Some advisors have assumed that most 403(b) plans offer them opportunities to capture retirement plan clients who may not fall under the U.S. Department of Labor’s sweeping new fiduciary regulations -- but a recent spate of lawsuits may challenge that assumption.

In August, ERISA class action lawsuits were filed against universities alleging that they had not met their fiduciary responsibilities to employees enrolled in 403(b) plans.

“It’s a little complicated,” says Robin Schachter, a partner in the Los Angeles office of Akin Gump Strauss Haure & Feld. “These plans may or may not fall under the DOL’s rulemaking. In some respects, these plans may be low-hanging fruit for advisors and for litigators because they were not previously ERISA plans.”

Regardless of the threat of additional regulation, 403(b) plans will be a growing area of the retirement market moving forward, according to a recent report by Boston-based analytics firm Cerulli Associates

403(b) plans serving government and not-for-profit employees are expected to grow by 7 percent annually over the next five years, said Cerulli, while the market for other corporate and public defined-benefit plans will stagnate or shrink.

Cerulli explains the growth of 403(b) plans by pointing out that not-for-profit and government employees tend to be longer tenured and thus carry larger account balances.

Most 403(b) plans are “non-ERISA plans,” meaning they have not been bound by the existing major fiduciary regulations regarding retirement plans, yet it isn’t clear that any 403(b) would be free from the DOL’s rulemaking.

“Historically, a lot of these plans were only employee salary deferrals, they were deemed to be voluntary plans,” Schachter says. “Employers had only a very limited involvement, and theoretically any provider could come onto a school campus or into a non-profit organization and offer these services.”

In most cases, 403(b)s resembled or were in fact individual annuity contracts with no written plan document, but that changed in 2009 with an IRS regulation that required employers to draft plan documents and establish certain rules regarding the plans -- like those governing loans from the 403(b).

“There was increasing employer involvement in these plans,” Schachter says. “As time has gone by,  simply maintaining a 403(b) has required a lot more decision making on the part of the employer.”

Until now, governmental plans, school plans and non-electing church plans have been exempt from ERISA regulations. In recent guidance, however, the DOL has indicated that 403(b)s could only be exempted from ERISA and other retirement regulations if there were no employer contributions, if the employer had little-to-no involvement in the plan, and if participation was voluntary for employees.

Assets from existing non-ERISA 403(b) plans will also be subject to the DOL’s fiduciary rule if they are rolled over into an IRA.

The four universities named in the most recent class actions, Duke University, Johns Hopkins University, the University of Pennsylvania and Vanderbilt University, along with their plan fiduciaries, allegedly did not act in their participants’ best interest when selecting investment options for their plans.

“Often times these suits get settled because they become quite large and expensive, but there have been a few that have gone to a decision,” Schachter says. “If these institutions can demonstrate that they’ve been monitoring the plans and acting prudently, they’re likely to prevail, but in time a very active plaintiff’s bar is going to influence the market and the design of these plans.”

Under ERISA, plan sponsors are required to act in the best interest of plan participants and are held to standards of prudence and loyalty.

Sponsors and fiduciaries to 403(b) plans are still bound by many non-ERISA regulatory regimes, particularly common law regarding trusts, which also states that financial trustees of any kind have fiduciary responsibilities, including duties of prudence, loyalty and impartiality, expectations that they will keep trust property segregated and identified, and keep records and provide reports for beneficiaries.

“Historically, the plan provider may or may not be a fiduciary because they may or may not be making the decisions within the plan,” Schachter says. “With the new DOL rulemaking, it becomes a more complex analysis. It’s going to depend on products within the plans and revenue-sharing arrangements. In certain instances, there may be a higher fee or a revenue-sharing trail that’s used to offset the employer’s administrative expenses. That would potentially create a conflict of interest between the employer and the plan provider, which could expose them to litigation.”

The three lawsuits filed in August allege that plan sponsors and their fiduciaries ensure that fees were reasonable, failed to seek out less expensive administrative services for the 403(b) plan by not seeking competitive bids, breached their duty of loyalty by hiring a third-party provider with some relationship to the sponsor or plan fiduciaries, failed to ensure that only prudent investment options were offered, failed to monitor investment options to remove those that regularly underperformed and charged excessive expenses as compared to similar options available in the marketplace.

Schachter says that universities should review their 403(b) plans to ensure that fee and investment decisions are made in participants’ best interest, and to verify that the process for making those decisions is documented.

“Because many of these changes are so recent, there are probably a lot of institutions out there sponsoring 403(b) plans that haven’t focused on monitoring the investment choices they’ve offered,” Schachter says. “They’ve figured that what they’ve had before has worked up to this point, and they want to continue to maintain that.”

Duke, Vanderbilt, Penn and Johns Hopkins  joined a growing list of universities targeted by class actions that now includes Yale, MIT, NYU, Cornell, Columbia, Northwestern and the University of Southern California.

All of the class actions were filed by St. Louis-based Schlichter, Bogard and Denton, the firm responsible for bringing Tibble vs. Edison International before the U.S. Supreme Court, a case that ruled that 401(k) fiduciaries are responsible for regularly removing “imprudent” investments from their plans.

All of the recent lawsuits have similar complaints. For example, the complaint against USC alleges that the school uses an excessive amount of record keepers, three, who charge excessive fees to participants, and that the plans include dmultiple high-priced investment options. The complaint was filed subsequent to USC’s recent 403(b) revisions to eliminate one of the plan’s record keepers, reduce investment options from 340 to 34 and remove certain fixed and variable annuity options while freezing contributions to others

Schachter said that the complaint’s accusation of too many confusing investment choices is new to ERISA lawsuits, but an argument could be made that sponsors shouldn’t ask 403(b) participants to research selections from a basket of 100 or more potential investment choices.

“They’re also basically attacking the use of active management within these plans,” adds Schachter. “They’re arguing that there are too many actively managed investment alternatives with higher fees, when the sponsor could use an index fund that carries lower fees. Never mind that they’re substantially different investment options.”

In the long run, Schachter says that the DOL rule and ERISA itself may end up applying to 403(b)s anyway due to the threat of further class actions against sponsors and plan fiduciaries.