Plan Litigation Never Sleeps!

As advisors, plan sponsors, and recordkeepers continue to analyze Secure 2.0 and it’s impact on tax-exempt retirement plans, we received a reminder that 403(b) plan litigation never sleeps.?Earlier this month, it was announced that a long-standing 403(b) lawsuit against the University of Southern California (USC) had reached a settlement.?As I’ve mentioned in my previous newsletters on these lawsuits and settlements, they are important to monitor because each new judgement or settlement sets a new precedent for the rest of the 403(b) marketplace (and sometimes the 401(k) marketplace as well).?Let’s dive into the details of USC’s recent settlement!

??????????????This particular lawsuit against USC was filed quite some time ago in August of 2016.?Think about the amount of time and legal fees that USC, as the plan sponsor, had to dedicate over this almost 7 year period.?This is not an opinion on the merits of the lawsuit and not meant to dismiss the participants claims, but is meant to shed light on how much time, money, and resources the plan sponsor expends to defend a lawsuit like this.?

??????????????Prior to March 2016 USC sponsored two retirement plans, which involved four separate recordkeepers and more than 340 investment options, of which all but 14 were proprietary investments.?In March of 2016, USC did eliminate one recordkeeper and made a number of changes to the investment line up including eliminating hundreds of mutual funds as well as some variable and fixed annuity options.?This was all done prior to lawsuit being officially filed in August of 2016.?So why did participants still file a lawsuit after USC made all of these changes??Because in the communications to the participants about these changes, the lawsuit claims that USC as the plan sponsor expressly acknowledged that the previous structure of multiple recordkeepers and hundreds of investment options caused the plan and it’s participant to pay unreasonable expenses.???Wow!

As I mentioned, it is very important to monitor these suits when they are settled or receive judgements because precedent is set for future lawsuits.?This settlement against USC had several terms that are worth analyzing.?

• There is a cash aspect to the settlement in the amount of $13,050,000.?After legal fees and expenses are deducted, the rest will be allocated to participant accounts.?The law firm that led this lawsuit on behalf of participants was Schlichter Bogard & Denton, which I’m sure many of you will recognize from litigating previous lawsuits.
• The settlement requires changes in the plan administration that will need to be made in a “settlement period” of three years from the effective date.?One big requirement relates to participant data and cross-selling by the recordkeepers.?Basically, USC is to only allow recordkeepers to provide education and retirement planning services and they CANNOT solicit plan participants for the purpose of cross-selling other products unless expressly requested by the plan participant.?I know some recordkeepers rely on the opportunity to cross-sell other products to help increase the revenue received on the plan.?I’m curious how a stipulation like this would impact certain recordkeepers’ plan pricing and overall service model.?
• Within 180 days of the settlement effective date, USC is required to conduct an RFP for recordkeeping and administrative service to be managed by an outside consultant.?At least three recordkeepers must be included in this RFP.?It also stipulates that the RFP require that plan pricing be quoted as a fixed fee on a per participant basis and CANNOT be based on a percentage of assets.?It’s very interesting to see how granular the settlement terms are becoming as this one states how an RFP must be issued.?Not allowing pricing to be quoted on a percentage basis is highly interesting and I’m curious if this will be the start of a big trend within the tax-exempt marketplace.?
• Lastly, the settlement requires that the plan fiduciaries receive ongoing training regarding their fiduciary duties under ERISA, and that they continue to work with an independent consultant.?

As I mentioned, these settlement terms are becoming more and more specific.?A lot of the terms are being taken from what is being seen in the 401(k) marketplace, especially related to pricing, investments, and the requirement to work with an independent consultant.?These are all trends that have started much earlier in the 401(k) world.?I can’t emphasize enough that plan sponsors need to monitor and follow these lawsuits as they become settled, or judgements are rendered.?These terms are guidelines for how plan sponsors should be running their own plans and is an opportunity to have an independent advisor or consultant analyze your plan and compare it to those that have had lawsuits filed against them.?It’s much easier to deal with any potential issues now than to battle them for almost 7 years like USC had to.?

Thanks for reading and I hope this information is helpful!?As always, feel free to reach out to me if I can ever be a resource to you!

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.