Texas TRS Passes 403(b) Rule Amendments

After significant deliberation with NTSA and other stakeholders over the last several months, the Texas Teachers Retirement System Board unanimously passed new 403(b) rules that will be fully effective on Oct. 1, 2019.

The final rule is a substantial improvement from the initial draft published in July which would’ve resulted in the wholesale elimination of products and providers from the Lone Star State’s 403(b) marketplace. The final rule reduces the fee caps from the current overall maximum allowable annual asset-based fee of 2.75% to maximum asset-based fee caps tiered by asset class for annuity and mutual funds as follows:

Asset Class	Maximum Asset-Based Fee Variable Annuity	Maximum Asset-Based Fee Non-Annuity
Money Market	1.90%	1.65%
Diversified Bond	2.25%	2.00%
Asset Allocation	2.25%	2.00%
Large Cap U.S. Equity	2.25%	2.00%
Small/Mid Cao U.S. Equity	2.45%	2.20%
International Equity	2.55%	2.30%
Global Equity	2.55%	2.30%
Real Estate	2.60%	2.35%
Other	2.70%	2.45%

In addition to adjusting the fee caps the new rule also:

• eliminates mutual funds with front-/back-end sales loads;

• reduces the maximum allowable loan initiation fee from $50 to $25; and

• increases the application fee to be a certified company and the registration fee for qualified investment products.

The final rule as approved represents a significant improvement from what was originally proposed by TRS in July of this year. Significant changes from the original proposal include:

• allowable surrender penalties of 12 years (with disclosure) and 10% penalty declining annually;

• grandfathers all existing 403(b) products with existing customers;

• increases the maximum allowable fixed dollar charge to $60;

• increases the maximum fee caps by 0.50% for annuity products;

• increases the maximum fee caps by 0.25% for mutual fund products; and

• delays implementation of the fee caps by 18 months.

The delay in the implementation date is intended to allow the Texas legislature adequate time to opine on the new 403(b) rule and intervene or provide additional guidance if they choose to do so.

Product registration under the new fee caps will begin on Oct. 1, 2019. TRS Staff has committed to working with the NTSA to revise and clarify the registration system requirements over the next year to make this process as efficient and accurate as possible.