403b Plan Participants Taking A Backseat To 401k Plan Participants
by: Brendan Magee
I met with two employees of a local school district after each had expressed dissatisfaction about the returns of their retirement plans. They are both participating in their school district's 403b plan, a nonprofit employee's version of a 401k plan.
Last year was a great year for the stock market. U.S. Large Company stocks were up 32.33%. Carol's 403b plan returned .0030%. That is 30% of one percent for the year. Worse then that she paid in investment expenses, 1.25%. She is paying more in expenses than she earned! Steven has been a participant for the last eight years. From 2006 through the summer of 2013 he earned just 2.35%, while in that period of time U.S. Large company stocks earned 7.58%. His investment expenses were over three percent per year. Steven's returns not only didn't keep pace with the rising cost of living, he is slowly but surely working his way into the poor house with oppressive expenses.
Now even though Carol and Steven have had investment representatives that enrolled them in the school district's 403b plan, neither had a clue about how bad their investments were really doing. They never heard from them after they signed up. Now, their experience is not the exception. after talking to many 403b plan participant's it seems to be the routine experience for countless 403b plan participants.
What most 403b plan participants do not realize is that when it comes to a Non-Erisa 403b plan, they are completely on their own. If their investments go bad, unlike a 401k plan, there is no one they can hold accountable. In a 401k plan, the plan sponsor has a fiduciary responsibility to the participants and the beneficiaries of participant. Often times to alleviate some of the liability, 401k plan sponsors will hire investment advisors who are also operating under a fiduciary responsibility. This means that if a 401k plan participants investments do not work out and they can prove that the sponsor and advisor did not live up to their fiduciary responsibilities, they can be held personally liable to the participant and their families.
One of the biggest requirements of a sponsor of a 401k plan is to monitor the plan. For the sponsor of the plan this means having an idea about investment expenses, returns, what types of educational material is being put in the hands of the participants, reviewing the results of the investments being offered to the participants, and making sure the plan's performance is meeting certain benchmarks.
No such protection exists for employees who are making payroll deposits into a Non-Erisa 403b plan. The benefits manger or whoever has the responsibility for choosing the vendors for the plan does not have the responsibility of monitoring the plan. The vendors are free to approach the employees however they see fit and convince them that theirs are the right investment products for that employee. Unless properly educated before hand the, the employee is completely at the mercy of the vendor. Public school 403b plans and a few others fall into the Non-Erisa category.
So what does this mean to the Non-Erisa 403b participant? They have no right to hold the benefits manger or business manager responsible for anything. They could, unknowingly, be sold underperforming, over priced, completely unsuitable investments that do not keep pace with the rising cost of living and not have the right to hold anyone but themselves responsible. They can't even hold the company rep who sold them the products responsible, if they signed forms that they agreed the investment was suitable to their circumstances. They also could wave their right to take a rogue salesman into court if they signed an arbitration agreement which basically means you have agreed to waive your right to a trial which would be decided by a jury of your peers. (Before financial services companies will open the account they require their reps to have these forms signed)
It's unfortunate, but without that liability hanging over their necks, a lot of school district benefits managers and business managers do not have the motivation to stay on top of their 403b plans. They take the out of sight, out of mind approach and try to leave well enough (or substandard to dismal investment options) alone.
In this school district's case, when Steven, Carol, and a few other employees found investment options that were less expensive and performed more to their liking, the business manager told the employees they already had nine other vendors to choose from. He wasn't about to add a vendor or even listen to their side of the story. He had no idea, or didn't care to know, that the other vendors that were available were just as expensive and performed just as miserably as the ones the employees already had.
This would not be the case for 401k plan participants. They would have the right to contact the Department of Labor and plead their case. They could initiate an audit of their 401k plan. The plan sponsor is never out from under their fiduciary responsibilities.
Unfortunately, for some reason when it comes to employees of a public school districts, their retirement, their income, and the securities they invest in through the school district's plan, they do not deserve the same kind of protection.
Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions call 610-446-4322 or e-mail Brendan@coachgee.com.
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