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.”