Held by schools and other tax-exempt organizations, 403(b)s used to be highly dissimilar to 401(k)s — with fewer rules and requirements. And by far, the majority of high-profile excessive-fee lawsuits have targeted 401(k)s. But a recent suit against Northeastern University’s 403(b) is a strong reminder that all retirement accounts mandated under ERISA to keep fees reasonable are at risk.
Excessive Investment and Recordkeeping Fees
The lawsuit against Northeastern University alleges that investment management and recordkeeping fees charged by Fidelity Investments and TIAA resulted in participants losing an unacceptable amount of savings. In addition, the plaintiffs allege that plan fiduciaries didn’t uphold their duty by timely replacing investment options with comparable funds that had lower fees.
According to the suit, more than 10% of the plan’s assets were placed into a consistently underperforming CREF Stock Account, and a significant portion was allocated toward a TIAA Real Estate Account with fees up to one-third higher than those of comparable funds.
The 403(b) Frontier
Until fairly recently, 403(b)s were almost considered to be the wild west of retirement plans. In fact, 403(b)s weren’t even required to provide a written plan document until 2009. But over the last several decades, the two types of plans have become increasingly similar, with 403(b)s subjected to many requirements that 401(k)s have had for some time. For example, the IRS recently proposed changes around 403(b) required minimum distribution (RMD) rules. Currently, 403(b) RMDs operate like those of IRAs. But the proposed rule would more closely follow the rules in place for 401(k)s. If the rule goes into effect, RMDs will have to be taken from each 403(b) contract, and participants will no longer have the ability to request their total RMD amount from one 403(b) account.
Size Matters
Northeastern’s plan held about $1.3 billion in assets under management during the period covered by the suit. With a plan of that size, it’s clear why large educational institutions might be targeted by litigators. And the fact that 403(b) requirements have changed, and are continuing to change, means advisors should stay up to date on 403(b) governance and keep the standard of prudence in mind when managing these plans.
Benchmark Better
Live bid benchmarks provide in-depth and highly detailed information, but the time and resources required can make them impractical for issues that come up between the typical three-to-five-year interval. Busy advisors need more options to provide clients the information they need quickly.
PlanFees offers three innovative benchmarking solutions. In just two minutes, Prism Total Fees Benchmarking allows you to generate a report that compares your plan’s administrative, recordkeeping, investment and advisory fees to average costs for similar plans. If your client or prospect needs more detailed information about advisory fees, Prism365 analyzes 15 core advisory services across five key performance areas to determine whether advisor fees are low, average or high. And our latest offering, RFP Express, provides real price quotes from top providers within 24 hours.
Today’s 403(b)s are no longer the wild west of retirement plans — with increased governance and regulatory requirements, there’s a new sheriff in town. To help reduce the risk of excessive fee lawsuits, benchmark regularly. PlanFees assists 401(k) and 403(b) advisors in maintaining reasonable fees by providing them with fast and accurate benchmarking tools.
Benchmark better with PlanFees.
Sources:
https://www.plansponsor.com/fresh-excessive-fee-erisa-complaint-lodged-403b-plan
https://www.irs.gov/retirement-plans/written-plan-document-requirement-for-403b-plans
https://smartasset.com/retirement/the-irs-is-changing-your-403b-plan-heres-what-you-need-to-know
https://www.plansponsor.com/proposed-rmd-rules-403bs-mean-big-changes
