403(b) Plans Under Scrutiny – What Does This Mean for Your Retirement Plan

By Jennifer S. Kiesewetter

Between August 9 and August 17, 2016, twelve university 403(b) plans were sued in federal courts across the country – extending from California to New York – by Jerome Schlichter, the first attorney to sue for excessive fees against university plans. Universities targeted were Yale, New York University, Columbia, Cornell, University of Pennsylvania, Duke, Johns Hopkins, Vanderbilt, Northwestern, University of Southern California, and Massachusetts Institute of Technology. Other schools to follow, sued by other attorneys on similar bases since August 2016, were University of Chicago, Princeton, Washington University and Brown University. All cases are still pending, and are primarily in early stages of litigation.

Why the legal onslaught against these prestigious universities? Why are 403b plans being drug into the litigious light?

What is a 403(b) Plan?

A 403(b) plan – which is named for Section 403(b) of the Internal Revenue Code – is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers. These plans are often referred to as TSA plans, or tax-sheltered annuity plans.

These plans are made up of individual, self-directed accounts for participants, which can be invested in annuity contracts through insurance companies, custodial accounts invested in mutual funds, or retirement income accounts set up for church employees (which can then be invested in either annuities or mutual funds). Often these plans have multiple vendors based on the structure of annuities and /or custodial accounts, which then separately recordkeep their own investment options under their individual contracts.

Section 403(b) plans often allow employee contributions and/or employer contributions, similar to a 401k plan. Private entities fall under ERISA governance. Government plans and certain church and other 501(c)(3)s that have limited employer involvement may be exempt from ERISA.

Summary of Claims

The class action claims brought against these plans are similar to those brought against 401k plans in excessive fee cases beginning approximately a decade ago – perhaps by no coincidence by the same law firm, Schlichter, Bogard & Denton out of St. Louis. The claims generally against the plans fall to the following:

  • Excessive fees for recordkeeping services; having multiple recordkeepers, leading to excessive fees and inefficiencies

  • No bidding process for recordkeepers

  • Maintaining a “dizzying array” of investment options (in some cases hundreds of options)

  • Failure of fiduciaries to select investments with reasonably lower fees when available

  • Failure to select, evaluate and monitor investments

  • Failure of the plan fiduciaries to monitor the plan’s other fiduciaries

  • Retaining historically underperforming investments

These claims, the complaints allege, fall squarely under breach of fiduciary duties – such as the duty of prudence and loyalty — under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Further, the complaints allege that these failures have caused participants to suffer millions of dollars in losses in retirement savings, and further seek damages to make the participants whole.

The Defense

In most cases, the universities have filed motions to dismiss claiming that plaintiffs have failed to state claims against them for breach of fiduciary duty. Further, many universities have also asserted failure to establish standing in that the plaintiffs have failed to show injury.

The universities, in general, asserted that the plaintiffs’ claims are nothing but speculation. Specifically, defendants stated that plaintiffs’ failed to address the decision-making process that would suggest imprudence. Further, the plaintiffs’ failed to state that any participants were confused by the choice of investment options or failed to identify which funds underperformed. The universities stressed the high level of intelligence of its participants and stated that active choice was preferred.

Many universities stated that by law, and function, Section 403(b) plans operate differently than other plans due to their investments – annuities. Defendants argued that a multi-recordkeeper approach is the normal approach in the 403(b) world as the probability of finding one recordkeeping vendor to keep assets held by unrelated mutual funds or annuity products would be low, if not impossible.

In May 2017, two universities received partial victories to their motions to dismiss. Emory University received dismissal victory on the following claims:

  • Plan fiduciaries acted imprudently by offering too many investment options

  • Various claims based on damages incurred more than 6 years ago due to alleged imprudence

  • Investing in TIAA mutual funds created an alleged prohibited transaction because TIAA is a plan recordkeeper

All other claims were allowed to proceed.

Duke University received dismissal victory on the following claims:

  • Investing in TIAA mutual funds created an alleged prohibited transaction because TIAA is a plan recordkeeper

  • Plaintiff’s allegation of breach of duty to monitor

  • Claim regarding “locked in” allegations pertaining to certain annuity products and their alleged imprudence

All other claims were allowed to proceed.

How Will This Affect Your Retirement Plan?

With the recent excessive fee litigation bringing 403(b) plans into the fold, plan sponsors should take a step back and perform some internal due diligence on their retirement plans. Participants are becoming more educated on how retirement plans operate. The law is changing with respect to fiduciary guidance. The agencies are auditing. And Jerry Schlichter is suing.

Plan sponsors need to not only review documents, but review governance and operational procedures, including:

  • Who is a fiduciary and what are those duties

  • Delegation of fiduciary duties

  • Reviewing and documenting changes to investment policy statements

  • Processes to select, maintain and replace investments

  • Processes for determining number and diversity of investments

  • Processes to select, monitor and review third party service providers and other plan fiduciaries

  • Processes to determine reasonableness of fees

  • Processes for prudent documentation

Plan sponsors must always act solely in the best interest of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses of administration. This high level of fiduciary duty is one that must be revisited often – not just every now and again. Going through this review process at least annually will help keep plan sponsors loyal to their participants, and out of the courtroom. Or at least with a good defense if served with a complaint.

Jennifer S. Kiesewetter, Esq.
Kiesewetter Law Firm, PLLC
jkiesewetter @kiesewetterfirm.com
www.kiesewetterfirm.com