First, we need to dispel a couple of myths about the fiduciary issue for non-ERISA plans:
Myth #1 The 403(b) Regulations impose fiduciary requirements. Not true. Code section 403(b) and the Treasury Regulations relate to the tax attributes for employees of a “qualifying” arrangement, but the tax laws themselves do not impose fiduciary requirements. For private sector tax-exempt plans, the DOL has addressed whether the degree of involvement required by the 403(b) Regulation causes a plan to become subject to ERISA – and thus subject to ERISA’s fiduciary rules – but has indicated that, handled properly, such plans can comply with the Regulation and still avoid becoming ERISA plans. Public education plans are, of course, completely exempt from ERISA, so there is no federal law that imposes fiduciary requirements on these plans.
Myth #2: A completely contradictory myth is that there are no fiduciary obligations imposed on non-ERISA 403(b) arrangements. This one may or may not be true, depending on the state in which the arrangement is operated and the type of entity sponsoring the arrangement. Even though the fiduciary rules under ERISA do not apply, many states impose fiduciary requirements and standards that are similar to – and in some cases virtually identical with – the requirements under ERISA. It is obviously not possible to provide a survey in this column of the fiduciary requirements of every state. Thus, it is essential that school officials and executives of tax-exempt entities review the requirements under their own state’s laws.
To reiterate, it is likely that state law imposes fiduciary requirements on those who are charged with overseeing the operation of a 403(b) arrangement, even if it is exempt from ERISA, but that is not always the case.
Consider a public school 403(b) in California. The California Constitution and Government Code impose fiduciary requirements on the boards responsible for overseeing the operation of public “retirement systems.” The requirements are virtually identical with those set out in ERISA, with very minor wording changes. (For example, California law is politically correct, using “person” instead of “man” in the rule regarding prudent conduct of fiduciaries.) At the same time, public school employees in California (and a number of other states) may select any provider they want (so long as the provider has registered on a state Web site), and the educational entity ( e.g., the school district) becomes essentially the central remitter of deferrals to the proper provider. So a public education 403(b) arrangement in California is not a “retirement system” that would be subject to the California Constitution and Government Code fiduciary rules.
Even if California public education 403(b)s are not subject to the full range of fiduciary rules, it is important to recognize that 457 plans and trusts that established for other types of benefits (such as retiree medical benefits) are subject to explicit fiduciary requirements under California law.
We are not saying that all public education 403(b) arrangements are exempt from fiduciary requirements altogether. As noted, many states impose such requirements, and in those cases, the full array of fiduciary duties applies to school officials.
Even in the "open door" states like California, there is some obligation on the part of the school officials to make sure the right amount of deferrals is deducted from employee paychecks and remitted to the proper provider. While the school officials are not expected to make prudent selections of providers or investments or to monitor their activities or performance, the obligation they do have is, in some sense, a fiduciary one, since they are handling other peoples' money.
What about private sector tax-exempt 403(b) arrangements? Does this same analysis apply, especially where the employer has little or no involvement in the operation of the 403(b) and serves essentially as a remitter of deferrals? Again, the answer depends on state law, and in some states the officials of the tax-exempt entity may be charged with duties similar to those under ERISA even in these circumstances.
What if the arrangement is subject to state law fiduciary rules? What are the rules? In general, it is helpful to look to the fiduciary standards of ERISA to determine the obligations and appropriate conduct of those who are responsible for non-ERISA 403(b) plans. This is because the law in many states is modeled after or at least consistent with ERISA. As a result, the courts will often look to interpretations of ERISA in analyzing state law. Further, the standards under ERISA establish what might be referred to as "best practices" for an arrangement designed to handle other peoples' retirement savings. Thus, in the absence of state law fiduciary standards that differ materially from those under ERISA, it would generally be appropriate to look to DOL and case law interpretations of ERISA for guidance.
This column addresses a lot of "maybe's." What's the bottom line? In most cases, there are fiduciary rules that apply to non-ERISA 403(b) arrangements. Those rules will generally be identical (or nearly so) with the ERISA fiduciary rules. Even if there are no explicit rules that apply, because you are dealing with the retirement savings of other people, it is appropriate to conduct yourself as though the full array of fiduciary rules do apply. After all, wouldn't you want your retirement funds to be treated that way?
- Bruce Ashton, Reish Luftman Reicher & Cohen
NOTE: This feature is to provide general information only, does not constitute legal advice as part of an attorney-client relationship, and cannot be used or substituted for legal or tax advice.