PENDING CALIFORNIA LEGISLATION CONCERNING 403(B) ARRANGEMENTS UNDER THE STATE TEACHERS' RETIREMENT SYSTEM

[14735] May 21, 2002 TO: PENSION COMMITTEE No. 18-02 PENSION OPERATIONS ADVISORY COMMITTEE No. 33-02 RE: PENDING CALIFORNIA LEGISLATION CONCERNING 403(b) ARRANGEMENTS UNDER THE STATE TEACHERS’ RETIREMENT SYSTEM The California Assembly is currently considering legislation, Assembly Bill 2506, which would require the California Teachers’ Retirement Board, the manager of the State Teachers’ Retirement System (STRS), to establish a registration process for vendors seeking to offer retirement investment products to employees of all local school districts, community college districts, and county offices of education (“local entities” for purposes of this memorandum). Each local entity would be able to select and provide options to its employees from among the registered vendors. The registration process would require prospective vendors to provide information concerning: • Evidence of experience in California and other states in providing custodial account mutual fund arrangements or other retirement products and related financial services under public employer retirement plans; • Disclosure of expenses paid directly or indirectly by retirement plan participants, including, but not limited to, penalties for early withdrawals, declining or fixed withdrawal charges, and surrender or deposit charges, supported by certain documentation; • Ability of the vendor to offer a wide array of products to participants; • A discussion of the ability, experience, and commitment of the vendor to provide retirement counseling and education services, including, but not limited to, access to group meetings and individual counseling; • Evidence of the financial strength and stability of the vendor, as may be applicable, pursuant to ratings assigned by nationally recognized rating services that evaluate the financial strength of life insurance, mutual fund, and other similar companies; 2 • Ability and willingness of the vendor to coordinate its activities with the Board and to exchange and supply information and data as may be required; • Location of offices and counselors of the vendor relative to serving the local entities and their employees in California; • Ability to comply with all applicable provisions of federal and state law governing retirement plans, including minimum distribution requirements and contribution limits; • The demonstrated ability to offer an appropriate array of accumulation funding options, including, but not limited to, a diversified mix of value, growth, growth and income, hybrid and index funds or accounts across large, mid, and small capitalization asset classes, both domestic and international; • A discussion of the range of administrative and customer services provided, including asset allocation, accounting and administration of benefits for individual participants, recordkeeping for individual participants, asset purchase, control, and safekeeping, execution of a participant’s instructions as to asset and contribution allocation, calculation of daily net asset values, direct access for participants to their account information, periodic reporting to participants, not less than quarterly, on their account balances and transactions, and compliance with the standard of care applicable in the provision of investment services and consistent with federal law; and • Any other information required by the Board to establish an impartial information bank of vendors. The impartial information bank would allow local entities and other interested parties, including participants, to compare the registered vendors and the investment options being offered, and would be required to include information related to participant cost, participant education, vendor experience, and other vendor services offered, including how to access all performance and other prospectus disclosures required by the NASD and the SEC. The cost of establishing and maintaining the vendor registration system and the information bank and the costs associated with publicizing the availability of the information bank would be charged to each registered vendor. A copy of AB 4506, as last amended on April 11, 2002, is attached. The bill currently is scheduled for a hearing before the California Assembly’s Appropriations Committee on May 22, 2002. Kathy D. Ireland Associate Counsel Attachment (in .pdf format)