Compliance January 24, 2018

Hospital 403(b) Plan Faces Lawsuit Over Investment Share Class Selection

The plaintiffs claim plan fiduciaries repeatedly failed to monitor the share classes of mutual fund investments and to substitute less expensive share classes of mutual funds for more expensive ones.

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The Norton Healthcare Defined Contribution Retirement Plan and its fiduciaries have been charged in a new lawsuit of breaching their fiduciaries duties under the Employee Retirement Income Security Act (ERISA) by selecting more expensive share classes of investments than were available to the plan.

According to the complaint, the Norton plan holds approximately $700 million in assets and is large enough to meet initial investments minimums in lower-cost institutional share classes of investments. The plaintiffs claim that the defendants repeatedly failed over the class period from 2012 to 2016 to monitor the share classes of mutual fund investments and to substitute less expensive share classes of mutual funds for more expensive ones. “As a result, Defendants wasted the assets of the Plan participants, who were forced to pay higher fees than were necessary,” the complaint says.

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One example provided in the complaint is the Principal Income Equity R-5 fund. In 2012 Norton invested $33,558,344 in the fund, and its total operating expenses charged to the plan for 2012 amounted to .77% (77 basis points) of total plan investments. According to the complaint, in 2012 Principal also offered an identical Principal Equity Institutional Class Fund which carried a total operating expense of .52% (52 basis points). Plaintiffs’ contend this basis point difference means plan participants unnecessarily overpaid $83,895.86 in fees for the fund.

To remedy the alleged fiduciary breaches, the plaintiffs, on behalf of a class of participants and beneficiaries to the plan, seek to enforce the defendants’ liability to make good to the plan all losses resulting from each breach of fiduciary duty and to restore to the plan any profits made through the defendants’ misuse of plan assets. They also seek other equitable or remedial relief for the plan as the court may deem appropriate.
Data and Research January 24, 2018

Two-Thirds of 401(k) Assets Held in Equities

However, at year-end 2015, for example, the ICI says participants in their twenties had 80% of their portfolios invested in equities, while participants in their sixties had 55% in equities.

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Assets in 401(k) plans rose from $3.0 trillion in 2007 to $5.3 trillion as of September 30, 2017—a 77% increase in assets, according to data from the Investment Company Institute (ICI), in a new report, “Frequently Asked Questions About 401(k) Plan Research.”

In 2007, 401(k)s accounted for 17% of the U.S. retirement market. Today, that is 19%. In total, there are nearly 550,000 401(k) plans in the U.S. with 54 million Americans participating in them.

At year-end 2015, according to an Employee Benefits Research Institute (EBRI)/ICI database, 401(k) participants had 66% of their balances invested either directly or indirectly in equities, either through mutual funds or other pooled investments, company stock or the equity portion of balanced funds. Only 9% was invested in the fixed income portion of balanced funds, 8% in bond funds, 6% in guaranteed investment contracts and other stable value funds and 4% in money market funds.

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The younger the investor, the more likely they are to have their money invested in equities, while older investors are more likely to gravitate to fixed-income securities, including bond funds, money market funds, stable value funds and guaranteed investment contracts, ICI found. At year-end 2015, for example, participants in their twenties had 80% of their portfolios invested in equities. For 401(k) participants in their sixties, this drops to 55%.

Looking at the account records of 22 million defined contribution (DC) plan participants, ICI examined whether they retreated from these investments following the financial crisis of 2008, only to discover that a mere 3.7% of participants stopped contributing to their accounts, 14.4% changed the allocations of their balances, and 12.4% changed the allocations of their contributions. “These activities have become even less prevalent since 2008,” ICI says. “For example, an analysis of more than 29 million DC accounts in 2016 found that 2.7% of participants stopped contributing, 9.4% changed the asset allocation of their account balances, and 5.6% changed the asset allocation of new contributions.”

The EBRI/ICI database also shows that consistent participation in 401(k) plans pays off; workers who stayed the course in their 401(k) plan between year-end 2010 and year-end 2014 saw their balances grow at a compound annual average growth rate of 15.5%.

The majority of 401(k) plan assets, 65%, are invested in mutual funds. The remainder is in company stock, individual stocks and bonds, guaranteed investment contracts, bank collective trusts, life insurance separate accounts and other pooled investment products.

Mutual funds held in retirement accounts—individual retirement accounts and all types of DC plans, including 401(k)s—were $8.5 trillion as of September 30, 2017, or 47% of all mutual fund assets. Mutual fund assets in 401(k)s were $3.5 trillion, or 20% of the total mutual fund assets in the U.S.

ICI also learned that the older the worker and the longer their tenure with their company, the higher their account balance. “In the EBRI/ICI 401(k) database, participants in their thirties with more than two to five years of tenure had an average 401(k) plan account balance close to $25,000, compared with an average 401(k) account balance of nearly $275,000 among participants in their sixties, with more than 30 years of tenure,” ICI says. At year-end 2014, the median age of 401(k) participants was 46 and their median job tenure was eight years.

The EBRI/ICI database also showed the 87% of participants are in plans that offer loans, and among this group, 18% had loans outstanding as of the end of 2015, with an average balance of $7,982. This represents 12% of their average balance of $95,784. The younger the participant, the more likely they were to have a loan, with 25% of those in their twenties having an outstanding loan, 19% of those in their thirties, 9% of those in their fifties and 8% of those in their sixties.

ICI’s report, “Frequently Asked Questions About 401(k) Plan Research,” can be viewed here.

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