UpFront | Published in October 2016

What The 403(b) Excessive Fee Lawsuits Do Not Consider

403(b) plan's have a much different history than 401(k) plans

By Rebecca Moore | October 2016
Art by Pete Ryan

Numerous lawsuits have been filed against large universities over alleged excessive investment and recordkeeping fees for their 403(b) plans. One was filed against excessive fees in a university’s 401(k) plan.
The lawsuits attack the 403(b) plan design model of offering an extensive amount of investment options, including individual annuities, and using multiple recordkeepers. Before new 403(b) regulations were passed in 2007, there was little plan sponsor oversight of 403(b)s. Often, annuity providers were allowed to meet with employees and set up individual annuities for them, resulting in many plans having hundreds of investments. In addition, before the regulations, it was much easier for 403(b) plans to be exempt from the Employee Retirement Income Security Act (ERISA), as long as they did not include employer contributions.
“I’m surprised the plaintiffs’ bar has turned to 403(b)s,” says David Levine, a principal with Groom Law Group, Chartered, in Washington, D.C. “These lawsuits are in many ways clones of 401(k) lawsuits, completely disregarding some of the distinctions between the two plan types.”
It was only in 2009 that 403(b) plans were required to have a written plan document, notes Joseph Urwitz, a partner with McDermott Will & Emery LLP in Boston. “If someone is not in [the 403(b)] field, he may think 403(b) plans are still really different from 401(k) plans, when in fact the differences between the two have decreased over the years,” he says.
Todd Solomon, a partner with McDermott Will & Emery LLP in Chicago, says he thinks the lawsuits are based on the outdated notion that 403(b) plans are part of a “wild, wild West” of plans.
Levine notes that 403(b) plans have different funding vehicles, custodial accounts or annuities. And some plan sponsors and participants like the traditional model of offering multiple vendors, saying it gives participants more choice, while others say paring down vendors makes things less complicated for sponsors and participants.

“Plan participants may have grown up with a traditional annuity product and prefer that, and many plan sponsors have a multi-vendor model because there are some products they can’t get rid of,” he says.
“Academic institutions sponsoring 403(b)s have lots of engagement with faculty and staff about what benefits should be offered,” Levine says. “These institutions have given much thought to their plan design and what they need for participants.”

Urwitz says that the 403(b) lawsuits offer clues for plan sponsors about how to guard themselves. “Plan sponsors may not be able to completely protect themselves, but the type of things lawyers are looking for can be addressed by plan sponsors’ investment committees,” he says.
Urwitz says, to the extent 403(b) sponsors can renegotiate with fund providers and recordkeepers to eliminate revenue sharing and 12b-1 fees, they will be putting themselves in a better position.
“I would tell anyone seeing this in the news to take steps to look at their processes,” Solomon says. “When is the last time they did a fee review or benchmarking of investment options? Do they use a consultant or adviser to help the investment committee? Are they in the most favorable share class of funds?”