Brown University Faces Familiar Allegations in 403(b) Lawsuit

By Rebecca Moore | July 10, 2017
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It’s been fairly recent that the plaintiffs’ bar has added Employee Retirement Income Security Act (ERISA) 403(b) plans as targets for excessive fee lawsuits similar to those filed against 401(k) plans for years.

However, before new Internal Revenue Service (IRS) 403(b) regulations were passed in 2007, even ERISA 403(b)s operated very differently than 401(k) plans. The lawsuits attack the 403(b) plan design model of offering an extensive amount of investment options, including individual annuities, and using multiple recordkeepers. Before new 403(b) regulations were passed in 2007, there was little plan sponsor oversight of 403(b)s. Often annuity providers were allowed to meet with employees and set up individual annuities for them, which resulted in many plans having hundreds of investments. “I’m surprised the plaintiffs' bar has turned to 403(b)s,” says David Levine, a principal with Groom Law Group, Chartered in Washington, D.C. “These lawsuits are in a lot of ways clones of 401(k) lawsuits, completing disregarding some of the distinctions between the two plan types.”

Since the 403(b) regulations were passed, plan sponsors have been trying to consolidate recordkeeprs and investment options, and recognize this is better for participants, especially as related to costs. However, what is especially challenging about mapping legacy 403(b) annuity assets into a new lineup of mutual funds is that participants invested in these legacy assets often have full discretion over their money. The plan sponsor cannot force them out.

One can only speculate whether courts and judges know the distinctions between the two plan types or will consider this as it is presented to them by plans’ attorneys.

In the case against Emory University, the U.S. District Court for the Northern District of Georgia granted dismissal of the claim that the plan included too many funds in the investment lineup. The plaintiffs argue that having too many investment options is imprudent. Similar to the Brown University lawsuit, plaintiffs assert that the plans offered 111 investment options, and that many of those options were duplicative. Instead, the plaintiffs allege that the plans should have offered fewer options and used more bargaining leverage with those investment options to obtain lower fees. The judge did not agree with the plaintiffs’ theory. “Having too many options does not hurt the plans’ participants, but instead provides them opportunities to choose the investments that they prefer,” he wrote in his opinion.

However, a judge for the case against Duke University’s 403(b) plan let a similar claim move forward.