Compliance July 10, 2017

Brown University Faces Familiar Allegations in 403(b) Lawsuit

Individual annuity contracts and a large plan investment lineup are targets in the Brown University lawsuit, just as they are with most other lawsuits against higher education institutions’ 403(b) plan fiduciaries.
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With wording that seems to be duplicated from filings against other higher education institutions, a complaint has been filed against Brown University and fiduciaries of its Deferred Vesting Retirement Plan and Legacy Retirement Plan.

As with other lawsuits, the complaint alleges that because the marketplace for retirement plan services is established and competitive, and because the plans have more than $1 billion in assets, the fiduciaries have tremendous bargaining power to demand low-cost administrative and investment management services and well-performing investment funds, but instead, they caused the plans to pay unreasonable and excessive fees for investment and administrative services.

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In addition, the complaint says the retirement plans’ fiduciaries selected and retained investment options for the plans that historically and consistently underperformed their benchmarks and charged excessive investment management fees. It also alleges the fiduciaries failed to negotiate fixed fees for recordkeeping services, rather than asset-based fees, and retained share classes for funds that charged higher fees than other less expensive share classes that were available for the plans for the same funds.

Also similar to other lawsuits against higher education institutions, the complaint says that instead of regularly monitoring all the plans’ investment choices and for periodically reviewing and evaluating the entire investment choice menu to determine whether it provided an appropriate range of investment choices into which participants could direct the investment of their accounts, the fiduciaries offered a “bewildering array” of investment options in the plan. At one time, the Legacy Retirement Plan offered 175 investment options through Fidelity Investments and an additional 24 investment options through TIAA, which included numerous duplicative investment choices (e.g., target-date funds from each recordkeeper), the complaint says. In addition, at one time, the Deferred Vesting Retirement Plan offered 177 investment options through Fidelity and an additional 26 investment options through TIAA, which also included numerous duplicative investment choices.

The complaint also calls out the use of individual annuity contracts offered by TIAA that only allowed participants to withdraw funds in ten annual installments unless they paid a surrender fee of 2.5%.

Finally, the lawsuit alleges fiduciaries approved a TIAA loan program that required collateral as security for repayment of the loan, charged “grossly excessive” fees for administration of the loan, and violated U.S. Department of Labor (DOL) rules for participant loan programs.

NEXT: How will 403(b) plan excessive fee lawsuits play out?

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.
Data and Research July 10, 2017

Part-Time Workers Are Financially Vulnerable

As the nation moves more to a “gig” economy, the question becomes: How can we prepare part-time employees for a financially secure retirement?
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The American labor force appears to be undergoing a fundamental shift from traditional single employer, 40-hour work weeks to a more flexible, “on demand” model, according to the report “Part-Time Nation” from The Guardian’s 4th Annual Workplace Benefits Study.

As more employers embrace the new “gig” or “flex” economy, the ranks of part-timers, including independent contractors, will continue to rise. In Guardian’s latest research, employers reported that more than 82% of their workforce are full-time, permanent employees, while 13% are part-time employees (or work fewer than 35 hours) and 5% are independent contract workers. These proportions are consistent with U.S. Bureau of Labor Statistics for the past few years, where the annual average for part-time/contract workers ranges from 17.5% to 18.5%, Guardian says.

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Its research found more employers expect their part-time workforce (including contractors) to grow over the next three years. About one in three employers anticipate growth in part-time workers, while 13% expect a decrease—a net of more than 20% of employers projecting growth in their part-time workforce.

Part-time workers share a number of demographic characteristics. For example, a higher percentage of part-timers are at the two ends of the career spectrum: Younger Millennials (ages 22 to 29) who are just starting their careers and pre-retiree Baby Boomers (ages 60 and older) who are winding down. About one in four part-timers consider themselves retired from their primary career.

And, it’s not just the “gig” economy that creates a long-term financial problem for workers. Among part-timers surveyed, 36% work in the hospitality industry (e.g., waiter/waitress, hotel front desk, tour guide, amusement park attendant), 23% are employed in health care (e.g., nurse, technician, home health aide, therapist) and 20% in retail (cashier, sales associate, customer service) sectors. Another 35% combined work in the construction, financial services and manufacturing industries.

NEXT: Limited access to retirement plans and options for part-timers

Only 32% of part-time workers indicate they have access to an employer-sponsored retirement plan, compared to 69% of full-time employees. In addition, only one-quarter of part-time employees have access to an employer-sponsored medical plan versus 80% of full-timers.

With limited options at work, part-timers turn to other channels for retirement products. Guardian found roughly half have a retirement savings plan, with 16% buying annuities or individual retirement accounts (IRAs) outside the workplace.

Thirty-nine percent of Millennials cite their financial situation as their top source of stress, as do 51% of Generation X and 22% of Baby Boomers.

So, the question becomes: How can we prepare part-time employees for a financially secure retirement?

Speaking at the 2016 PLANSPONSOR National Conference, Tami Simon, global practice leader, Knowledge Resource Center, Buck Consultants, a Xerox company, said, “The higher the percentage of contingent workers grows, the offering of traditional benefits may become minimal.” She speculated that perhaps these “gig” workers will unionize or use associations to create and participate in retirement plans.

Guardian’s Douglas Dubitsky, VP and head of Retirement Product Solutions, based in New York, says if the employer has a part-time employee who can’t participate in the retirement benefit offerings, the individual could contribute to an IRA—traditional or Roth. Roth IRAs let you withdraw your money tax-free at retirement, and Traditional IRAs let you deduct your contributions from your taxable income, he notes. The Treasury Department offers the myRA program available to part-time workers.

In addition, annuities may be a viable option, depending on the specific needs of the individual. Dubitsky notes that a financial professional can counsel the individual about retirement products that can provide guaranteed lifetime income for their fixed retirement expenses, such as annuities, and help them plan for a retirement they can enjoy. "It’s important to build a holistic plan with a professional, who can share the variety of tools that they can leverage for retirement. If an employer can give insights about these offerings, and how a part-time employee can get access to these products, through educational sessions at their offices or information on its website, it would make a difference and leave a lasting impression for that employee," he says.

Dubitsky adds that if an individual has a part-time job at an employer and works part-time as an independent contractor (the employee as employer)—moonlighting income, then this individual is now self-employed and can also contribute to a Simplified Employee Pension (SEP) or a Solo 401(k) plan based on his/her self-employed income. SEP IRAs help self-employed individuals and small-business owners get access to a tax-deferred benefit when saving for retirement. With a Solo 401(K), self-employed individuals and owner-only businesses and partnerships can save more for retirement through a 401(k) plan designed especially for them. “Again, any insights that the employer can provide to the part-time individuals about the options they can explore on their own would be invaluable,” he concludes.

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