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Next Phase of SEC Scrutiny: Sales of 403(b)s to Teachers

403(b) Plans

The Security and Exchange Commission is putting sales of 403(b) plans to teachers under its scrutiny. Where did this come from? And what does it mean?

In June 2019, the SEC announced two new initiatives that it said built on its ongoing efforts to protect retail investors: The Teachers’ Initiative and the Military Service Members’ Initiative. That includes focusing additional enforcement and investor education resources on behalf of teachers, veterans, and active duty military personnel stationed domestically and abroad.

The SEC said that the initiatives built upon SEC Chairman Jay Clayton’s “commitment to protecting the most vulnerable market participants, and the SEC Enforcement Division’s long and successful history in pursuing securities fraudsters who target teachers, active military, and veterans.” 

Then in October 2019, the SEC announced teacher investment outreach efforts as part of the Teachers Initiative. This includes new efforts to educate teachers, as well as regional and nationwide events. Through the outreach, the SEC sought to:

  • inform educators about the importance of savings and investing;
  • research investment products and financial professionals before investing; and
  • identify the red flags of investment fraud.

The Wall Street Journal reported that month that the SEC sent letters to companies that administer the teachers’ retirement plans seeking information that would help it determine whether federal securities laws were violated.

The SEC scrutiny of teacher plans is “the next phase in a continuing evolution of SEC scrutiny of retail space,” according to James Lundy, a partner in Faegre Drinker Biddle & Reath’s Chicago office. Under Clayton, he says, the SEC has been “interested in mainstream issues for some time.”

In Nov. 5 remarks at the 2019 SEC Regulation Outside the United States Conference held in London, England, Stephanie Avakian, Co-Director of the SEC Division of Enforcement, outlined the agency’s examination of the administration of teacher retirement plans and said that the administration of teacher retirement plans “is another area where there may be undisclosed conflicts of interest, particularly in the area of fees and lower fee alternatives.”

Avakian’s disclosure was “a bit of an unusual acknowledgement,” Lundy says. “This very much has the feel of a broader effort,” he continues, adding that it “appears to be a priority” and that the “SEC Enforcement Division believes that there are concerns” with the costs and expenses that sales of teacher 403(b) plans entail.

Lundy characterizes the SEC effort as “regulation by enforcement”—rather than Congress passing legislation or the SEC promulgating a new rule, “the SEC under Clayton is using the enforcement division to aggressively enforce the rules they already have.” 

Other Consequences?

Is the SEC effort having effects beyond addressing the SEC’s concerns over teacher plans? Lundy says it is possible that one effect of the initiative may be that offerings in those plans “may become more diversified and have lower cost as a result.” He also observes that “these types of vehicles provide the most valuable and useful opportunities for many people” and that it’s “too soon to tell” whether it is making people reluctant to establish a 403(b) plan or maintain one. 

Lundy suggests that price may not always be the first thing plan sponsors look at when they are considering offering a 403(b); rather, they still may start by considering “the nature of the product itself.” He adds that “considering a variety of options is the best way to approach” the matter, and that “ultimately, it’s the investor’s decision.” 

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