The TRS rule seeks to reduce fees in 403(b) products in the state but does so in a manner that many believe would inadvertently eliminate at least two-thirds of all the existing registered products in the state beginning April 1, 2018. This would force companies out of the Texas 403(b) business unless and until they develop and seek regulatory approval for new products that would comply with the new regime.
NTSA’s comment letter focuses on three major concerns:
- Disruption — the removal of at least two-thirds of all choices for participants.
- Uncertainty — the effects of eliminating advice and guaranteed income benefits.
- Attrition — the dramatic reduction in participation rates likely to ensure from the rule.
“The proposed rule will be enormously disruptive for participants and the local businesses that provide them with financial guidance and advice through their workplace 403(b) plans,” says the comment letter, which warned that the rule would result in “the removal of at least two-thirds of all choices for participants.”
The proposed rule “mandates fees for variable annuities that are lower than most of the current registered products and sets a maximum surrender period for fixed annuities,” says the letter. The result, it says, is that “the proposed rule eliminates a number of legitimate, acceptable annuity products that are currently available and widely selected by public school employees.” This, the ARA and NTSA argue, “would limit teachers’ choices to only a handful or products such as ‘no load’ and low fee mutual funds without any recognition of the investment returns and the other benefits that may be available through annuities.” And this “rapid, wholesale” elimination of options, the letter asserts, is “sure to impact and confuse teachers who, without access to federal Social Security benefits, are already stretched thin on choices for retirement security.”
Not only that, the ARA and NTSA argue, the Board also has not allowed enough time for providers to modify products to comply with the proposed rule. “They will have mere months to rethink their products and service delivery models, refile those products with the proper authorities, and then create a marketing strategy to bring these retirement solutions to public school employees,” the letter says, creating a void during which the 403(b) program will have almost no enrollees.
“Teachers hired after the proposed implementation date in April of 2018 will face a dearth of choices and no guidance which will have repercussions for their retirement security,” it warns.
The proposed rule will breed uncertainty, the letter says in a number of ways. It would do so, the NTSA and ARA say, by:
- eliminating options outright;
- making the differences between the remaining products indiscernible;
- eliminating fixed and variable annuity options;
- eliminating guaranteed income solutions; and
- removing teachers’ ability to benefit from valuable advice and planning.
“One of the most attractive reasons to obtain a 403(b) plan for any participant is the possibility of a guaranteed withdrawal benefit, which ensures a steady, predictable income in retirement,” says the letter. But, it asserts, “The proposed rule as drafted would make these benefits a thing of the past, and leave teachers’ retirement security in Texas at risk.”
The NTSA also warns a “dramatic reduction” in participation rates is “likely” to ensue from the proposed rule. “Adopting price controls in retirement plans may seem like a worthy cause, but it ignores economic realities and thus threatens teachers’ retirement security. It has not worked elsewhere and it likely will not work in Texas,” they argue.
The NTSA specifically advocates for the following approach:
- Instead of relying on arbitrary price controls of CDSC charges, annual asset-based fees, surrender/withdrawal percentages, and loan charges, consider a combined single cap which seems much more workable given the various provider models.
- Allow companies sufficient time to refile products, modify prospectuses, modify brochures, and alter applications and other sales materials that result from any rule change.
- Mitigate against the departure of providers from the state to protect participation rates and preserve meaningful choices for teachers.
- Review the benchmarking assumptions that were relied upon in the formulation of the proposed rule and fee caps.
The NTSA respectfully recommends that the TRS staff and Board not implement any proposed rule changes until there is further review of its impact, and implores that they carefully consider the rule’s unintended consequences “We do not find the evidence compelling that the chief benefactors of the proposed rule as written will be Texas schoolteachers,” the letter states.
Public Comments Invited
Public comments can still be submitted until July 17, 2017. They can be submitted in writing to:
Brian Guthrie, Executive Director
1000 Red River Street
Austin, Texas 78701-2698
They may alternatively be submitted electronically to 403(b)@trs.texas.gov.
Ray Harmon, Esq., is government affairs counsel for NTSA. John Iekel is NTSA Net’s senior editor.
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