PLANADVISER - September/October 2022 - 33

annuities, met one-on-one with the employees and enrolled
them into a payroll savings plan. " These advisers would sit in
the teachers' lounge all day long, trying to talk to teachers,
to sign them up for the 403(b) plan, " says Jennifer Tanck, an
attorney and executive vice president at Pensionmark Financial
Group in Santa Barbara, California.
There is a subset of non-ERISA 403(b)s that resemble ERISA
403(b)s in their operation, says Tanck, citing, for example,
some church plans and educational institution plans. Here,
sponsors take a more paternalistic view and treat the participants
much as an ERISA-plan sponsor would. But they still
toe the line to avoid becoming technically subject to ERISA.
In other cases, though, sponsors' lack of involvement has
shifted the funding and management decisions completely
to the participants, Tanck says. " When we look at the nonERISA
403(b) space, it can be the employee/plan participant
who's responsible for administering her own mini plan. "
An Insurance Loophole?
Reg BI " absolutely applies " to advisers' discussions about rollovers
and distributions with ERISA 403(b) participants, just
as it does with 401(k) participants, Tanck says.
Further, the one-on-one adviser-to-participant arrangement
prevalent in non-ERISA plans would seem to be just
the situation Reg BI was designed for. That is the case when
the adviser has a broker/dealer or registered investment
advisory affiliation and the distribution or rollover advice
involves securities, but the widespread use of annuities in
non-ERISA 403(b) plans creates a question about the regulation's
application, Tanck notes. Before the annuity regulations
were changed in 1974, participants could invest only
in annuity products. After 1974, plans could include mutual
funds, but non-ERISA plans, especially those of K-12 public
schools, have tended to stick with annuities.
The SEC regulates variable annuities as securities,
but fixed annuities and fixed-index annuities
are insurance products. Additionally, some salespeople
working in the non-ERISA market may be
licensed solely as insurance agents with no B/D or
RIA affiliation. In these cases, the adviser or agent is
subject to state insurance regulations but is outside
the SEC's and Reg BI's jurisdiction.
It can get complicated, Tanck says, citing an
example of a non-securities registered insurance
agent who recommends the rollover of the account's
fixed annuity as the focal point of a transaction. " In
my view, because this agent is not a broker/dealer
registered representative, the transaction does not
fall within the purview of Reg BI, " Tanck says. " If
the agent did have a Series 6 license, but he was
still recommending the rollover of the non-ERISA
403(b) assets into a fixed annuity, only the recommendation
of the potential liquidation of securities
within the plan would be subject to a Reg BI
analysis and not the actual fixed annuity rollover
recommendation, due to the non-securities nature
of that piece of the transaction. "
How Reg BI Is Working So Far
Assuming Reg BI applies to a specific situation, has the landscape
changed for 403(b) advisers, products and approaches
to the market? Scott Dauenhauer, owner of Meridian Wealth
in Murrieta, California, thinks not. " I haven't seen any shift in
the relationship sales professionals have with 403(b) participants-it's
business as usual, " says Dauenhauer, who has
worked in the 403(b) industry since 1998 and consulted with
the California State Teachers Retirement System on its 403(b)
programs. " Maybe they have to do a bit more paperwork.
Their compliance departments see to it that they can sell the
same low-quality products but in a way that complies with
the new rules. Products haven't shifted. "
As far as the required disclosure of potential conflicts of
interest, Dauenhauer maintains that companies' efforts have
skirted the regulation's spirit. " Reg BI requires mitigation or
disclosure, " he says. " Most have chosen disclosure because
that's easier and more profitable. But that disclosure is not
done in a meaningful way, in my experience. It seems to me
the disclosure is made in either a reference to an online document
of disclosure that's written in a manner to obfuscate
and mislead or the same thing but in paper form.
" If anything, " he says, the situation " is worse because
now these salespeople go around saying that Reg BI requires
them to work in the best interest of their customers, but it
doesn't. It doesn't require a sales professional to offer the best
product. If it did, we'd have seen a huge shift in who services
the 403(b) market over the past few years, but we haven't. "
Tanck's assessment of Reg BI's impact is more positive. " I
don't think it's the same old, same old, " she says.
" It's not so much that I think the sales practices have
changed, " she adds. " I think there's better documentation of
the sales process and better disclosure to the client. "
-Ed McCarthy
GAO Findings on 403(b)s
* In 2020, for employers with a 403(b) plan, if it was an Employee
Retirement
Income Security Act 403(b)
it was likely the
primary plan offering; non-ERISA plans were mostly supplemental
to another plan, such as a defined benefit plan.
* Per Investment Company Institute quarterly data for yearend
2020, 48% of total ERISA and non-ERISA 403(b) assets
were in life insurance products, excluding mutual funds
held inside variable annuities; 24% of assets were in variable
annuity mutual funds; and 28% were in nonvariable annuity
mutual funds.
* As of 2021, surrender fees for selling or withdrawing funds
from an investment within a specified period-common with
annuity options-ranged as high as 10%, with surrender-fee
phase-out periods as long as 15 years.
Source: Government Accountability Office, " Defined Contribution Plans:
403(b) Investment Options, Fees and Other Characteristics Varied "
planadviser.com September-October 2022 | 33
http://www.planadviser.com
PLANADVISER - September/October 2022

Table of Contents for the Digital Edition of PLANADVISER - September/October 2022
