403(b) plans have historically been the default choice for nonprofits as they may be easier to administer than 401(k) plans, but they’re not without their downsides. Recent lawsuits against 403(b) plans are taking aim at excessively high fees for investments, recordkeeping, and administrative services. These types of participant raised suits are surfacing and plan sponsors could be held liable for damages. If you’re a 403(b) plan sponsor, you need to be fully aware of your fiduciary responsibilities, understand possible ramifications, and know how to be prepared if you get hit with a lawsuit yourself.
403(b) Plan Lawsuits
The laws governing employee benefits, or Employee Retirement Income Security Act (ERISA), have grown more complex over the years, and litigation is on the rise. The latest salvo was fired back in August, with the start of a wave of lawsuits against higher education 403(b) plans where participants have alleged that poor oversight of plan investments has resulted in exorbitant fees taken out of their retirement accounts. Not all of these cases have gone to trial, but there have been some huge settlements: just last year, Novant Health settled a suit involving their hospital’s nonprofit 403(b) plan for $32 million.
403(b) plans have traditionally been known for their high costs. As seen in the chart on the right, a recent study by Aon Hewitt shows approximately 43% is held in fixed annuities (which charge 1.15% per year on average), 33% is held in variable annuities (which charge 2.25% per year on average), and 24% is held in in mutual funds (which charge .97% per year on average). These charges add up: even a 1% increase in fees can amount to a substantial difference over time.
Fiduciary Process is Key
There’s nothing you can do to avoid being sued; however, you can be prepared. ERISA is meant to ensure that employers follow a consistent, prudent process: if you document your process thoroughly and in detail, you may have the opportunity to circumvent costly mistakes. Here are a few basic actions you can take as a plan sponsor to help your company’s retirement plan comply more readily with ERISA guidelines:
1. Document everything
2. Assemble and formalize a retirement plan committee
3. Draft and review an Investment Policy Statement (IPS)
4. Conduct annual benchmark reports
5. Conduct periodic RFPs
6. Delegate fiduciary responsibility
It bears repeating: document everything. Once you’ve established a solid documentation process, you need to identify your plan fiduciaries. Many organizations assign this role to their retirement plan committee; its members are thus legally obliged to act in the best interests of participants, as defined by ERISA regulations, and all should be aware of their roles and duties as fiduciaries.
Additionally, the committee should create and follow an established document, or set of documents, that describes the details of the plan as stated in the Investment Policy Statement (IPS). The IPS should describe the available investment choices for plan participants as well as specify the criteria for when an investment should be placed on the watch list or remove list. Additionally, the IPS should outline the set standards an investment must uphold to be considered an acceptable option.
Plan sponsors also have an obligation to make fees known and reasonable. Performing an annual benchmark report displays prudent oversight. It is also recommended to periodically conduct RFPs for your plan service providers in order to keep fees competitive.
While you can’t delegate away all your fiduciary responsibilities, you can reduce your liability exposure. Plan sponsors may consider teaming with a 3(21) co-fiduciary or 3(38) investment manager to assist them in selecting, monitoring, and replacing investment options available to participants under the plan.
Developing a consistent process that aims to monitor your investments and assess fees associated with the plan are keys to fulfilling your fiduciary responsibly. Regularly benchmarking your plan will help to manage plan costs, but can be a daunting task without the help of a third party.
At Investment Solutions Group, we have been investment fiduciary advisors for over 20 years, we are well-versed with compliance regulations and advanced plan design for both 403(b) and 401(k) retirement plans. If it has been over 4 months since your plan was thoroughly benchmarked, there may be opportunities to reduce your plan fees.
Feel free to contact us to learn more about complimentary benchmarking.
Securities and advisory services offered through LPL Financial, a registered investment adviser. Member FINRA / SIPC.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. This material was prepared for Jerome Pfeffer’s use.
 Belfiglio, Jeff. “Excessive Fee Litigation Hits 403(b) Plans: What Nonprofit Fiduciaries Need to Know.“ Davis Wright Tremaine LLP. Aug. 2016.
 Aon Hewitt. “How 403(b) Plans are Wasting Nearly $10 Billion Annually, and What Can Be Done to Fix It.” Jan. 2016