Compliance June 1, 2021

U.S. Asks Supreme Court to Weigh In on Excessive Fee Claims

U.S. attorneys argue the Court of Appeals’ decision in a case against Northwestern University is incorrect and conflicts with decisions made by the 3rd and 8th Circuits in similar cases.

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U.S. attorneys have asked the Supreme Court to grant a petition for a writ of certiorari requested by participants of two Northwestern University 403(b) retirement plans suing the school over excessive recordkeeping and investment fees. A writ of certiorari is a request that the Supreme Court order a lower court to send up the record of the case for review.

The question before the high court is whether participants in a defined contribution (DC) Employee Retirement Income Security Act (ERISA) plan stated a plausible claim for relief against plan fiduciaries for breach of the duty of prudence by alleging that the fiduciaries caused the participants to pay investment management or administrative fees higher than those available for other materially identical investment products or services.

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Last year, the 7th U.S. Circuit Court of Appeals affirmed a lower court’s decision granting Northwestern’s motion to dismiss the case.

The Circuit Court rejected the plaintiffs’ claims of excessive investment management fees, saying that the plan offered low-cost index funds, and any participant could avoid what the plaintiffs consider to be the problems with the plan’s retail mutual funds by choosing other options. The 7th Circuit also rejected the plaintiffs’ claims of excessive recordkeeping fees, saying that ERISA does not mandate that plan sponsors use a single recordkeeper, and ERISA does not say revenue sharing is imprudent. It also reasoned that continuing to use TIAA as a recordkeeper, in addition to Fidelity, could have been a prudent decision because it allowed the plan to continue to offer the TIAA Traditional Annuity, which was a popular option among participants.

But the U.S. attorneys say the plaintiffs state at least two plausible claims for breach of ERISA’s duty of prudence. They argue the Court of Appeals’ decision is incorrect and conflicts with decisions made by the 3rd and 8th Circuits in similar cases.

Specifically, the attorneys note that the plaintiffs allege that respondents selected retail class investment funds for inclusion in the plans even though identical institutional class investment funds with lower management fees were available to the plans based on their size. The attorneys make it clear that fiduciaries should not consider costs alone when establishing an investment menu for plan participants but should consider all relevant factors. However, they note that in this case, the petitioners have stated a claim for relief by alleging that respondents selected certain investment options instead of alternatives offered by the same investment providers that differed only in their lower costs.

“If petitioners prove their allegations that respondents had the opportunity to offer those identical lower-cost institutional-class investments for the plans, then there is no apparent justification for respondents’ failure to do so,” the attorneys state in their brief.

The attorneys also point out that under the law of trusts, which informs ERISA’s fiduciary standards, “fiduciaries are not excused from their obligations not to offer imprudent investments with unreasonably high fees on the ground that they offered other prudent investments.” They reminded the high court that it previously concluded in Tibble v. Edison International that “under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones.”

Regarding the plaintiffs’ claims of excessive recordkeeping costs, the attorneys note that the 7th Circuit was correct in its conclusion that ERISA does not mandate that plan sponsors use a single recordkeeper or avoid revenue sharing. However, they say that these conclusions do not address what the plaintiffs are arguing; the plaintiffs argue that the plan fiduciaries failed to monitor the plans’ recordkeeping costs and employ strategies used by similar plans’ fiduciaries to reduce those costs.

The attorneys add that the plan sponsor’s desire to preserve one particular investment option, the TIAA Traditional Annuity, in the plans would not justify its alleged failure to consider whether the recordkeeping costs were reasonable, “such as by soliciting competitive bids and comparing the potential advantages of a switch against the disadvantages from eliminating the Traditional Annuity.”

The attorneys also say the university’s defense doesn’t explain why it did not negotiate with TIAA for lower recordkeeping fees, as the plaintiffs allege comparable plans’ fiduciaries had done.

Finally, the attorneys note that the 7th Circuit stated that “plan participants had options to keep the expense ratios (and, therefore, recordkeeping expenses) low.” But they reiterate that plan fiduciaries cannot avoid liability for offering imprudent investments with unreasonably high fees by also offering prudent investments with reasonable fees. “ERISA fiduciaries may not shift onto plan participants the burden of identifying and rejecting investments with imprudent fees,” their brief says.

The Markets June 1, 2021

529 Awareness Is Low—And Stagnant

Despite a lack of knowledge about the accounts, experts say the potential for growth in these products is high.

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There are 15.1 million 529 college savings accounts with $438 billion in assets, according to March 2021 data from Institutional Shareholder Services (ISS)’s Market Intelligence division. However, according to the findings of a survey of 2,200 adults by Edward Jones and Morning Consult, those figures could be a great deal higher if Americans were better versed on 529 plans.

Only 36% of Americans can correctly recognize a 529 plan as an education savings tool, according to the survey, the 10th annual iteration of the study. Perhaps even more surprising is that this figure has remained virtually unchanged from the 37% of Americans who understood what a 529 plan is in the inaugural survey in 2012.

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Meanwhile, from 2012 to 2021, student loan debt ballooned by 70% to $1.7 trillion, according to estimates by the Federal Reserve, and, in the same period, the cost of attending a private college was up by 17% to $37,650 a year.

Only 20% of parents say they have saved or are planning to save for their children’s education in a 529 plan. Instead, 40% are using a personal savings account for this purpose, 23% are relying on scholarships and 22% are turning to federal or state financial aid.

Steve Rueschhoff, a principal at Edward Jones, says the continued lack of knowledge about 529 plans is surprising to him for a couple of reasons.

“When asked to name their top savings goals, parents say saving for education is in the top three, behind retirement and emergency savings, and the cost of higher education continues to rise, along with the level of student debt, so it is surprising that the general knowledge of 529s has stayed the same over the past 10 years,” Rueschhoff says. “We also know from the survey that consumers are willing to work with a financial adviser on saving for higher education for their children, as 25% say they would like help from one on setting up a 529.”

The Role of Financial Literacy

Rueschhoff says he and other experts at Edward Jones believe knowledge about 529 plans—as well as many other financial planning basics—could be advanced by addressing the issue of low financial literacy in this country. The firm is tackling this with its Financial Fitness curriculum program that it is offering, in partnership with Everfi, in high schools in Maryland, Massachusetts, Missouri and Colorado.

Edward Jones also celebrates “529 Day” on May 29 every year, Rueschhoff says.

“Between our annual survey on 529 plans and Financial Fitness, what we are doing helps get the word out,” he says. “Advisers should take confidence in Americans’ interest in help with college savings and ask their clients about their needs in this area. Even though awareness hasn’t grown in the past 10 years, it will go up, and advisers can play a critical role in helping people realize that saving for college is within reach.”

Rueschhoff adds that there is a lot of potential for 529 growth, pointing to the survey’s findings that 67% of Americans say they are not aware of the tax benefits of 529 plans, and 65% are not aware of their uses beyond higher education.

As to what retirement plan advisers can do to rectify this lack of knowledge, probably the most effective thing is holding webinars, small group meetings or one-on-one sessions where participants can ask questions, says Paula Smith, senior vice president, strategy and business development, defined contribution (DC) and college savings, at Voya Investment Management. “People wind up having a lot of questions about 529 plans, such as their tax benefits, when distributions can come out tax free and how they affect financial aid,” Smith says.

It is also important for advisers to note that money invested in 529 plans grows tax free if it is used for college or other educational purposes. The plans’ tax-free incentives have recently been expanded to include $10,000 a year for K-12 private education; $10,000 toward student loan debt, be it for the beneficiary or a sibling; and no limit on qualified costs for apprenticeships.

“529s are becoming more and more flexible,” Smith says. “While people may be saving for college in other vehicles, 529s are the best way because they grow tax-free and many states give a tax benefit. People need to understand these key benefits. People most often worry that if they save money in a 529 plan, they won’t be eligible for financial aid, but the truth is that 529s have minimal impact on financial aid. So 529s offer tax-free growth, flexibility, the ability to take tax-free withdrawals and to change the beneficiary. Or, if the child decides not to immediately attend college, perhaps they attend school later or opt for a trade school, the owner has control of the money, whereas a custodial account becomes the property of the child at maturity.”

Marianela Collado, CEO of Tobias Financial Advisors, adds: “You can make up to five years’ worth of annual exclusion gifts in one year. That adds up to $75,000 per person or $150,000 per couple.”

Reaching Multiple Generations

Smith also notes that advisers might be able to expand their client base and even to solidify existing relationships with clients who are parents if they make 529 plans part of their repertoire.

“529 plans can be an important part of an adviser’s practice,” Smith says. “They enable advisers to effectively reach multiple generations; parents and grandparents certainly want to talk about saving for college. It is a topic that is important to a large number of advisers’ clients. Plus, having a 529 college savings plan protects parents’ retirement savings and keeps them from taking out loans from their retirement accounts to fund their children’s education, or from saddling themselves or their children with student loan debt.”

She adds that advisers will need to be proactive about educating retirement plan participants about 529s, which are generally sold, not bought, meaning potential investors might need a nudge to use the plans.

Advisers can start by scheduling an in-depth webinar to educate people, she says. “They can also send out materials, because people always have a lot of questions about 529 plans,” she adds. Smith says she believes that if advisers hold an education and communications campaign, they will see the number of 529 plans being opened go up.

That said, Smith cautions advisers that adding 529 plans to their services takes time. “You don’t just put a program on the books today and watch it immediately grow. It takes a while for employees to warm up,” she says. Still, she believes that as more people become aware of the many benefits of 529 plans, the number of accounts and their assets will grow.

Advisers can also help employers realize that they can offer 529 plans to their employees at no cost to them. “This is a great benefit that an employer can offer at no cost, just add it to their financial wellness package to round it out, along with such benefits as health care HSAs [health savings accounts] and student loan debt assistance or education,” Smith says.

The Nasdaq Fund Network is also trying to advance 529 plans with retirement plan advisers and financial planners, says Devin McCarthy, managing director at Nasdaq on 529 plans.

“Just as the Nasdaq Fund Network provides transparency and discoverability for mutual funds, collective investment trusts [CITs], unit investment trusts and money market funds, we are doing the same for 529s by working with the issuer to register the CUSIP and publish that widely,” McCarthy says, referring to the nine-digit code that identifies all stocks and registered bonds and that is assigned by the Committee on Uniform Securities Identification Procedures (CUSIP).

“That provides enhanced transparency and discoverability among the adviser community and even among individuals for the funds. In fact, we have seen a lot of success [for 529 plans] in the past four, five months,” McCarthy continues. “Yes, awareness of 529 plans is very low—but that is one of the reasons why we see this space as an opportunity. From an asset perspective and accounts perspective, we are seeing 529 plans ramp up. Registering 529 plans’ CUSIPs makes it a searchable ticker symbol—and is just another variable for growth in this space.”

In fact, Voya has turned to the Nasdaq Fund Network to help market its Tomorrow’s Scholar 529 plan that it offers through the state of Wisconsin.

“The ability to access accurate and timely information is critical to create better awareness for any investment solution,” Smith says. “Through the Nasdaq Fund Network, our advisers and clients are benefited by enhanced transparency, as they can easily search and evaluate 529 plans to make more informed financial recommendations.”

Editor’s note: PLANADVISER magazine is owned by Institutional Shareholder Services (ISS).

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