Retirement Plan Litigation Lessons
Over the last year, many colleges and universities have been the subject of lawsuits over the management of their 403(b) retirement plans. The complaints in the lawsuits have common threads and they identify patterns of high-risk practices. The courts have begun to weigh in on some of these issues, but their interpretations of the issues vary; the decision by a judge in one Federal District does not necessarily have any bearing on the decision of a judge in another. In fact, earlier this year, several complaints were partially dismissed by judges in two districts, but portions of the complaints that were dismissed were not consistent across jurisdictions. Regardless of what the courts say, Plan Sponsors are required by ERISA to act in the best interests of their participants. Without passing judgment on specific plans or plan sponsors, there are a number of observations and conclusions that can be made from looking at plans involved in lawsuits. In many cases, there are questionable structural issues with these plans, and it is easy to see why these plans have become targets.
In learning from these lawsuits, despite allegations and legal procedures, the question plan sponsors should ask is “Are these plans doing the right thing in upholding the best interests of the participants?” One significant structural issue with these 403(b) plans is the use of multiple Recordkeepers. Many plans have multiple record-keepers, making the plans targets of lawsuits. In the litigation, the use of multiple record-keepers has been allowed to move forward. The use of multiple Recordkeepers results in a number of negative consequences, also cited in the lawsuits:
Cost: Record-keepers have a variety of pricing models, including head-count, assets and cash flow coming into the plan. Using two, three or even four providers is highly unlikely to get the best pricing for participants in an industry where pricing is greatly impacted by economies of scale. By diluting these metrics across multiple platforms, costs may be higher.
Investments: The Courts have been mixed in their treatment of charges regarding offering too many investment options in a plan; however, in the litigation, the issue of selection and monitoring of investment options has been allowed to move forward. In reviewing the 403(b) plans under attack, several plans offer very similar funds that are available on more than one platform, at considerably different costs. This is particularly true for index funds. One plan examined has S&P 500 funds on three platforms, managed by three different companies, ranging in cost from 4 to 33 basis points.
In another instance, a plan had several share classes, of the same index fund, on the same platform. This shows a lack of basic understanding of investment selection. The use of multiple record-keepers adds to confusion for plan participants as it is very difficult to look at investment options across platforms and make informed investment decisions.
Loans: In one plan examined, loans are offered on two of three record-keeping platforms. While the statutory limitations are consistent across both platforms, the loan structure and fees vary widely. Based on information disclosed to participants, it is impossible to tell which option is the better deal. For example, one provider requires that 110% of the loan value be placed in a collateral account. The cost of the loan is based on the differential in interest rates between what is charged on the loan and what it is earning on the collateral, but no rate information is provided. The second provider charges a set-up fee and a quarterly administration fee. On a $5,000 loan, the administrative fee comes out to 1.2% per year. Is this a better deal? In a second plan with two record-keepers, loans are only available through one of them. In order to take out a loan, savings must be transferred to the more expensive provider.
Reporting and disclosure: When using multiple record-keepers, reporting and disclosure is inconsistent. Some reports are easier to understand than others, leading to confusion for the plan participants. It is entirely possible for participants to make decisions based on erroneous factors relating to the presentation of data, rather than its interpretation. In multiple cases, where plans use multiple record-keepers, one of the provider’s materials may overshadow the others in terms of presentation, volume or positioning on the Sponsor’s website. This can make retirement savings decisions a beauty contest for participants.
In conclusion, while other aspects of record-keepers’ platforms may vary, there is no sound explanation for the use of multiple record-keepers now that there are open architecture options. Using multiple record-keepers adds complexity and confusion that is not necessary, not to mention adding additonal cost.
Watch for future posts with updates on the ongoing litigation and addition analysis of key issues important to plan sponsors.
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