The recent slew of lawsuits against sponsors of 403(b) plans at some of the country's most distinguished universities raises questions as to whether or not the allegedly imprudent practices of plan sponsors are systemic among retirement plans in the not-for-profit sector.

Plans sponsored by the Massachusetts Institute of Technology, Yale, New York University, Duke University, Johns Hopkins, University of Pennsylvania, Vanderbilt, and Columbia University represent billions of retirement assets in the aggregate.

The claims make similar allegations. Participants lost tens of millions in retirement savings due to allegedly imprudent management on the part of the sponsor fiduciaries.

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High cost, low performing investment options, and unreasonably high recordkeeping fees resulting from the use of multiple service providers are evidence sponsors failed their fiduciary obligations under the Employee Retirement Income Security Act, allege plaintiffs in the suits.

The plans offered participants high numbers of options in investment menus, raising the question of how much choice is too much in defined contribution savings plans.

John's Hopkins and Duke each offered participants more than 400 investment options. MIT and Vanderbilt offered more than 300 options within recent years. NYU sponsored two plans, one with 103 investment options, another with 84. Yale offered 115 options, and Columbia more than 100 in each of its two plans.

Data from Callan Investments Institute cited in the claims shows defined contribution plans offered an average of 15 fund options, excluding target-date funds, in 2014.

 

Average number of investment offerings in 403(b) plans

New research from the Plan Sponsor Council of America shows sponsors of retirement plans in the higher education sector offer the most investment options relative to other non-profits.

PSCA's 2016 403(b) Plan Survey shows higher education sponsors offered, on average, 47 investment options.

By comparison, associations and foundations offered an average of 20; hospital systems offered an average of 25.

PSCA broke down data for 11 non-profit sectors, and four size segments by number of participants.

For plans among all sectors with more than 1,000 participants, which would include all of the universities in the recent lawsuits, about 12 percent offered more than 50 investment options. About 21 percent of plans offered 26 to 50 investments, and 21 percent offered 16 to 20 investments.

About 67 percent of large 403(b) plans offered less then 25 options, according to PSCA's report.

 

Consolidated recordkeepers

The claims against the universities also allege that the use of multiple record keepers drove plan costs higher and in turn deprived participants of return on their savings.

In not consolidating assets with one record keeper, sponsors limited participants' purchasing power, causing them to pay higher recordkeeping fees. Also, multiple record keepers contributed to duplicated investment offerings. In one case as many as five record keepers were used.

PSCA's most recent data on 403(b) plans shows the practice of using multiple record keepers is widespread among sponsors of plans within the higher education sector.

Only 12.6 percent of higher education plans use one record keeper, while 50 percent use more than six.

And nearly 22 percent of use between three and five record keepers; another 23.4 percent use two.

PSCA's 2016 study shows that among all non-profit sectors, 66 percent of 403(b) plans with 1,000 or more participants used one record keeper last year; 15 percent used two; 13 percent used three to five; and nearly 6 percent used six or more record keepers.

That the use of multiple record keepers is demonstrably higher in the higher education sector suggests sponsors and providers may be working off of assumed best practices within their industry peer group.

Hattie Greenan, director of research and communications at PSCA, told BenefitsPro that the trend among large sponsors in all non-profit industries is toward record keeper consolidation.

Last year's study showed that 57 percent of 403(b) plans with more than 1,000 participants used one record keeper. This year that number jumped to nearly 66 percent, noted Greenan.

 

The role of advisor specialists in 403(b) plans

The lawsuits do not say whether or not sponsors used outside plan advisors to design the allegedly imprudent plans, nor are advisors named as defendants in any of the lawsuits.

PSCA's data shows that 57 percent of all large 403(b) plans employed a plan advisor independent of the plans' record keepers.

When plan sponsors do use an advisor, more than 51 percent use a co-fiduciary to select investments.

Among higher education 403(b) sponsors, 67 percent said they have an investment policy statement in place.

About half of large 403(b) sponsors said they monitor their investment lineups quarterly, according to PSCA's report.

 

Columbia University

Two plans sponsored by Columbia University had a total of $4.6 billion in assets at the end of 2014.

Columbia offered two record keepers to participants in each plan, Vanguard and TIAA, at that time. Over 100 investment options were offered to participants in each plan, including proprietary annuities, mutual funds and target-date funds from TIAA, mutual funds and TDFs from Vanguard, and mutual funds from Calvert Trust Company, according to court documents.

In Jane Doe v. Columbia University and Vice President of Human Resources, Dianne Kenney, the first suit filed against Columbia (a second has been filed by a separate plaintiff, represented by a separate law firm), the suit alleges the imprudent management of the plans cost participants "hundreds of millions of dollars" in retirement savings.

Some of those losses resulted from the use of two record keepers. The complaint alleges that revenue-sharing payments to both TIAA and Vanguard grew as assets in the plans grew, causing the cost of recordkeeping "to exceed a reasonable fee for the services provided," according to the complaint.

But the complaint does not specify how much participants paid in recordkeeping fees. The alleged losses from using two record keepers "will be determined at trial after complete discovery," according to court documents.

Asked how it can be alleged that participants paid too much in recordkeeping fees when the exact fees are not known, Charles Field, a partner at Sanford Heisler LLP, and the lead attorney for an unnamed plaintiff in the first suit filed against Columbia, said, "The conventional wisdom among pension consultants is that multiple record keepers are inefficient."

 

Columbia's Form 5500 and SPD

In  2014, one of Columbia's plans, the Retirement Plan for Officers of Columbia University, which had about $2.8 billion in assets and had more than 27,000 participants, paid $191,830 in "professional fees," according to that year's Form 5500 filing, provided to BenefitsPro by Sanford Heisler LLP.

PriceWaterhouse Coopers was paid $73,650 as the plan's auditor. Two plan consultants were also listed. Hewitt Enniss Knupp, which is a part of Aon Hewitt Investment Consulting, was paid $85,252. And Towers Watson was paid $32,928.

Whether or not Aon Hewitt or Towers Watson offered fiduciary investment advice is not clear from the Form 5500 filing. A representative from Aon Hewitt said the company couldn't comment on its relationships with clients.

A representative from Columbia University would also not comment on the role plan consultants played designing the plan menus, but offered this statement: "Columbia is proud of the retirement benefits offered to its faculty and staff and takes its responsibility as a fiduciary seriously. Columbia does not comment on pending litigation."

 

Aon Hewitt calls for new approach to 403(b) design

A white paper published by Aon Hewitt Investment Consulting in January 2016 claims the tendency of 403(b) plans to offer dozens of investment options, expensive annuity investments, and use multiple record keepers costs participants in the non-profit universe billions a year due to inefficient plan design.

Most of the estimated $1 trillion in 403(b) plans is invested in annuities–43 percent in fixed annuities, and 33 percent in variable annuities. The rest is in mutual funds, according to Aon Hewitt.

The paper argues that 403(b) plans would better serve participants by incorporating the efficiencies adopted by 401(k) plans in the private sector.

Instead of dozens, or in the case of some 403(b) plans, hundreds of investment options, Aon Hewitt says sponsors should limit menus to a target-date offering, and a select group of funds with as few as four to six investment options. The consultancy recommends a brokerage window for plans that insist on wider choice, and suggests annuities be deployed only at retirement, and not in the accumulation phase of investing.

The paper also recommends consolidating record keepers to a single, "or reduced number of providers" to reduce administrative costs

 

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.