Continuing our commentary on California public school and charter school 403(b)s, we shift focus from the ability of a 403(b) employer to limit investment selection to a discussion of the California law on the selection by public school districts and charter schools of third party administrators or recordkeepers (collectively, Recordkeepers) for their 403(b) plans.
As with school district 403(b)s and investment selection, there isn’t a lot of “law” on the books concerning California school 403(b)s and recordkeeper selection. First, there are the provisions of California Education Code section 44041.5, which authorize California K-12 and community colleges to contract with third party Recordkeepers, including CalSTRS, to provide administrative, fiduciary and recordkeeping services for their 403(b) plan, and which require the employers to include certain safeguards to protect the interests of participants. Second, there is a 2008 California Attorney General’s Opinion (Opinion), which addresses whether a school district may promote or give preferred status to a particular provider of 403(b) plans. (Note that while formal opinions of the California Attorney General generally are accorded “great respect” and “great weight” by the courts, they do not have the same precedential value as an actual appellate court decision.)
What does California Education Code section 44041.5 say about recordkeeper selection? Among other things, section 44041.5 authorizes K-12 or community college employers to contract with Recordkeepers, including CalSTRS, to provide administrative, fiduciary and recordkeeping services for their “sponsored” 457(b) and 403(b) plans. The fact that we are talking about “employer-sponsored” 403(b) plans is critical because, as we discussed previously, the California Insurance Code provision (section 770.3) that deals with annuity provider selection should not apply in the case of an employer-sponsored 403(b) plan. Therefore, section 770.3 should not be part of any discussion involving a section 44041.5 recordkeeper.
According to section 44041.5, any school district that hires a Recordkeeper for its 457(b) or 403(b) plan must:
- Require the Recordkeeper to provide proof of liability insurance and a fidelity bond;
- Require the Recordkeeper to provide evidence of a safe chain of custody of assets relating to participant accounts; and
- Require the Recordkeeper to protect participant data and information from affiliated and non-affiliated investment providers.
In addition, section 44041.5 requires contracted Recordkeepers to:
- Disclose any fees, commissions, cost offsets, reimbursement (and other compensation) received by them or a related entity, as well as any compensation they receive from investment providers;
- Disclose any affiliation or contractual relationship they have with a provider of plan investments; and
- Insure that any personal information they obtain in providing recordkeeping services will only be used to provide the contracted services.
More importantly for our discussion, section 44041.5 states that none of these requirements shall “interfere with…the ability of the employer to establish nonarbitrary requirements upon [providers] that in the employer’s discretion, aid in the administration of its benefit programs and do not unreasonably discriminate against any provider….”
What does the Opinion say about recordkeeper selection? Fortunately, the Opinion picks up where section 44041.5 leaves off, and clarifies that a school district may promote or give preferred status to particular provider of 403(b) plans – that is, a Recordkeeper – if the arrangement will aid the district in the administration of its benefit programs and does not unreasonably discriminate against any provider. The Opinion also mentions section 770.3, but this reference appears to conflict with the case law mentioned in our previous post.
The bottom line is that a school district or charter school can indeed establish its employer-sponsored 403(b) plan utilizing a single provider or Recordkeeper as long as it makes the selection in a rational and fiduciary-wise manner.
Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at firstname.lastname@example.org or (916) 329-3685.