The Securities and Exchange Commission today announced a $40 million civil settlement with a financial adviser it says violated the rules in promoting retirement investments to Florida teachers.
The SEC order says the company, Valic Financial Advisors, “failed to disclose to certain Florida teachers who were potential and actual clients that VFA’s parent, The Variable Annuity Life Insurance Company, doing business under the AIG Retirement Services, Inc. brand (“VALIC”), was providing cash and other financial benefits to a for-profit company owned by Florida K-12 teachers’ unions.”
The order also says, “three full-time VALIC employees, called Member Benefit Coordinators (“MBCs”), were deceptively identified as the Teachers Union Entity’s employees, instead of as VALIC employees, at various retirement planning seminars and benefit events attended by K-12 teachers and referred K-12 teachers to VFA for investment advisory services. VFA’s conduct constituted a course of business which operated as a fraud or deceit upon clients and prospective clients.”
Each Florida school district provides its K-12 teachers with defined contribution tax-deferred retirement plans under Sections 403(b) and/or 457(b) of the Internal Revenue Code. Under these plans, the teachers themselves have discretion to choose investments and advisory services. In some cases, Florida teachers were paying Valic an advisory fee of .6 percent of their retirement assets, while also investing in annuities with fees of up to 2.3 percent of assets annually. By contrast, index funds or ETFs available to individual investors directly from firms such as Vanguard or Fidelity may charge fees as low as 0 percent. Over time, the higher fees mean that teachers have less money in retirement than they would otherwise. The SEC settlement will allow the teachers to recover some of that money by forcing Valic to disgorge some of the fees it collected.
In a telephone press conference to announce the charges and settlement, Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement, said that Valic was a financial services provider to teachers “in virtually all” of Florida’s 67 school districts. She said Valic had been paying more than $100,000 a year to an entity owned by Florida teachers unions for 13 years, and that the union-owned entity agreed in exchange to exclusively endorse VFA as its preferred financial services partner.
In response to a question from Education Next about whether the unions or the union-owned entity had done anything wrong or would be referred to other agencies for investigation or further enforcement action, Steven Peikin, Co-Director of the SEC’s Division of Enforcement, said, “unfortunately, there’s nothing we can say about that.”
The SEC action is part of what the SEC officials on the call—who also included the agency’s chairman, Jay Clayton—described as an ongoing “agency-wide teacher initiative” aimed at making sure “all material conflicts of interest are fully and fairly disclosed.” While this investigation focused on Florida teachers, it involved SEC staff in San Francisco and Texas.
“Teachers need and deserve our attention, and we are dedicated to ensuring they receive all of the information they are entitled to when making decisions about their financial futures,” Clayton said in the press release announcing the charges and settlement. “Too often educators are targeted with misconduct related to their investments. Our nation’s educators, and our Main Street investors more generally, are entitled to full and accurate information about the incentives and conflicts affecting their financial advisors.”
“Like all investors, teachers need full and fair disclosure,” Avakian said.
“Financial relationships and affiliations in the K-12 teachers’ retirement sector can impact teachers’ financial interests,” Peikin said. “It is critical that teachers get the information they need to make informed decisions about their retirement options.”
The Wall Street Journal reported that the union entity was Creative Benefits for Teachers and had ties to the Florida Education Association. As is common in civil SEC settlements, Valic, a subsidiary of AIG, agreed to the settlement without admitting or denying 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 told Education Next.
Ira Stoll is managing editor of Education Next.