ERISA 403(b) Litigation Informs Plan Governance Practices

403(b) plan sponsors need help understanding their fiduciary duties, reviewing plan investment lineups and benchmarking fees.

In the past three years, 403(b) plan sponsors have been subjected to the same Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuits that 401(k) plans have been fighting.

“The biggest lesson plan sponsors should take is that this is still a live area, and the claims have some sticking power. If a university hasn’t been sued, it should consider itself in the crosshairs,” says Patrick Menasco, partner at Goodwin Procter, Minneapolis.

He adds that well-known ERISA litigation attorney Jerome Schlichter filed the opening salvo in August 2016; another eight were filed in 2018. The lawsuits include the same core claims—expensive underperforming funds, expensive recordkeeping fees, revenue sharing—and many include assorted one-off issues, such as improper participant loan practices.

According to Menasco, some claims have survived motions to dismiss, seven have settled or are awaiting settlement approval, and nine are in the appeals process. “These cases do have some staying power. We would expect Schlichter and others to continue to look for other targets,” he says.

Anne Tyler Hall, principal and attorney at Hall Benefits Law in Atlanta, agrees that it’s likely more lawsuits will be filed. Although often when ERISA cases are settled, and with no court decision, there is nothing instructive for plan sponsors, she says the litany of non-monetary requirements in the 403(b) lawsuit settlements are instructive.

Awareness and documentation

For example, in the case against Johns Hopkins University, among other things, the settlement agreement required it to for three years, within 30 days after the end of each year, provide plaintiffs’ counsel a list of the plan’s investment options, fees charged by those investments, and a copy of the investment policy statement (if any). If the plan’s fiduciaries have not done so, within 90 days of the settlement’s effective date, the plan’s fiduciaries shall retain an independent consultant to assist the fiduciaries in reviewing the plan’s existing investment structure.

With the assistance of the independent consultant, the plan’s fiduciaries (or a delegate thereof) shall issue requests for proposals for recordkeeping and administrative services. The requests for proposal shall request that any proposal provided by a service provider for basic recordkeeping services to the plan include an agreement that the service provider will not solicit current plan participants for the purpose of cross-selling proprietary non-plan products and services. After conducting the request for proposal for recordkeeping services, the independent consultant shall provide a recommendation to the plan’s fiduciaries regarding whether the plan should use a single recordkeeper or more than one recordkeeper. To the extent the plan’s fiduciaries decide not to follow a recommendation, the plan’s fiduciaries shall document the reasons for that decision and provide those reasons in writing to plaintiffs’ counsel along with the consultant’s written report(s), if any, or other documentation reflecting the consultant’s recommendation and basis for such recommendation.

Within 30 days of selecting the recordkeeper(s), the plan’s fiduciaries shall provide to plaintiffs’ counsel the final bid amounts that were submitted in response to the request for proposals and shall identify the selected recordkeeper(s), which shall be accompanied by the final agreed upon contract(s).

While Hall says this seems embarrassing—“It’s like elementary school students having to get step-by-step instructions from a teacher and check in”—she still says it is instructive for plan sponsors.

Menasco suggests 403(b) plan sponsors audit their investment options for underperformance and expenses, benchmark their service provider relationships for fees relative to peers, and look at the structure of their investment menu. “The worst place to be is to have expensive investments that don’t over perform and have no record of what they were compared to and why they were selected,” he says.

Ongoing legal help   

“We at Hall Benefits Law talk a lot about being proactive—understanding fiduciary duties and what ERISA says,” Hall says. “It’s broad. It talks about any involvement in plan assets and administration, and plan sponsors need to understand what the responsibilities are under that. It’s not just a 403(b) plan problem, its’ a retirement plan industry problem.”

She cites research from AllianceBernstein in which it questioned fiduciaries across a broad range of asset levels, and found all survey respondents had some involvement with their retirement plan, but half said they are not a fiduciary. As they were asked more specific questions, it became clear they didn’t understand what their responsibilities were.

“The fact that 403(b) plan litigation has soared in the past three years is symptomatic of fiduciary non-awareness in the industry. Plan sponsors should make sure they have a fiduciary legal compliance paradigm, specifically those that have had rapid growth over the last decade. This increases visibility; with more participants, there is more exposure to lawsuits,” Hall says.

In none of the cases in the AllianceBernstein research did she read that the respondents have an ERISA attorney. “Keeping an attorney on retainer would help them realize their fiduciary status, get training on fiduciary duties and set up a compliance paradigm,” she adds.

Menasco points to the one case that went to trial, Sacerdote v. New York University, and the scolding remarks in the decision made against the retirement plan committee. “You don’t want to appear ignorant of the basic responsibilities you have by being on the committee,” he says. He suggests annual ERISA training; the first time can be in-person and it can be videoed to use later.

It may be harder for smaller plans to afford regular audit and training, but with technology it is becoming more affordable to do something, Menasco says, noting that firms like his have training shelfs that can be automated.

‘It’s always been like that’ is no excuse

In some of the cases against 403(b) plan sponsors there have been friend of the court briefs asking judges to consider the history of 403(b) plans—the traditional model of allowing participants to choose providers with which to work and having mostly individual annuity contracts in the plan.

“The standard of what is reasonable is often suggested by market practice. If plan sponsor are told this is the way it is done, it is hard for them to say it is unreasonable,” Menasco says. “The plaintiffs’ bar would discount history. At the end of the day, it is not good enough under ERISA to get lucky, so simply following what others are doing is not good enough. Plan sponsors have to show a prudent process and regularly review their options.”

Hall concedes that the history of 403(b) plan administration poses unique challenges for the plans. “But, this doesn’t negate that there is an investment lineup in these plans that has purportedly consisted of investment options with fees far in excess of the market,” she says. “I believe some plan sponsors have settled because there was something found in discovery that was compelling that they decided not to fight.”