In what appears to be a growing trend, state and federal regulators are launching investigations into the sales practices and administration of 403(b) retirement plans for school districts.
Two weeks ago, on January 10, 2020, Delaware Attorney General Kathy Jennings announced a settlement with Horace Mann Investors, Inc., concluding the state’s multi-year investigation into the facts and circumstances relating to over 120 403(b) retirement accounts opened by teachers in 2016 and 2017. The accounts were opened with Horace Mann during the state’s transition of its deferred compensation plans from numerous 403(b) independent service providers to a sole provider, Voya Financial. The Delaware Attorney General’s Investor Protection Unit (IPU) alleged and concluded that one of Horace Mann’s registered representatives engaged in dishonest and unethical practices in violation of the Delaware Securities Act by taking unfair advantage of his customers, who were confused about the transition to Voya Financial, by providing them with inadequate or inaccurate information. IPU also alleged and concluded that Horace Mann failed to sufficiently supervise its registered representative. As part of the settlement, Horace Mann and its registered representative will each pay a fine of $250,000 and make a $50,000 payment for investor education for Delaware educators. Horace Mann will also be required to make settlement payments, compensating over 120 teachers for potential loss earnings.
Delaware’s investigation is the most recent in what appears to be a growing trend by state and federal regulators in cracking down on teacher pension plans. In 2014, the Financial Industry Regulatory Authority (FINRA) announced that it had fined Merrill Lynch, Pierce, Fenner & Smith Inc. $8 million for failing to waive mutual fund sales charges for certain charities and retirement accounts and required the firm to make over $24 million in restitution to more than 13,000 small business retirement accounts and over 3,100 403(b) retirement accounts. A year later, the U.S. Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations announced a multi-year Retirement-Targeted Industry Reviews and Examinations Initiative (ReTIRE Initiative) that will focus on high-risk areas of registrants’ sales, investment, and oversight processes, with emphasis on select areas where retail investors’ savings for retirement may be harmed. To that end, in late 2019, the SEC launched a broad investigation into the compensation and sales practices of companies that administer 403(b) retirement plans for school districts. Specifically, the agency is seeking details on how administrators, which serve critical roles in selecting investments for 403(b) plans for teachers, choose investment options and police themselves when conflicts of interest arise. The SEC’s announcement came on the heels of New York’s investigation into whether life insurers and their agents were taking advantage of teachers by selling them potentially high-cost and inappropriate investments in 403(b) retirement savings programs.
Though it is difficult to predict how many other states will follow the lead of the SEC, New York and Delaware, with the ReTIRE Initiative in place and the increased activity by both state and federal regulators, investment advisors and broker dealers should review and reflect upon their policies, procedures and practices relating to the sale and management of their 403(b) plans and consider stepping up their focus in this area.