Getting a Handle on 403(b)

The 403(b) system is coming under increased scrutiny. The Los Angeles Times recently wrote an article about flaws in the public employee 403(b) programs in California. 403(b) plans, an important part of the defined contribution plan system, are a lot like 401(k) plans. Participants reduce their paycheck, defer taxation, and invest in a mutual fund or annuity. However, a key difference between 403(b) and 401(k) plans is the application of ERISA.

The Employee Retirement Income Security Act (ERISA) provides federal protections to those who participate in 401(k) plans. The most important protection is the requirement that each plan must have a fiduciary who is personally responsible for insuring that plan investments are managed solely in the best interest of participants. Those who participate in 403(b) plans sometimes do not receive ERISA’s protections. In California it is illegal for 403(b) participants to have the fiduciary protection afforded 401(k) participants. As a result, according to The Los Angeles Times the average investment fee charged to participating teachers in California is 211 basis points and teachers choose from among thousands of available investments, regardless of their fees or performance.

As a service to 403(b) plan sponsors, PSCA is conducting its third annual survey of 403(b) plan practices. The questionnaire can be accessed at www.psca.org.

PSCA’s letter to the Editor of The Los Angeles Times is below.

Dear Editor:
Re: Kudos to the LA Times for its article “California Teachers' Supplemental Pension Plan is Flawed, Study Finds,” reporting that state laws like the one in California potentially expose 403(b) participants to unscrupulous vendors. 401(k) plans require named plan sponsor fiduciaries to assume personal liability if they do not act solely in the interest of participants when selecting and monitoring plan investments. Government employers in California by law cannot protect 403(b) plan participants even if they want to. As a result, the retirement savings of some 403(b) participants end up in inappropriate over-priced products that significantly reduce the likelihood that these participants will have meaningful accumulations upon retirement. Laws like the one in California should be changed.

David Wray
President
Profit Sharing/401k Council of America
20 North Wacker Drive #3700
Chicago, IL 60606
Phone: 312 419 1863