IRS Approves DATAIR 403(b) Pre-Approved Plan Document
The document is a volume submitter format and is designed to accommodate both ERISA and non-ERISA plans as well as church plans and plans for governmental entities.
The Internal Revenue Service (IRS)
has issued an Advisory Letter to DATAIR Employee Benefits Systems
approving its 403(b) Volume Submitter pre-approved plan document and announced a restatement window for 403(b) plans ending March 31, 2020.
The
DATAIR 403(b) document uses the volume submitter format, which allows
for the customization of language as may be necessary to meet the
specific needs of clients, but remains within the pre-approved volume
submitter program.
Lanning Hochhauser, Employee Retirement Income
Security Act (ERISA) attorney at DATAIR, says the DATAIR 403(b) document
is able to handle a wide variety of provisions and plan types including
safe harbor contributions and automatic enrollment. The firm says it is
designed to accommodate both ERISA and non-ERISA plans as well as
church plans and plans for governmental entities.
Hochhauser adds
that the restatement process also provides an opportunity to perform a
“self-audit” on the plan’s terms and conditions, as well as a correction
window in which defective provisions can be retroactively
self-corrected.
A website to keep up with IRS approvals of 403(b) pre-approved plan documents can be found here.
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Charles Baird, an employee of
Barclays from 2000 until 2009, when Barclays was acquired by BlackRock
Institutional Trust Company, and an employee of BlackRock from 2009
until July 2016, has filed suit against the firm, claiming the use of
proprietary funds in its 401(k) plan caused the plan participants to
incur excessive fees.
In a statement, BlackRock said, “The suit is without merit and contains
a number of factual inaccuracies. We will vigorously defend against the action.
BlackRock is committed to making the best decisions in the interest of our plan
participants, continually looking for ways to help them secure a better
financial future.”
According to the complaint, the plan has
approximately $1.56 billion in assets and approximately 9,700
participants. “Combined with BlackRock’s investment sophistication, the
Plan has enormous leverage to demand and receive superior investment
products and services,” the complaint says.
The plan fiduciaries
are charged with failing to honor their fiduciary duties under the
Employee Retirement Income Security Act by selecting and retaining
high-cost and poor-performing investment options, with excessive layers
of hidden fees that are not included in the fund expense ratios. The
complaint notes that almost all of the fund options offered to BlackRock
employees and participants are funds affiliated with BlackRock, Inc.,
meaning managed and/or maintained by a subsidiary of BlackRock, Inc.,
such as BlackRock Institutional Trust Company, N.A. or BlackRock
Advisors, LLC.
The complaint contends that several BlackRock
proprietary funds that would have been removed by a prudent and loyal
fiduciary remained in the plan during the class period (April 5, 2011,
through judgment in the case).
“Plan participants were subjected
to higher hidden fees through excessive fund layering, where one
BlackRock fund invests in a rabbit hole of other BlackRock funds. In
this layering scheme, each BlackRock fund charges additional fees to
employee investors and those unnecessary layers of fees cannibalize the
returns of the employee,” the complaint says. “In total, 21 of the
BlackRock Proprietary Funds offered to employees through the Plan funnel
the employees’ retirement assets into other BlackRock funds, which
charge additional fees (not reported in the expense ratio), thereby
eroding the participants’ returns.”
The lawsuit alleges that in
some cases, a single BlackRock fund is funneled into as many as an
additional 27 BlackRock proprietary funds, and the majority of the
BlackRock proprietary funds in the plan performed worse than their
respective benchmarks and other comparable non-proprietary funds with
similar investment strategies.
The fees charged by the BlackRock
Proprietary Funds in the Plan (most of which were hidden in excessive
fund layering) were higher than the fees charged by comparative funds
with like assets and similar investment strategies. “The Fiduciary
Defendants failed to remove and replace the BlackRock Proprietary Funds
despite the fact that the continued investment of Plan assets in such
funds constituted violations of ERISA’s duties of prudence, loyalty and
constituted self-dealing and prohibited transactions,” the complaint
says.
NEXT: TDFs comparison with Vanguard and the TSP
The suit particularly called out the BlackRock LifePath target-date
funds (TDFs), saying “the $509 million in retirement assets that
employees and participants invested in BlackRock’s LifePath Funds were
imprudent and disloyal investments because each of the BlackRock
LifePath Funds invests in 27 other BlackRock Funds, creating excessive
fee layering that cannibalizes the employees’ investment returns.”
The
complaint also says the BlackRock LifePath Funds in the plan
underperformed relative to target-date benchmarks and alternative TDFs
with comparable investment strategies. On average, between December 31,
2010, and December 31, 2015, the nine TDFs underperformed the Dow Jones
Target Date Index counterparts by approximately 2,000 basis points
(bps). Based on the $509 million the Plan invested in the BlackRock
LifePath Funds, employees lost tens of millions of dollars in retirement
assets due to the excessive fund layering of the BlackRock LifePath
Funds, leading to excessive fees, the lawsuit contends. It also says, by
participating in the M class, rather than in cheaper classes of the
same fund, the plan incurred expenses over 10 times more than other
available share classes, which offer the exact same investment for lower
fees.
As with other ERISA self-dealing lawsuits, the BlackRock suit compared its proprietary funds with Vanguard funds.
According to the complaint, Vanguard manages the Vanguard Target
Retirement Income Trust I target-date funds, which are comparable in
investment strategy to the BlackRock LifePath funds. It says the
LifePath funds underperformed the Vanguard Target Date funds by
approximately 8.5% on average for the period between December, 31 2010,
and December 31, 2015 (after taking into account the compounding of
returns realized every year). The Vanguard TDFs do not have extensive
expense layering like the LifePath funds, the complaint notes.
The
complaint also compares the BlackRock TDFs to the firm’s management of
funds in the federal Thrift Savings Plan (TSP) for government employees,
BlackRock was hired to manage the assets underlying the TSP funds;
namely the C, F, G, I and S funds and applied many of the same
strategies in those funds as it did for the funds underlying the
LifePath funds. “The TSP funds are therefore a helpful benchmark against
which to compare the performance and structure of LifePath funds
available to Plan participants,” the complaint contends.
The TSP
and LifePath funds that were indexed to the exact same underlying assets
and managed by the same company should have performed almost exactly
the same. However, in reality, the LifePath funds underperformed the TSP
funds by 5.6% on average. Investment documents provided by TSP indicate
that BlackRock invests the C, F, G, I and S funds in separate accounts
which directly purchase the securities making up the indices, thereby
avoiding the excessive fund layering utilized by the BlackRock LifePath
Funds.
In addition, the complaint says, by designating the
LifePath funds as the default for participants, the Investment Committee
enabled all trusts layered within the LifePath funds sponsored by
BlackRock Institutional Trust Company, N.A. to report large
institutional participation and growing assets under management. The
plan’s investment in trusts with excessive fee layering has dramatically
increased.
The lawsuit contends that by acting to benefit
themselves and contrary to their fiduciary duty, the plan fiduciaries
caused the plan, and hence participants, to suffer losses through
excessive fees and underperformance of more than $60 million.
The
plaintiff seeks relief including disgorgement of all investment
advisory fees paid to BlackRock and/or its subsidiaries from plan
assets, as well as the losses caused to their retirement accounts from
the many fiduciary breaches and prohibited transactions