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.”