On June 16, the Texas Teachers Retirement System (TRS) Board of Trustees published a proposed rule in the Texas Register that could eliminate virtually all of the existing registered 403(b) products in the state from being actively marketed under new salary reduction agreements.
The TRS is required by law to review and consider for re-adoption each of its rules every four years. This cycle, the Board has devoted its review to its fee-capping authority, registration fees and parameters for companies to enter the system and sell products. Of the thousands of products currently registered to be marketed in the Lone Star State, it appears that almost none would make the cut, potentially sending providers packing and leaving teachers with dramatically fewer choices.
Fee Impacts
The proposed rule would take effect April 1, 2018 and would prohibit newly registered products or investments, other than fixed annuities, from charging fees in excess of the maximum allowed by asset class below:
As for surrender or withdrawal charges, no product would be allowed to be registered that “assesses a surrender charge for the portion of an annuity contract that consists of a variable account or for eligible qualified investment products other than annuity contracts.” The proposed rule goes on to reduce the current allowable surrender charges for newly registered fixed annuities to five percent terminating over five years. Existing, previously registered annuities would not be able to exceed 10% over 10 years.
The proposed rule would also prohibit companies from registering any products or investment options with front-end or back-end sales loads after April 1, 2018.
TRS also proposes more than doubling the once-every-five-years product registration fee for companies doing 403(b) business in the state from $3,000 to $7,000 to cover TRS administrative costs. If a significant number of companies pull out of Texas because of the other provisions in the rule, it is unclear if this registration fee increase would be paid by enough providers to meet the administrative costs TRS intends to cover.
Grandfathering
As for grandfathering concerns, Sec. 53.11 of the Texas Administrative Code states that if a product or investment option is no longer eligible to be registered (meaning it does not meet the new fee rules above), a certified company “shall restrict and no longer offer” the product as the subject of new salary agreements, “but may continue to allow additional contributions” under existing agreements. TRS also adds a definition of “restricted” in Sec. 53.2(22) which reiterates this point.
Public Feedback Requested
An “Informal Rulemaking Conference” will be held at 10:00 a.m. on Wednesday, June 28 in Room E345 at TRS Headquarters in Austin, Texas. There, the Board will welcome feedback from stakeholders like affected participants, affected providers and the public.
Comments can be submitted in writing to:
Brian Guthrie, Executive Director
1000 Red River Street
Austin, Texas 78701-2698
Ray Harmon, Esq. is government affairs counsel for NTSA.
The TRS is required by law to review and consider for re-adoption each of its rules every four years. This cycle, the Board has devoted its review to its fee-capping authority, registration fees and parameters for companies to enter the system and sell products. Of the thousands of products currently registered to be marketed in the Lone Star State, it appears that almost none would make the cut, potentially sending providers packing and leaving teachers with dramatically fewer choices.
Fee Impacts
The proposed rule would take effect April 1, 2018 and would prohibit newly registered products or investments, other than fixed annuities, from charging fees in excess of the maximum allowed by asset class below:
| Asset Class | Maximum Annual Product Administration Fee | Maximum Annual Expense Ratio | Maximum Annual Asset-Based Fee |
| Money Market | 1.25% | 0.15% | 1.40% |
| Diversified Bond | 1.25% | 0.50% | 1.75% |
| Balanced | 1.25% | 0.50% | 1.75% |
| Large Cap U.S. Equity | 1.25% | 0.50% | 1.75% |
| Small/Mid Cap U.S. Equity | 1.25% | 0.70% | 1.95% |
| International Equity | 1.25% | 0.80% | 2.05% |
| Global Equity | 1.25% | 0.80% | 2.05% |
As for surrender or withdrawal charges, no product would be allowed to be registered that “assesses a surrender charge for the portion of an annuity contract that consists of a variable account or for eligible qualified investment products other than annuity contracts.” The proposed rule goes on to reduce the current allowable surrender charges for newly registered fixed annuities to five percent terminating over five years. Existing, previously registered annuities would not be able to exceed 10% over 10 years.
The proposed rule would also prohibit companies from registering any products or investment options with front-end or back-end sales loads after April 1, 2018.
TRS also proposes more than doubling the once-every-five-years product registration fee for companies doing 403(b) business in the state from $3,000 to $7,000 to cover TRS administrative costs. If a significant number of companies pull out of Texas because of the other provisions in the rule, it is unclear if this registration fee increase would be paid by enough providers to meet the administrative costs TRS intends to cover.
Grandfathering
As for grandfathering concerns, Sec. 53.11 of the Texas Administrative Code states that if a product or investment option is no longer eligible to be registered (meaning it does not meet the new fee rules above), a certified company “shall restrict and no longer offer” the product as the subject of new salary agreements, “but may continue to allow additional contributions” under existing agreements. TRS also adds a definition of “restricted” in Sec. 53.2(22) which reiterates this point.
Public Feedback Requested
An “Informal Rulemaking Conference” will be held at 10:00 a.m. on Wednesday, June 28 in Room E345 at TRS Headquarters in Austin, Texas. There, the Board will welcome feedback from stakeholders like affected participants, affected providers and the public.
Comments can be submitted in writing to:
Brian Guthrie, Executive Director
1000 Red River Street
Austin, Texas 78701-2698
In addition, electronic comments can be submitted to 403(b)@trs.texas.gov.
Comments must be received no later than July 17, 2017.
Ray Harmon, Esq. is government affairs counsel for NTSA.
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