Compliance

403b Plan Sponsors Have Distinct Arguments in Excessive Fee Suits

Attorneys point out that 403(b) plans have distinctions from 401(k) plans that cause them to have a different model.

By Rebecca Moore editors@strategic-i.com | August 18, 2016
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In the past two weeks, eight lawsuits have been filed against large universities concerning excessive investment and recordkeeping fees for their 403(b) plans. One has been 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, which resulted 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 a lot of ways clones of 401(k) lawsuits, completing disregarding some of the distinctions between the two plan types.”

It was only in 2009 that 403(b) plans were required for the first time to have a written plan document, notes Joseph K. Urwitz, partner with McDermott Will & Emery LLP in Boston. “If someone is not in [the 403(b)] field, they 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Todd Solomon, partner with McDermott Will & Emery LLP in Chicago, adds that he thinks the lawsuits are based on the outdated notion that 403(b) plans in general are part of a wild, wild west of retirement plans. “With respect to large institutions that have good governance, this notion is outdated. Plan sponsors are taking great care to manage their plans and do all they need to do,” he says.

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