403(b) litigation driving fiduciary-role awareness
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August 05, 2019 12:00 AM

403(b) litigation driving fiduciary-role awareness

Attorneys call documentation crucial for successful defense

Robert Steyer
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    David Kaleda
    Tyler Mallory
    David Kaleda believes 403(b) sponsors now ‘take notice’ of their responsibilities.

    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.


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    Most of the 403(b) plan lawsuits have been filed against large private universities, although five of the lawsuits have been filed against health-care institutions. ERISA governs these plans because they are private tax-exempt employers. ERISA doesn't cover 403(b) plans offered by churches, governments and school boards, although there can be some exemptions and exceptions.

    Four universities announced plan settlements, admitting no wrongdoing: the University of Chicago ($6.5 million) in May 2018, Duke University, Durham, N.C., ($10.7 million) in January 2019; Brown University, Providence, R.I., ($3.5 million) in March 2019; and Vanderbilt University, Nashville, Tenn., ($14.5 million) in April 2019. Also, Providence Health & Services, Renton, Wash., agreed to a $2.3 million settlement in January 2019 that affected a 403(b) plan, a 401(k) plan and a 401(a) plan.

    "Most of the cases that have settled have done so at an amount that is close to nuisance value," said Mr. Clark, who declined to comment on specific cases. "To the extent there have been a few outliers with higher settlement amounts, that is more indicative of the plan sponsor likely having issues following good fiduciary process as opposed to these (legal) theories having great merit."

    Attorneys and consultants said many settlement terms appear to reflect best practices that should be routine and/or relatively painless agreements to help end such suits.

    Most non-monetary settlement terms are "common sense," such as "improved communication and determining the need for an RFP," said Earle W. Allen, a New York-based partner for consulting firm Cammack Retirement Group Inc., who declined to discuss specific cases.

    "I think the organizations were willing to fight, then they realized the cost and time," he added. Payments reflected the desire to "get this off their plate and be done with it."

    Brown University, for example, agreed to "use commercially reasonable best efforts to continue to try to reduce record-keeping fees" for three years and conduct an RFP for an independent investment adviser, according to court documents.

    The University of Chicago also promised to "use commercially reasonable best efforts to reduce fees" as well as to hold the line on record-keeping fees for three years, according to court documents.

    Duke University, in settling two suits against its 403(b) plan, agreed to provide participants with detailed information about new investments; give plaintiffs' attorneys a list of fees and investment options for two years; and provide the attorneys with the investment policy statement, according to court documents. It also agreed to hire an independent consultant to determine if the university should issue an RFP for record-keeping and administrative services.

    Although 401(k) plans differ from 403(b) plans, the latter have become closer in certain responsibilities due to IRS regulations that took effect in 2009. The IRS rules required 403(b) plans to have a written plan document. This regulation had the effect of encouraging 403(b) plans with multiple record keepers to consider consolidating them to reduce the amount of administration and paperwork.


    ‘A wake-up call'

    "This was a wake-up call," said Lori Wright, an Atlanta-based principal and senior defined contribution consultant for Mercer, referring to the IRS rules. The lawsuits "intensified the trends that were already in place. It accelerated the process for plans to make changes on a proactive basis."

    Mercer recommends to DC clients with multiple record keepers "to check if it's appropriate" for their participants, she said. Plan executives must make sure investment committee members are "engaged and educated about their jobs," she said.

    Echoing comments of other DC consultants, Ms. Wright preached the pursuit of process. "Make documents up to date," she said. "Make the investment policy statement a useful tool for committee members."

    The lawsuits "have tended to make plan fiduciaries more attentive to details," Cammack's Mr. Allen said.

    When he meets clients, he discusses the lessons learned from lawsuits and settlements. He advocates benchmarking fees every year, adding that it's a "good idea" to benchmark record-keeper performance and services. Plans' investment committee members should establish regular communication with the employer's human relations staff so they know "what they're hearing from employees," he added.

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