Skip to Content
October 12, 2016 Article 3 min read
An investment advisory's disaster recovery plan couldn't weather the realities of Hurricane Sandy – but it provided valuable insights into portfolio performance and how to best plan for adversity and risk.

Over the last several months, plan participants of the 403(b) or 401(k) plans of many not-for-profit institutions filed class action lawsuits against their respective retirement plans, alleging excessive fees and mismanagement of retirement assets by the plan sponsor. These lawsuits involve not-for-profits such as major universities M.I.T. and Columbia, and healthcare organizations such as Novant, Inc. These lawsuits and the slew of other lawsuits filed over the last year against large public corporations have grabbed national headlines and heightened awareness of the many complexities of administering 403(b) and 401(k) plans. We encourage plan sponsors of both not-for-profit and for-profit organizations to review and ensure they’re following best practices when offering a retirement program for participants in an effort to meet their fiduciary obligations.

Excessive fees

The recent lawsuits allege excessive administrative and record-keeping fees charged to participants, as well as improper fee negotiation by plan sponsors. It’s important to benchmark plan fees periodically, preferably annually. Plan sponsors should know what each party is charging for its services, how it’s getting paid (fee vs. commission), and whether or not that amount is reasonable for the services provided. This includes custodial, record-keeping, advisory, legal, investment, transactional, and any other fee that’s paid by participants. There are a variety of fee structures and payment methods available to plan sponsors. Through a benchmarking and/or request-for-proposal process, plan sponsors can determine if their fees are reasonable for services provided and, if not, renegotiate those fees or change service providers.

Investment due diligence

The recent lawsuits also allege improper monitoring of plan investments. Specifically, an excessive number of investment options have historically been offered, leading to participant confusion. Lack of passively-managed funds for participants seeking low-cost investments and failure to replace underperforming funds are also at the center of the allegations.

Another focus of litigation has been on the use of proprietary investment options that may not be in the best interest of participants. Because it’s difficult and time-consuming for plan sponsors to monitor plan investments internally, many have hired advisors that specialize in serving retirement plans.

Plan sponsors should periodically review the investments offered in retirement plans. What asset classes are covered? How have the funds performed compared to peers? What are the expenses associated with each fund? The type of investment product offered to participants (e.g., annuities, collective investment trusts, mutual funds, etc.) is also important. Some annuities offered in 403(b) plans are actually invested through individual contracts at the participant level, which makes them difficult for a plan sponsor to monitor. More and more plan sponsors of non-profit organizations, are moving away from annuities and individual contracts, as many aren’t fully liquid, have surrender charges, are expensive, and/or under perform their mutual fund equivalents. A best practice is to move to an “open architecture” platform where plan sponsors have the opportunity to build an investment menu that offers low-cost active and passive options and allows for more fee transparency.

Provider consolidation

A final key trend in the industry is consolidating plan record keepers/administrators into a single vendor. While this is typical in the 401(k) world, many 403(b) sponsors have multiple vendors. Additional burden is placed on plan sponsors when they use multiple providers to serve their retirement plans. Multiple sponsors increase the amount of due diligence required — more investment options must be monitored, more fees must be benchmarked, and more points of contact must be maintained, making it more difficult to operate the plan as a good fiduciary and in accordance with the plan document. The recent litigation also emphasizes that using multiple providers leads to increased fees as, typically, larger plans mean smaller fees.

Consolidating service providers down to a single record keeper may offer plan sponsors the ability to considerably reduce the amount of time spent monitoring the investment options and operating the plan while simultaneously reducing fees.

Meeting fiduciary obligations can be very challenging. It takes a very high level of understanding of the industry to navigate the continually evolving 403(b) and 401(k) regulatory environment. Failure to ask the appropriate questions or devote the proper amount of time to your retirement program can dramatically increase the likelihood of participant complaints that could lead to a Department of Labor audit, penalties for operational failures, and/or class action litigation. We believe this is an area where the use of an expert, free of conflicts of interest, can add significant value and time savings.

For more information, please contact a member of the Plante Moran Financial Advisors Institutional Service team.