ERISA: A Burden or Needed Protection for Governmental 403(b)s?

July 22, 2011 ( - Scott Dauenhauer, CFP, MSFP, AIF, Meridian Fiduciary Consulting, contends that public sector defined contribution plan participants are losing billions of dollars every year to the financial services industry because of a lack of coordinated laws, rules or regulations that create a consistent fiduciary framework for these programs.

In his report, Tale of Two Cities…er, Retirement Plans, Dauenhauer notes that many who run government plans are happy to NOT be covered by the Employee Retirement Income Security Act (ERISA) and would fight the idea that they should be. But, he says, some of the differences between plans governed by ERISA and those that are not are harmful to participants. At a minimum, Dauenhauer contends there should be a dialogue concerning a structure that one might term PERISA (a Public ERISA), whether it is simply a standard for plans to benchmark to or an actual set of regulations that specifically address the differences in public sector defined contribution plans’ fiduciary structures.  

According to the report, the lack of a fiduciary standard and ERISA-like principles lead to retail-distributed plans, confusion, high fees, and high spreads (on general account products). The commissions paid to agents are undisclosed and provide incentives to work against the participant’s best interest.  

Dauenhauer says it is not uncommon for insurance agents and registered representatives to earn special trips, large cash bonuses or other perks for the sale of financial products to school employees. In the ERISA world this would be considered a “Prohibited Transaction,” but not in the land of government defined contribution. He contends that even when state laws are present, the lack of oversight and enforcement (due to budget constraints) essentially continue the status quo. 

In addition, Dauenhauer notes that under new fee disclosure rule changes to ERISA, private sector employees who have a 401(k) plan will know what they are paying in fees and the fiduciaries of their plan will have full disclosure from their providers; but government employees will see no such protection or disclosure.  

According to Dauenhauer, the Internal Revenue Service could have approached the rule changes in a manner that would have been participant and employer friendly while also making the job of the IRS a piece of cake. His recommendations include grandfathering all 403(b) plans and contracts prior to January 1, 2012; removing the employer from all involvement with prior contracts, except to the extent of minor employee information (such as date of hire, date of termination); requiring that 403(b) plans adhere to a Fiduciary Standard; encouraging a Single Vendor platform going forward; and removing the requirement that 403(b) plans ONLY invest in annuities or custodial mutual funds.  

Dauenhauer’s paper is here.