New Jersey's Bad 403(b) Bill
July 19, 2022
In language eerily similar to Pennsylvania's Act 5, which prevents school districts in that state from going single vendor, a new bill in New Jersey would require all school districts with more than 1,000 students to have at least three 403(b) “financial institutions or pension management organizations.”
Bad Bill
It’s an understatement to call this an awful bill. In the 403bwise database of more than 3,500 school district 403(b) plans, the plans with the best pricing are all single vendor (explanation of grading system). Why? Because vendors were forced to compete on pricing and services. How many vendors does Apple Computer have in its 401(k) plan? One. If a multi-vendor plan was best practice don't you think one of the world's most innovative companies would adopt that?
Say What?
Promoters have said the bill will ensure quality pricing but nowhere in the proposed legislation does it specify this must happen.
New Jersey Bill Language (A1974)
1. a. A board of education of a school district with a student enrollment of at least 1,000 students that offers a 403(b) plan to school district employees pursuant to section 403(b) of the federal Internal Revenue Code (26 U.S.C. s. 403(b)) shall select a minimum of three financial institutions or pension management organizations to provide services to the 403(b) plan. If fewer than three such financial institutions or pension management organizations are determined to be available, then the board of education shall select the number of available providers able to meet the requirements of this section.
b. A financial institution or pension management organization that provides services to a board of education under subsection a. of this section shall:
(1) enter into an agreement with the board of education that shall require the financial institution or pension management organization to provide in an electronic format all data necessary for the administration of the 403(b) plan as determined by the board of education; and
(2) provide all data required by the board of education to facilitate disclosure of all fees, charges, expenses, commissions, compensation, and payments to third parties related to investments offered under the 403(b) plan.
2. This act shall take effect immediately.
STATEMENT
This bill requires a board of education of a school district with a student enrollment of at least 1,000 students that offers a 403(b) plan to school district employees to select a minimum of three financial institutions or pension management organizations to provide services to the 403(b) plan. If fewer than three such financial institutions or pension management organizations are available, the board of education must select the number of financial institutions or pension management organizations available to meet the requirements of the bill.
A financial institution or pension management organization that provides services to the 403(b) plan under the bill must: (1) enter into an agreement with the board of education that requires the financial institution or pension management organization to provide in an electronic format all data necessary for the administration of the 403(b) plan as determined by the board of education; and (2) provide all data required by the board of education to facilitate disclosure of all fees, charges, expenses, commissions, compensation, and payments to third parties related to investments offered under the 403(b) plan.
A Better Bill
All school disricts must put their 403(b) plans out to bid in order to get the best combination of services and pricing. A mix of low-cost (less 0.30%) index funds and target date funds (less than 0.40%) must be offered.
Winning vendors are forbidden from...
- charging loads
- charging surrender fees
- assessing wrap fees
- cross selling
- requiring a representative (unless a fiduciary)
- offering equity indexed annuity products.
This is really just the minimum a school district should doing. They should also be providing unbiased financial education on an annual basis.
Sponsors of A1974
It's hard to imagine that legislators would objectively look at the K-12 403(b) and think A1974 would benefit educators. It's easy to imagine parties interested in maintaining the multi-vendor enviroment crafting and suggesting this bill.
Bill sponsors
Stay wise and well (and urge legislators to either drop or improve this bill).
Related Podcast: New Jersey's Bad 403(b) Bill
New Jersey's Bad 403(b) Bill Proposed New Jersey legislation would require large school districts to have at least three 403(b) vendors. We speak with “Izzy” Tannenbaum, partner at Withum, a tax advisory and public accounting firm. Izzy supports the intent of the bill but acknowledges it contains flaws. Listen Now »