Lawsuits Target Higher Education: What Retirement Plan Sponsors Need to Know

Written on October 17, 2016

Retirement plan excessive fee litigation surrounding 403(b) plans was a hot topic in the employee benefit plan world this past week. Several universities that sponsor 403(b) plans were added to excessive fee litigation filed by the law firm of Schlichter, Bogard & Denton, bringing the number of universities having to defend their decisions for their retirement plans to eight. Though these lawsuits have been occurring for the past decade for 401(k) plans, these suits are the first of their kind in the 403(b) plan industry.

Some of the shortcomings of the plan sponsor’s duties based on the litigation include:

  1. Improper investment selections;
  2. Too many service providers;
  3. Too many investment choices; and
  4. Plan sponsors not using their plan size as a bargaining chip to reduce costs.

The recent uptick in litigation makes it clear that retirement plans in higher education will be under increased, unprecedented scrutiny. What can you do as the plan sponsor of a benefit plan, whether that plan is a 403(b) or a 401(k)?

Those charged with governance for an employee benefit plan have a fiduciary responsibility to act solely in the interest of participants and beneficiaries of the plan. Although there is no rule on the proper number of investment options that should be available for a plan, the plan sponsor is responsible for selecting and monitoring the investment alternatives that are made available under the plan. This responsibility also includes ensuring that the plan pays only reasonable administrative fees, which may be made up of fees relating to investments within the plan. Additionally, those charged with governance should understand how fees are paid and monitor those fees and expenses.

Is your head hurting yet? If you are considered one of the professionals charged with governance, how do you go about making sure your plan is making the best decisions?

An employee benefit plan should have an investment policy statement (IPS).  The IPS should outline the process in which plan investments are selected, monitored and terminated. Monitoring of plan investments would include benchmarking the fees associated with the investments and assessing the reasonableness of those fees. Once again, there is no rule on the benchmarking of fees; however, it is best practice to assess and review plan fees annually or at least every two years.

The Department of Labor (DOL) has noted that even a small increase in plan fees paid from plan assets can, over time, significantly eat away at the ultimate account balance. When assessing whether the fees are “reasonable,” consider that you’re ultimately answering to the DOL and the participants. One of the best ways to demonstrate that you’re a prudent fiduciary is to document. Having meeting minutes, copies of documents analyzed and other documentation can demonstrate how you’ve complied with these regulations and carried out your fiduciary duties. The DOL realizes the amount of complexity involved with being a plan fiduciary and has formulated well-documented responsibilities on its website as a resource.

Many plan sponsors have decided to hire an investment advisor to help those charged with governance. Dealing with investment selections, fee analysis, share class and continued monitoring has proven to be too much for some plan sponsors. Investment advisors can help those charged with governance.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com

Warren Averett is an independent member of the BDO Alliance USA. This article was borrowed with permission from BDO USA, LLP.

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