New Texas Law Enhances School District Role in 403(b)s

A new Texas law will increase the role that school districts in the state play in the 403(b) plans they offer their employees.

Rep. Dan Flynn (R-Canton) introduced the measure on March 1, 2019. The state House of Representatives passed it on April 10; the Texas Senate received the bill the next day and passed it one month after the House did. Gov. Greg Abbot (R) signed it into law on May 24; it goes into effect on Sept. 1, 2019.

HB 2820 rescinds the power of the Teacher Retirement System (TRS) of Texas to regulate those 403(b)s. In the statement of intent concerning the measure, Flynn notes that under current law, all 403(b) financial products are regulated by the state through the Texas Department of Insurance (TDI) and the State Securities Board and/or by the federal government through the SEC, FINRA, the IRS and the DOL. This oversight includes registration, regulation and approval of these products, ensuring that strong consumer protection safeguards are in place. But the TRS also regulates 403(b) products, including setting maximum fees for 403(b) products rather than allowing the market to determine those rates. Texas teachers and other school employees can use pre-tax dollars to purchase financial products through the TRS 403(b) marketplace.

Flynn argues that current law allows for duplicative roles with the teachers’ 403(b)s. Not only that, he says, and TRS has to use its already limited funds to fulfill its role with 403(b)s — to such an extent that the TRS is “often turning to other state agencies and private consultants for assistance.” He adds that “limiting fees may not only reduce product offerings, but also limits a company’s ability to offer services that provide valuable advice and educational tools that can assist teachers in making appropriate choices for their retirement income. Further, focusing only on fees ignores product performance and could deny teachers access to products that may have higher returns.” Removing TRS from regulating 403(b)s, Flynn says, will eliminate dual regulation already being conducted by other appropriate state and federal agencies.

Under the new law, the TDI will oversee disclosures for 403(b)s and laws regulating market conduct. “Updating Texas law governing 403(b) products will allow TRS to focus on its core function of managing one of the largest public pension funds in the country,” says Flynn.

The new law includes provisions that:

• Repeal the requirement that an educational institution can only enter into a salary reduction agreement with an employee of the institution if the qualified investment product is registered with the TRS.
• Require that educational institutions that enter into a salary reduction agreement with employees, to the greatest degree possible, require that contributions to eligible qualified investments be made by automatic payroll deduction and deposited directly in the investment accounts.
• State that an insurance company is eligible to offer qualified investment products to the employees of educational institutions in Texas if the company satisfies the following criteria:

1. the company is licensed by the TDI and is in compliance with minimum capital and surplus requirements, including applicable risk-based capital and surplus requirements prescribed by rules adopted by TDI; and
2. the company has experience in providing qualified investment products, rather than at least five years' experience in qualified investment products, and has a specialized department dedicated to the service of qualified investment products, as determined by the educational institution.

• State that a company that offers qualified investment products other than annuity contracts, including a company that offers custodial accounts under Section 403(b)(7), is eligible to offer qualified investment products to employees of educational institutions.
• Prohibit an educational institutional from:

1. refusing to enter into a salary reduction agreement with an employee if the qualified investment product that is the subject of the salary reduction is an eligible qualified investment;
2. entering into or continuing a salary reduction agreement with an employee if the qualified investment product that is the subject of the salary reduction agreement is not an eligible qualified investment, without first providing the employee with notice in writing that indicates the reason the subject of the salary reduction agreement is no longer an eligible qualified investment.

• Prohibit a person, other than an employee of an educational institution, or an affiliate of the person from entering into or renewing a contract under which the person is to provide services for or administer a plan offered by the institution under Section 403(b), unless the person is a financial institution that has sufficient presence in Texas to serve the employees of educational institutions who participate in the plan, rather than has its main office, a branch office, or a trust office in the state.
• Require a person, if he or she holds a meeting at which qualified investment products will be marketed to employees of the educational institution, to provide representatives of other companies eligible to sell qualified investment products, rather than provide representatives of other companies certified to TRS an opportunity to attend and market their qualified investment products at the meeting.
• Provide that a person breaks the law if the person sells or offers for sale an investment product that is not an eligible qualified investment and that the person knows will be the subject of a salary reduction agreement.
• State that the required notice state, in plain language that the annuity must be a qualified investment product and be registered.
• Require a company that offers an eligible qualified investment that is subject to a salary reduction agreement to require, rather than to demonstrate annually to TRS, that each of its representatives are properly licensed and qualified, by training and continuing education, to sell and service the company's eligible qualified investments.