Co-authored by Richard Turner
One of my personal highlights of the just finished NTSAA Annual meeting in Palm Springs (the first under the joint auspices of ASPPA and NTSAA, which has all the looks of a marvelous arrangement for the 403(b) market), was a conversation with Richard Turner, my old friend and VALIC’s top 403(b) lawyer.
Richard and I have been engaged in an odd sort of range war over the past two years on the level of liability a public school district has in relation to the manner in which it handles its 403(b) program. Early on (in late 2007, methinks), I gave a few speeches discussing the potential "fiduciary like" exposures school districts may have from mismanagement of their 403(b) programs. Richard responded with a lengthy paper differentiating 403(b) compliance duties from an employer’s decisions about how involved they choose to become in selecting individual investments. I responded in kind with a part of a paper for the National Association of School Boards (with Jack Lance, Fred Reish, Bruce Ashton, Dave Kolhoff and others) on the whole host of liabilities I see a school district bumping into. Of course, Richard replied with a few more things.
Richard and I finally caught up with each other in Palm Springs. Richard grabbed my arm, saying "Bob, we have to talk. You’re not serious about this broad school district fiduciary liability thing, are you?" My response was, of course, "and you’re not seriously saying that school districts can never be held liable if they seriously mismanage their 403(b) programs, are you?"
Richard and I have been arguing about various tax and retirement questions for nigh on 20 years, so-as he put it-a singularity has occurred that may jeopardize the continued existence of the universe as we know it: we came to a general consensus on this issue. Here’s where we ended up; we were never very far from each other’s point:
Throughout this process, two primary areas of contention have been: (a) In those states that provide broad statutory protections for public school 403(b) plan sponsors, is there some type, or level, of employer activity that might weaken or forfeit those protections? And, (b) To what extent, if at all, might certain uniform acts (such as prudent investor acts) that primarily govern the investment of state and local pension funds and certain trusts and estates, also apply to public school districts overseeing their 403(b) plans?
We’ve agreed that school districts which limit their plan involvement to coordinating plan compliance, either with central compliance oversight or by making sure vendors are talking to each either, and adopting a plan document, will likely have little liability to participants for the investment selections the participants are permitted to make under the program. In these sorts of instances, many states have laws which protect districts from this "hands off" approach.
We’ve also agreed to the other end of the spectrum: where a school district (lets say in an effort to control compliance costs and to get a better priced product for its employees ) selects and negotiates a single investment platform (either open or closed architecture) and oversees the selection of investment options on that platform, it could be forfeiting some of those state law protections by voluntarily taking on the additional investment selection responsibilities (outside of the scope of 403(b) compliance duties), and in doing so could be exposing itself to "fiduciary-like" (or even, in some cases, state fiduciary law ) liability. (It should be noted that in some states a public school is not permitted to take such actions.) As another example, such liability concerns might arise if a district hd authrotiy, under the plan and the underlying investment products, to map existing dollars to new investments and elected to do so.
Where there needs to be much more discussion is where the liability line is crossed in the "continuum" between these two points, though the answer could be different under the different laws in each state.
But where would we be if Richard and I agreed on everything?
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