Three years after 403(b) plan participants began suing plan sponsors for alleged fiduciary breaches, the legal landscape looks like an ERISA version of succotash.
Among the two dozen lawsuits, there have been five settlements, two voluntary dismissals by plaintiffs, one trial verdict for a sponsor, five lower court dismissals and one case that was appealed to the U.S. Supreme Court, which declined to hear it.
In addition, there are multiple appeals of dismissals and a batch of pending cases in which no court action has been taken yet or for which lower courts have ruled on multicount complaints dismissing some counts and rejecting defendants' dismissal requests for others.
Despite the mixed results, defined contribution consultants and ERISA attorneys said their clients can learn lessons from the varied litigation.
"In my experience, 403(b) plan sponsors are starting to take notice of what it means to be a fiduciary and that there are responsibilities," said David Kaleda, a Washington-based partner at Groom Law Group, whose firm isn't involved in the 403(b) litigation. "They are starting to get it."
Mr. Kaleda's analysis is somewhat similar to that of Jerome Schlichter, the St. Louis-based attorney who filed the first 403(b) lawsuits in August 2016 and who represents participants in 13 cases, including two that have been settled.
"Attorneys and advisers are telling them they need to shape up because they have (litigation) exposure," said Mr. Schlichter, the founding and managing partner of Schlichter Bogard & Denton LLP, referring to the 403(b) plans subject to ERISA. "Now, fiduciary duties are understood as opposed to being ignored by many 403(b) plans. Sponsors taking more fiduciary responsibility is a good thing."
However, Mr. Schlichter and sponsors' attorneys like Mr. Kaleda part company in many ways.
Although Mr. Schlichter said that "first and foremost the fiduciary duty is the same" for 403(b) plans as 401(k) plans, sponsors' attorneys say there are differences in how judges view the two types of cases and what constitutes fiduciary duties for 403(b) plan officials.
"Despite the allegations in these cases, institutional 403(b) plans are different creatures than institutional 401(k) plans, with a different history and different groups of participants with different needs," said Thomas E. Clark Jr., a St. Louis-based partner for The Wagner Law Group, which isn't involved in the 403(b) cases.
A major difference between 403(b) plans and 401(k) plans is that the former can only offer fixed and variable annuities and mutual funds, while the latter can offer other investment vehicles like exchange-traded funds and collective investment trusts. For-profit corporations cannot offer 403(b) plans. There are also differences in non-discrimination testing between 401(k) and 403(b) plans.
Because the IRS initially restricted 403(b) plans to offering only annuities, these plans, over time, could have multiple record keepers because each annuity contract was issued by a different insurance company. When the IRS amended its rules to allow mutual funds, that meant the plans could add another record keeper. Multiple record keepers have been common in 403(b) plans vs. single record keepers in 401(k) plans.
Mr. Kaleda said judges are becoming familiar with the differences between 403(b) plans and 401(k) plans, leading them to often dismiss certain claims filed against private universities governed by ERISA. "Courts have said it's not per se imprudent to have multiple record keepers," he said, referring to a common complaint against 403(b) plans.
However, many allegations against ERISA 403(b) plans — such as excessive fees, inadequate monitoring of investments and keeping poor-performing investments — are common to the fiduciary breach suits of 401(k) plans.