presented last year in Sacramento. Next week, it will be held in Los Angeles. Scott, Dan and I were disappointed as all they talked about is what they did, not the problems. 

This year, three advocates will be on the panels and were told they are free to talk! We are happy these two offices are trying to help, they do not have to do this. Imagine that. It is not their job to educate teachers but they are doing it because IT IS THE RIGHT THING TO DO, and nobody else in the education, the unions or the districts, are doing this publically that I know of.

 Rise2_2019.JPG.fa5d56104cda8204fc472f7cec06fcdf.JPG

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If changes were to finally occur would this be across the board or  state by state specific? California and New York seem much more progressive than many states. 

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