At least eight lawsuits have been filed against retirement plan fiduciaries of top-tier universities since early August, confirming that non-profit 403(b) and 401(k) plans are under DOL’s microscope in a new era of heightened regulatory focus on retirement plans. A tidal wave of class-action 401(k) lawsuits in the for-profit space in recent years revealed that plan participants across the country are losing a tremendous amount in savings from excessive fees and lack of investment education in their retirement plans. A White House study confirmed these problems cost retirement savers 1% in annual returns, adding up to tens of thousands of dollars – if not more – over time. To combat the problem, DOL has tripled the size of its audit task force and issued new regulations on April 7 which aim to save plan participants $40 billion over ten years by ensuring retirement plan sponsors meet all of their fiduciary responsibilities. These include monitoring plan fees and investment performance and providing ample plan education. Although subtle differences exist between 401(k) plans and 403(b) plans used by non-profits, the spirit of the new regulations is to protect retirement investors regardless of where they work. With the explicit backing of the Obama administration and case wins in the country’s highest courts, DOL has the resources and legal precedents to pursue both for-profit and non-profit organizations for retirement plan mismanagement.
Plaintiffs from eight universities – including MIT, NYU and Yale – allege that plan sponsors allowed employees to pay excessive fees, failed to replace expensive and poor performing investment options, and did not provide adequate education for many employees unsure of which investments to choose. Such allegations echo previous 401(k) cases settled over the last two years. Given plaintiffs’ success in those cases – last year the Supreme Court said in Tibble v. Edison that plan sponsors had a “continuing duty to monitor investments and remove imprudent ones” – this wave of cases against non-profit universities may produce similar verdicts.
It is the employer’s responsibility as the plan sponsor to monitor plan fees for reasonableness, remove poor investment options and provide frequent plan education. Yet many plan sponsors remain ignorant about their plan’s specifics – 35% don’t know the expense ratios of the mutual funds in their plans, for example. As a result, half of plan participants believe they do not pay any investment-related expenses. Plan education is also critical to ensure participants have an investment allocation suitable to their age and risk tolerance. In one recent case, half of plan assets were invested in the Stable Value option, which typically guarantees annual returns of around 2 percent. Stable Value funds can be good investments as a portion of a diversified allocation, especially for participants who plan to retire soon. However, workers in their prime saving years will be unable to retire on 2 percent returns.
As courts have decided that plan sponsors have largely failed in these areas, DOL has tripled the size of its audit task force to ensure retirement plans are being properly managed. The tendency for problems in retirement plans to affect large numbers of employees means plan mismanagement can be costly for plan sponsors. Indeed, the average DOL fine is $600,000 in such cases.
With the regulatory environment quickly shifting beneath their feet, many plan sponsors are partnering with 3(38) investment advisors to improve plan performance and reduce liability in case of a lawsuit. While both 3(21) and 3(38) investment advisors are fiduciaries, 3(38) advisors bear the bulk of the legal responsibility to properly manage a plan. Instead of giving general advice on how to write an Investment Policy Statement or build a fund menu – as 3(21) advisors operate – 3(38) advisors perform these and other critical plan functions on behalf of the plan sponsor. For example, if a lower priced share class of a mutual fund becomes available to the plan, a 3(38) advisor must replace the higher cost version. Plaintiffs in the Yale lawsuit allege the university did not use plan assets as a bargaining tool to access the lowest cost versions of each fund. Lack of due diligence to build a quality, low cost fund menu is a recurring theme among retirement plan lawsuits in recent years. Record keeping and other administrative costs must also be monitored.
A characteristic unique to 403(b) plans is their tendency to hold many insurance-based annuity products as investment options. Such products tend to have high fees as well as restrictions and penalties on withdrawals. The NYU lawsuit singles out the TIAA Traditional Annuity as an example.
“It is important for retirees and employees of universities to have the same rights and ability to build their retirement assets as employees of for-profit companies,” said Jerome Schlichter, a founding partner of St. Louis-based law firm Schlichter Bogard & Denton. “They shouldn’t be penalized.”
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