There is a long-held premise that sponsors of public 457(b) and 401(a) plans should neither worry about the defined contribution world’s legal and regulatory environment, nor must they closely monitor their “discretionary” or “voluntary” plan offerings. Specifically, as the line of reasoning goes, since government DC plans are not directly subject to the laws outlined in ERISA (The Employee Retirement Income Security Act of 1974) that hold private sector DC sponsors personally accountable as plan fiduciaries, they need not worry about ERISA standards around fees, fund selection and the monitoring of ongoing performance. In light of recent lawsuits, it’s time to rethink this strategy.
St. Louis law firm, Schlichter, Bogard & Denton, has filed more than 20 lawsuits against corporations for allegedly breaching their fiduciary duty by selecting high-expense, poor-performing investment options for their 401(k) plans. This firm has been widely successful, collecting more than $300 million in settlements in the last decade from small plans and larger plans alike, including a record $62 million last year against mega corporation, Lockheed Martin. Lawsuits filed for alleged breaches of ERISA standards by corporate DC plan sponsors are not uncommon, but a new flurry of lawsuits is charting a completely new course by pursuing plan sponsors in the higher education sector. According to a recent Pensions & Investments article, Jerry Schlichter’s firm has filed several more class action lawsuits against big-name universities, alleging their employee retirement plans are too confusing and charge excessive fees.
The suits allege that participants were subject to exorbitant fees from the use of expensive share classes, a failure to establish and follow a prudent process of selecting and monitoring funds, and establishing a system of using multiple recordkeepers that resulted in significantly higher administration costs relative to using a single provider.
Unfortunately, a large number of government plans have been suffering from high fees and poor performance from lack of oversight and attention. Worse, many individuals who have the authority to negotiate fees with vendors and potentially replace poorly performing investment funds on behalf of participants (the very definition of a fiduciary) have the misconception that they have no responsibility to monitor these variables. These fiduciary responsibilities are at the very heart of the recent suits and serve as a reminder that, while government entities are not directly subject to ERISA, statutory law looks to ERISA as a best practice for fiduciary practices.
While defined benefit pension plans have traditionally served as the primary retirement vehicle for public sector employees, many government entities have come under pressure to fund at higher contribution levels due to the lackluster equity market performance, significantly low yields on bonds and historically low interest rates, which have inflated plan liabilities. As a result, many public plans sponsors have needed to leverage 457(b) and 401(a) plans in an effort to shift some of the cost of contributions and economic risks to employees.
The good news is that more public employers are creating formal defined contribution plan governance procedures and leveraging independent consultants to help them professionally review the services provided to defined contribution participants, the relative cost for these services and identifying any hidden fees and expenses. As a best practice and to protect decision-makers, there should be fiduciary oversight and monitoring just as there is for the pension plan and these resources are finally being made available to public finance and HR departments as they carry out their responsibility to ensure improved participant outcomes.
As a part of the plan review process, many public employers that have utilized multiple providers are consolidating to one platform with one provider in an effort to drive down participant-paid costs and improve the overall operational efficiency of the plans. In addition to generally worse performance, lack of understanding and poor engagement by participants, plans that utilize multiple providers will likely have significantly higher costs than they would if all of the plan assets were with one record keeper. Further, human resource and payroll personnel have the added burden of sending census and contribution files off to more than one provider each payroll period, which adds internal time and resources that cost money to support the multiple provider arrangement.
Since plan participants ultimately suffer when these plans are not regularly monitored, now may be a good time to review your existing defined contribution plans to ensure that they can provide a dignified retirement for the participants or, at a minimum, are a healthy complement to your core defined benefit retirement plan.