403(b) PLANS (AND MORE 401(k) PLANS) IN THE CROSSHAIRS----FEE LITIGATION FINDS NEW TARGETS

By Carol Buckmman
Carol@cohenbuckmann.com

Is more always better?  Not according to a recently filed lawsuit against Duke University claiming that a plan offering more than 400 investment choices caused “participant paralysis” and an inability to make investment decisions. The suit, and several like it filed against institutions such as MIT, New York University, Johns Hopkins and Yale, claim that offering too many options is a fiduciary breach. The suits also claim that any plan with multiple recordkeepers pays excessive recordkeeping fees.

No sooner had I published my post, 401(k) Plans Still in the Crosshairs than these and other new lawsuits were filed challenging plan fees and investments. Plaintiffs are asking the courts to make new law in this area. These developments strongly support the point made in my earlier post that plan fiduciaries should not become complacent just because they haven’t been sued so far.  Here is a summary of the targets and theories in the new lawsuits:

              1. 403(b) Plans are a new target.  MIT, Duke, NYU, Johns Hopkins and Yale sponsor 403(b) plans. Suits against fiduciaries of 403(b)plans are a major development and may signal the beginning of a whole new phase in fee litigation.  403(b) plans, like 401(k) plans, permit employees to make pre-tax contributions, but only tax exempt employers may sponsor 403(b) plans.  Although Section 403(b) has been in the Internal Revenue Code for a long time and many (but not all) 403(b) plans are subject to ERISA, 403(b) plans have not traditionally received much attention from the Department of Labor.  Many are in “set it and forget it” mode and their governance policies haven’t been updated to reflect fiduciary best practices.  This makes them ripe targets for fee litigation.

                2.  Too many options. This charge also affects 401(k) plans and may well indicate a fiduciary breach. Duke, for example, may think it is a good thing to offer over 400 funds to maximize choice, but many funds with high fees and lagging performance are in that mix.  Offering over 400 funds may really mean that the fiduciaries have abdicated their responsibility to review the funds and select the best, most prudent investment options for the participants. The complaint also argues that there should not be multiple funds in the same asset class.

                 3. Too many recordkeepers.  This seems to be a 403(b) issue, since 401(k) plans typically do not have multiple recordkeepers.  The argument is that in using different recordkeepers for the different investments-Duke has four and Johns Hopkins reportedly has five- fiduciaries have unnecessarily subjected participants to inefficiencies that result in multiple and excessive fees. 

                4. Splitting business and asset classes defeats lower fees. Wal-Mart was sued because its 401(k) plan offered retail rather than lower-fee institutional class funds and the plan fiduciaries of this huge plan did not use their bargaining power to obtain lower fees.  This is a similar argument, and both 401(k) plans and 403(b) plans can be targets. The Duke complaint argues that using multiple recordkeepers and offering multiple funds in the same asset class also prevents leveraging size to get the lowest fees.  Plaintiffs also contend that plans should pay flat fees rather than fees with asset-based revenue sharing for recordkeeping because there is no increase in the value of the services provided simply because assets go up.

                5.  Using a money market fund rather than a stable value fund.  Stable value funds are capital preservation funds like money market funds but guarantee a minimum return.  An argument raised in a suit recently filed against Franklin Templeton is that, given the low money market rates available today, failure to use stable value funds can be a fiduciary breach.

                6. New proprietary fund cases.  New cases have been filed against Franklin Templeton and Neuberger Berman challenging use of proprietary funds in their own 401(k) plans, and Allianz recently failed to get a suit challenging its proprietary funds dismissed. The Neuberger Berman case focuses on one of those funds, the Value Equity Fund, which allegedly had high fees and a poor performance record, even though Neuberger Berman offered many non-proprietary funds.  Every provider that puts its own funds in its plans seems to be vulnerable to this charge, as it exposes the fiduciaries to allegations that the funds were selected only to provide additional fees to the sponsor and its affiliates.  Any fiduciaries who automatically select their provider’s target date funds without investigating whether there are better funds from other sources are also vulnerable.

                 7.  Annuity Investments and CREF Stock Fund.  The Duke complaint makes a number of charges that investments from annuity providers are problematic. It argues that investments offered through TIAA-CREF, a major 403(b) provider, have excessive fees. (TIAA-CREF is not a defendant). These include a fixed annuity that charges a penalty fee to withdraw all funds on termination of employment, and the CREF Stock Fund, an expensive underperforming fund, that was allegedly put in the lineup without investigation simply because TIAA-CREF said it was required.  Complaints also charge that mutual funds provided through variable annuities have multiple layers of unnecessary and excessive fees and contain charts showing the claimed markup.

New Law or New Settlements?

It will be interesting to see whether new law is made in these lawsuits, since most of the past cases ended up being settled.  (An exception was the Supreme Court decision in Tibble v. Edison setting forth an ongoing duty to monitor investments.) The settlements not only provided monetary recoveries to participants, but also included agreements to follow specific better plan practices-including engaging independent fiduciaries- going forward.  Any plan fiduciaries who have not reviewed their own practices up to now would be well-advised to put their own best practices for reviewing fees and investments in place before a court decision or settlement forces them to adopt new procedures or to hire an independent fiduciary not of their choice.