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Aon Retirement and Investment Blog

Excess Fee Litigation in the U.S. Hits 403(b) Plans

In August 2016, St. Louis-based law firm Schlichter, Bogard & Denton filed lawsuits against several prominent higher education institutions in the U.S. The suits allege that these universities, as retirement plan sponsors, breached their duties of loyalty and prudence under the Employee Retirement Income Security Act of 1974 (ERISA) by “… causing plan participants to pay millions of dollars in unreasonable and excessive fees for recordkeeping, administrative, and investment services of the [403(b)] plans.” The university employee plaintiffs further allege breaches of fiduciary duty due to:

  • Having chosen and retained numerous high-cost and poor-performing investment options.
  • Simultaneously using multiple administrative recordkeepers, rather than a single recordkeeper.
  • Failing to utilize a competitive bidding process at regular intervals to select a recordkeeper and ensure that expenses remain reasonable for the services provided.
  • Applying recordkeeping fees on the basis of a percentage of plan assets rather than on a fixed dollar amount based on the total number of participants.
  • Offering too many investment options.

While each of the universities may have substantial defenses to the plaintiffs’ claims, there are a number of prudent and practical steps (best practices) that plan fiduciaries should consider regarding their 403(b) plans – many of which may also be quite appropriate for 401(a) plan sponsors to consider. These steps are listed below.

  1. Identify the channels of revenue the plan’s recordkeepers are receiving to cover the costs of services. Are costs billed directly to the plan or the participants? Are they collected from plan assets via revenue sharing arrangements? Are there any additional asset-based charges
  2. Compare these channels of revenue to benchmarks based upon assets under management, number of covered participants, and other industry measures on at least an annual basis. If the findings indicate that modifications are warranted, consider new contract terms and service agreements.
  3. Consolidate multiple recordkeepers to a single recordkeeper to lower administrative costs, improve regulatory compliance, and create a more effective plan governance structure.
  4. Consider implementing an administrative fee structure that relates any administrative costs to the number of participants served rather than the size of plan assets.
  5. Routinely monitor all plan investment options. Where appropriate, emphasis should be placed on utilizing the lowest cost share class options available – this may necessitate revisiting investment options as the plan assets grow.
  6. Consolidate duplicative investment options. This allows fiduciaries to leverage plan assets more effectively in negotiations and better monitor the funds selected to ensure their continued viability and integrity.
  7. Document the fiduciaries’ diligence in evaluating and monitoring the plan’s investment results and fees, as well as administrative expenses.

The issues raised in these recent lawsuits are unproven allegations at this stage and don’t necessarily have merit. They may also be subject to reasonable defenses by the universities. But the implications of these recent lawsuits across the entire higher education sector and nonprofit community are concerning. Court decisions on these claims have the potential to dramatically change the 403(b) market. Changes could include the elimination of multiple recordkeeper structures, duplicative investment option line-ups, or asset-based compensation structures. Alternatively, the courts could establish standards that acknowledge the reasonableness of various service models, ranging from highly automated, technology-driven approaches, to the high-touch, one-on-one personal approach typically utilized by many 403(b) plans.

In the meantime, broad adoption of the above guidelines can help fiduciaries avoid the headlines and mitigate the risk of litigation.

Dan Pawlisch is an Associate Partner and 403(b) Client Practice Lead for Aon Hewitt Investment Consulting in Chicago. 

Content prepared for U.S. subscribers, but available to interested subscribers of other regions.

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