The Securities and Exchange Commission Tuesday ordered VALIC Financial Advisors to pay nearly $40 million to settle charges that the firm failed to disclose business practices and investment selections that harmed Florida teachers saving for retirement.
In one order, the SEC alleged that from October 2006 to late 2019, VFA failed to tell its teacher clients that the firm’s parent company, Variable Annuity Life Insurance Company, paid a for-profit organization associated with Florida K-12 teachers’ unions to refer business to VALIC and VFA, a Houston-based indirect subsidiary of AIG Retirement Services Inc. The SEC levied a civil penalty of $20 million for the violation.
In the other order, the SEC alleged that VFA failed to disclose to its teacher clients that it received 12b-1 fees and revenue sharing and avoided transaction fees for mutual fund investments for their retirement plans. The SEC said the investments were more expensive than others that were available. The SEC ordered disgorgement of $15.4 million and a civil penalty of $4.5 million. The monetary sanctions will be distributed to harmed investors.
The enforcement action comes about a year after the SEC launched an initiative to protect teachers investing for their retirement in 403(b) and other plans designed for educators. Those plans are notoriously rife with high-fees and are not covered by the federal retirement law that governors company-sponsored 401(k) plans.
“Today’s action should be a signal to teachers and those who sell them investment products,” SEC Chairman Jay Clayton told reporters on a conference call.
Clayton said teachers should ask questions about their investment options and “know how much of your money is going to work for your retirement.”
He warned investment professionals to stop conduct similar to VFA’s and to turn themselves in to SEC enforcement.
‘We believe in substantial credit for self-reporting and cooperation,” Clayton said. “We also believe that those who continue a practice that is clearly inconsistent with the law have no place in our markets.”
The advisory firm did not admit nor deny the SEC’s findings.
“We are pleased to have resolved these matters involving VALIC Financial Advisors, which is taking all necessary steps to ensure a robust program of disclosure improvements and governance enhancements,” an AIG spokesperson said in a statement.
Agency officials indicated they would continue to probe the teacher retirement fund market.
“This case ranks among the commission’s most important actions,” Stephanie Avakian, co-director of the SEC Division of Enforcement, told reporters. “We expect other providers to take a hard look at their arrangements and make sure that their practices are appropriate and that all material conflicts of interest are fully fairly disclosed.”
‘DROP IN THE BUCKET’
The SEC has a long way to go to clean up the $1.1 trillion 403(b) sector, said Tony Isola, head of the 403(b) practice at Ritholtz Wealth Management.
“It’s a drop in the bucket compared to what’s going on,” Isola said. “It’s a start. It’s going to send some shock waves through people. They’re used to acting with impunity. Hopefully, this will lead to other cases. There’s always more than one cockroach.”
But Ken Ford, president and founder of K-12 Financial Advisors, doubts that the SEC’s action will get the attention of AIG let alone the 403(b) marketplace. He notes that the $40 million in sanctions is eclipsed by AIG’s $4.4 billion in income.
“That’s peanuts to a company that size,” Ford said. “It’s a slap on the wrist and not enough to deter future behavior.”
Under the settlement, VFA agreed to cap advisory fees for all Florida K-12 teachers who participate in its advisory product in Florida 403(b) and 457(b) retirement programs. Avakian said VFA’s advisory fee would be held to about 45 basis points.
“That relief is going to be significant to individual teachers over the lifetime of their investments,” she said.
SEC officials noted that VFA failed to report itself for mutual fund disclosure violations through its share class selection initiative. Under that program, firms turning themselves in could avoid fines. Instead, VFA has to pay the $4.5 million civil penalty as part of the order dealing with mutual fund fee disclosures.
While the SEC is wading into the teacher retirement area, Ford has established a blog to analyze 403(b) plans. Recently, Isola set up a Facebook page to help teachers with investment decisions.
Teachers need all the help they can get, Ford said.
“This market is the wild, wild west of retirement plans,” Ford said. “We don’t have anybody protecting teachers from high-fee products. If I’m having a hard time researching a product and deciphering fees that are being charged, it’s almost impossible for the average investor.”
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