A Closer Look at a Recent 403(b) Lawsuit and Settlement Terms

In looking at some of the larger 403(b) plans lately, you may be asking yourself “What’s up with all of these lawsuits?”?It seems like every month a new lawsuit is filed or settled and a lot of the time it involves a large university or healthcare system.?The litigious environment around 403(b) plans really started picking up a few years ago, when multiple universities and colleges were named in class action lawsuits.?It has taken some time to work its way through the courts, but we’re finally seeing enough of these lawsuits concluded to see a pattern in outcomes.?The outcomes have been very interesting to say the least, but in my opinion, it’s giving the nonprofit community a great guide on how they should be operating their 403(b) plans.?

Before we talk about the most recent settlement, it would be helpful to discuss why 403(b) plans have seemed so vulnerable to lawsuits over the past few years. ?These plans were initially established in 1958 and at first were very simple to run and allowed only for annuity investments. It wasn’t until 1974 when investment in mutual funds became a new option.?This was also the same year that ERISA was enacted.?After 1974, there was no major regulation passed for 403(b) plans until the IRS published new regulations in July of 2007.?This major regulation overhaul took effect January 2009 and had massive implications for 403(b) plans.?Before this regulation overhaul, many plan sponsors were used to operating their 403(b) plans with minimal oversight.?It was almost like a “set it and forget it” mentality when it came to the operation of their plans.?Some took the stance that they’ve been with their provider for decades and no one complained so why change anything.?Others took the stance of allowing multiple providers to be a part of their plan, with the intent to offer their employees many choices and just let them decide who they want to work with. While I don’t believe plan sponsors had nefarious intentions by taking these approaches, it did contribute to a minimal involvement and oversight environment, and effectively left them open to lawsuits in the future.?

A few years passed after the IRS regulation overhaul took effect in 2009 before we started seeing class action lawsuits against 403(b) plan sponsors.?But once the first was named, many more followed shortly thereafter. As I mentioned in the beginning, we’ve seen enough of these lawsuits settle to see a pattern in the outcomes.?One recent example we can inspect involves Washington University, which was initially filed in 2017.?The claims in this lawsuit were like other lawsuits faced by universities and colleges across the country.?They claimed that there was no prudent process in place by the plan sponsor to monitor investments within the plan or to monitor the recordkeepers.?Much of this relates to the fees being paid by plan participants for both the investments being offered and the fees being charged by the recordkeepers.?This lawsuit also had a second complaint added later, alleging that plan officials “utterly abdicated their fiduciary duties to act prudently and loyally by turning the plan over” to their two recordkeepers.???In other words, they are alleging that the plan sponsor took a “hands off” approach to the operation of the plan.?After 5 years of arguing their cases in court, a settlement agreement has taken place where Washington University admits no fault but agrees to take certain steps to remedy the complaints in the lawsuit.

1.?????Washington University agreed to a monetary settlement and will pay $7.5M.?A large part of this will go to paying attorney fees and the rest will be dispersed amongst the class members of the lawsuit.

2.????One of the terms of the settlement requires the university to provide annual fiduciary training to all members of the Retirement Plan Advisory Committee (RPAC).?As part of the annual training, each member of the committee will also acknowledge in writing that they are serving in a fiduciary capacity and understand their obligations as a fiduciary.?

3.????The agreement also requires the RPAC to review their investment policy statement at least annually, with input from the plan’s investment consultant, and to monitor the plan’s investment expenses and recordkeeping fees.

For a large university this doesn’t seem like a grandiose sum of money to pay, but it’s still $7.5M out of the university’s budget, and not to mention that time of arguing against the lawsuit for the past 5 years.?The annual fiduciary training and acknowledgment of the role of fiduciary should be a best practice for all retirement plans.?That’s something that can be easily done and should be documented by the RPAC at least once a year.?Reviewing the investment policy statement and monitoring all plan fees should also be a best practice and can be done efficiently with the help of a retirement plan advisor or consultant.?One way I would suggest monitoring fees is to have your plan advisor or consultant regularly benchmark your plan.?As a hat tip to my recently passed colleague and friend Jeff Hemker, he always said there are three things can happen when you benchmark your plan and they’re all good.

1.?????You discover your fees are already reasonable, you document the benchmark, and there’s no need to change providers.

2.????You discover your fees are significantly high versus the average of similar plans and you bring this information to your current recordkeeper.?They then agree to lower your fees to get more in line with the average.?No need to change providers.

3.????You discover your fees are significantly high versus the average of similar plans and you bring this information to your current recordkeeper.?They refuse to lower their fees to be in line with the average, so you do an RFP for a new recordkeeper.?You find a recordkeeper that will give you equal or better service for lower fees and you make the change.?The plan is then better for you and your participants.

This settlement with Washington University is remarkably similar to the settlements of other recent 403(b) lawsuits.?These are now very common terms and precedent has been set not only with this case, but with several others preceding it including the Supreme Court case earlier this year of Hughes vs Northwestern University.?I cannot emphasize enough though that plan sponsors can easily avoid these situations as the settlement terms can be viewed as a guide for best practices in fulfilling your role as a plan fiduciary.?If you currently don’t have a prudent process in place for monitoring investments and fees, you can easily implement one by hiring an independent advisor or consultant.?This person can also likely set up fiduciary training for your committee and bring you other best practices from plans just like yours.?We at SRP have done this countless times for our clients, and have partnered with them to create their own prudent processes for operating their plan.?It’s all about have a prudent process in place and documenting it because if you don’t document it, the DOL and IRS can easily tell you it didn’t happen.?As always, thanks for your time and attention to my newsletter!?I hope you’ve found this week’s topic helpful!

About Strategic Retirement Partners?

Strategic Retirement Partners is a nationwide independent retirement plan consulting services firm dedicated to providing guidance in decision-making and problem solving to employers and sponsors of retirement plans. With 23 offices from coast to coast, Strategic Retirement Partners currently consults on over 975 corporate and non-profit plans and over $16.8 billion in assets as of January 1, 2022.?

Securities offered through LPL Financial, Member FINRA/SIPC. For hyperlinks to FINRA and SIPC, please refer to ‘See Contact Info’ section in my Linked In profile. Investment advisory services are offered through Global Retirement Partners, an SEC Registered Investment Advisor. Global Retirement Partners and Strategic Retirement Partners (SRP) are separate entities from LPL Financial.