Improving Equity in Financial Benefits

Retirement plan design changes can help close some equity gaps, but plan sponsors should first address differences in overall financial health among their employee demographics.

The share of Hispanic families with savings in retirement accounts declined in the wake of the Great Recession, from 38% in 2007 to 35% in 2016, while the share of Black families with retirement savings declined from 47% to 41%, according to an Economic Policy Institute (EPI) analysis of 2016 Consumer Finance data. In contrast, two-thirds (68%) of white non-Hispanic families had retirement savings in 2016, a share that was not much affected by the Great Recession (it was 67% in 2007).

The EPI analysis also found high-income families are seven times more likely to have retirement account savings than low-income families.

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More recent data from the Bureau of Labor Statistics (BLS)’s March 2021 “National Compensation Survey” shows the percentage of individuals with the lowest average hourly wage who have access to a defined contribution (DC) retirement plan is fewer than half that of individuals with the highest average hourly wage. However, access to a DC plan is only part of the story. Among individuals with the lowest average hourly wage, the DC plan participation rate, on average, is 22%, compared with 73% among individuals with the highest average hourly wage.

Private Industry Workers' Access and Participation to DC Retirement Plan Benefits by Average Hourly Wages

Access to benefits
Participation rate
42%
22%
$15–$19.99
64%
44%
$20–$32.19
75%
58%
>$32.19
85%
73%
Source: Bureau of Labor Statistics, March 2021 National Compensation Survey

Willis Towers Watson has been looking into how plan sponsors can consider equity and inclusion in their retirement plan designs to help address some of these gaps, notes Kezia Charles, director of retirement at Willis Towers Watson in Alexandria, Virginia. “Our 2020 DC survey asked employers if they have reviewed their plan to consider DE&I [diversity, equity and inclusion] and the relation between participant behavior and plan design,” she says.

Charles says plan sponsors are also looking at how salary affects an employee’s ability to save. “They are considering nonelective contributions in addition to matching contributions, and we’ve seen at least one organization looking at establishing a floor on the match to ensure lower-income participants at least have minimum benefits,” she says.

According to Charles, employers are beginning to do more data analysis, breaking it down by gender, race, age and income. They then use that information to understand differences in participation rates, loans and withdrawal uses. She says some equity issues plan sponsors might find can be addressed by plan design.

David O’Meara, director of investments at Willis Towers Watson in New York City, previously told PLANSPONSOR that a plan sponsor wanting to make diversity and inclusion part of its DC plan’s purpose should think about who the investment lineup is developed for.

“In general, investment lineups benefit those who have the ability to save and those more comfortable with investment decisions,” he said. “So, plan sponsors should be thinking about those not able to save as easily to help them with that, and, for those less highly educated and less comfortable making investment decisions, plan sponsors should create ways to engage those participants and simplify the investment selection process. This could lead to better investor behaviors across the participant population.”

Addressing Employees’ Financial Health

When it comes to retirement savings, employers should let employees know that starting small is OK, says Celeste Revelli, director of financial planning at eMoney Advisor in the Philadelphia area. “Maybe they can start with a 1% deferral to the retirement plan and increase that amount as their income increases,” she adds.

She says every organization has different employee demographics with different financial needs. Initially, employers need to be aware of financial health differences across their employee populations. “If the retirement plan’s company match contribution is generous, but an employee can’t even contribute to the plan, it doesn’t matter how generous it is,” she says.

“Employers need to help employees with other financial issues,” Revelli continues. “Offering financial education, financial wellness workshops, budgeting and debt management tools, and access to financial professionals could help them find the money to save for retirement.”

Employers can also provide resources to help employees better allocate their take-home pay, she adds. For example, they can provide access to mobile applications that will assess employees’ spending or support tools to help employees look at what they are spending on benefits to figure out how to save money in different areas.

Charles also says improving equity in financial benefits should include a conversation about financial literacy, helping employees understand the impact of their decisions and their use of financial resources. For example, is taking a loan from the DC plan an employee’s only option?

She says Willis Towers Watson’s 2021 “U.S. Perks” study found certain groups of employees need more emergency funds assistance. To address that, some employers are offering emergency assistance funds, as well as financial planning services and debt services to help employees with mortgages and consumer debt.

While automatic enrollment is a great tool for getting people to save for retirement, employers could potentially use a similar process to help employees establish an emergency savings account within the plan, Revelli says. Or employers can provide their employees with the ability to contribute to emergency savings outside of the retirement plan. “But I come back to take-home pay and helping employees see where they can free up money to save for retirement or emergencies,” she says.

Revelli says it’s important to have a pulse on employees’ financial needs and where there are barriers to financial success. For example, she says, employers that offer a student loan repayment benefit might not be helping other groups of employees (i.e., those without student loans who are struggling with other financial needs). She suggests employers survey employees—and provide an incentive to complete the survey—to understand the challenges they have. If debt due to family care is an issue for a large number of employees, for example, the employer can address that.

“Employers can expand their menu of benefit options to show they are listening to all areas of financial concern and offering help for them,” Revelli says. “Employers can also take a look at what benefits they are already offering that are being used and which are not to repurpose their benefits lineup.”

In addition to using data to determine employees’ needs, plan sponsors should take the opportunity to use employee resource groups, focus groups or pulse surveys, Charles suggests. Employers should ask how employees are interacting with their retirement plan, what their financial needs are and how the benefits offered are meeting their needs.

She adds that technology gives plan sponsors the opportunity to make more financial resources available to employees through access to financial planners and planning tools. “Technology will allow employees to involve family members and help them make more educated decisions,” she says.

In addition to offering financial benefits to meet employees’ needs, employers must provide education or access to financial professionals to help employees use their benefits, Revelli says. “These things will help employees feel they can view employers as trusted sources, and normalizing talk about finances at work builds trust,” she adds.

Since there are so many wealth and pay gaps across various demographics, employers offering equitable pay is often the first step to providing equitable benefits, Revelli says. Conducting ongoing competitive market pay and pay equity analyses is a first step to help employees find more financial security.

She adds that offering financial wellness tools focusing on spending, saving and debt, as well as incentives to use the tools, is also important to promoting benefit equity. “Getting ‘today’s money’ in order can help employees get to a point where they can comfortably contribute to retirement,” Revelli says.

Taking Care Not to Discriminate

Employers will need to be careful not to step into a discrimination problem when trying to make benefits more equitable, warns David Klimaszewski, a partner at Culhane Meadows PLLC in Dallas. For example, giving women a larger retirement contribution after seeing data that women are less prepared for retirement than men can create a gender discrimination problem. “That type of knee-jerk response doesn’t work well,” he says.

Trying to single out a particular class of employees, such as secretaries in a law firm, might or might not be a problem, but, generally, discrimination is something employers need to take into consideration, Klimaszewski adds.

All benefits have some sort of discrimination rule—mostly so higher-paid employees don’t get a disproportionately large share of benefits, Klimaszewski notes. However, giving lower-paid employees a better benefit is generally not a violation of those rules, and he says he has seen some employers do that.

In some cases, lower-paid employees would prefer to get a bigger paycheck than a bigger benefit. PLANSPONSOR’s 2021 Participant Survey found 52% of respondents would rather receive a $5,000 bonus than a $5,000 contribution to their DC retirement plan account.

However, sometimes increasing pay will result in a bigger benefit, Klimaszewski notes. For example, if employees are contributing a percentage of pay to their retirement plans, increasing their pay will increase the amount that goes into the plans.

Klimaszewski says it is generally OK to move the value of one benefit to another—e.g., allowing employees to use the value of unused paid time off (PTO) for student loan repayments. However, in such cases, it might become a taxable benefit, he notes.

“Employers must investigate the differences in tax rules,” Klimaszewski says. “A benefit might become taxable if an employee receives money, and it depends on how the money is paid. For example, medical coverage provided by an employer is generally tax-free, but if the employer paid cash to the employee, and the employee bought her own medical insurance, that insurance is generally not tax-free.”

Klimaszewski suggests employers should understand the discrimination rules for each benefit before structuring the design to give better benefits to certain groups of employees.

Plan Sponsors Are Getting No Answers From Excessive Fee Lawsuits

Excessive fee lawsuit activity has ramped up with no major decisions by the courts; however, a pending decision by the U.S. Supreme Court in one case could impact the amount of activity going forward.

Recently, defendants in a lawsuit against the University of Miami agreed to a $1.85 million settlement.

The lawsuit alleged the defendants violated their Employee Retirement Income Security Act (ERISA) fiduciary duties by allowing plan participants to pay excessive fees for investments and recordkeeping and by selecting poorly performing funds. Meanwhile, a new lawsuit has been filed against Advance Stores Co., the parent company of Advance Auto Parts, with similar allegations.

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In addition, the U.S. District Court for the District of Columbia has rejected an amicus brief filed by the U.S. Chamber of Commerce in an ERISA excessive fee lawsuit against the American National Red Cross. The brief said the rapid increase in excessive fee litigation is not “a warning that retirees’ savings are in jeopardy,” but proof that converting “subpar allegations” into settlements has proven to be a lucrative endeavor for attorneys bringing the lawsuits. The chamber pointed out that the increase in litigation has led to an increase in the cost of fiduciary liability insurance and made it more difficult to procure such insurance. It argued that this increased cost could lead large plan sponsors to make less generous employer contributions to their plans, and it could make employer contributions cost-prohibitive for small employers, adding that this goes against ERISA’s intent to encourage the offering of retirement plans to employees.

Judge Emmet G. Sullivan noted that leave to file an amicus curiae brief should be denied unless a party in the suit is not represented or not represented competently or unless “the amicus has unique information or perspective that can help the court beyond the help that the lawyers for the parties are able to provide.” He found that the chamber has “not shown that a party is not adequately represented,” and that “several of movant’s arguments are duplicative of those in the defendants’ motion to dismiss.”

In short, there is a great deal of activity when it comes to ERISA excessive fee lawsuits, but very few answers. The University of Miami joins a number of plan sponsors that have decided to settle lawsuits against them, and very few lawsuits have been dismissed.

The few cases that have gone to trial have largely involved more unique situations such as proprietary funds, questions about conflicts of interest or prohibited transaction issues, notes Emily Costin, a partner at Alston & Bird in Washington, D.C. She says the bulk of lawsuits involve more run-of-the-mill claims that fees are too high or investments are underperforming in single-employer plans.

According to Costin, more than 50% of lawsuits are making it past motions to dismiss. Then it becomes a choice for the plan sponsor to either continue to litigation, which becomes expensive for a claim that might only involve a couple of a million dollars, or settle the lawsuit because it’s not worth the expense. “For many of the lawsuits, the relief wouldn’t amount to much money, but plan sponsors also don’t want to spend the time and effort continuing to fight,” she says. She adds that the input from insurance carriers is a consideration in whether a case settles.

One thing industry watchers can glean from the settlements being made is there is a trend that, basically, if a suit has survived motions to dismiss, it will end up getting settled, says Ari Sonneberg, a partner at The Wagner Law Group in Boston.

Some of the settlements are monetary only, but some have included nonmonetary conditions, such as an agreement that the plan sponsor will hire an independent investment manager to select and monitor investments or that it will issue a request for proposals (RFP) for a new recordkeeper.

Costin says, often, the nonmonetary considerations are agreed to in order to bridge a gap. “Plan sponsors are saying there’s no more money to be given but they’ll agree to certain action so counsel will feel they’ve gotten a good deal for participants—a value to participants that is nonmonetary,” she says. “I wouldn’t read too much into [nonmonetary conditions].”

Whether a settlement includes nonmonetary conditions speaks to the type of plaintiff and/or attorney and whether those parties really care about what happens in the future for the plan and want to see changes, Sonneberg says. “Ostensibly, a large settlement will have that effect anyway because a plan sponsor will change its practices to avoid facing another lawsuit,” he adds.

Costin says comparing settlement terms is really an apples-to-oranges comparison. “We can’t look at a dollar figure and determine whether plan fiduciaries acted badly and how badly,” she says, noting that settlement amounts and conditions can be determined by different claims, the size of the plan, a certain judge or jurisdiction, or how much the plan sponsor has already spent on the case.

So far, the only takeaway from excessive fee lawsuits for plan sponsors is that having a good process is key, Costin says. She adds that there’s no guarantee of preventing a lawsuit from being filed, noting that one lawsuit might challenge a certain type of issue while another might claim just the opposite.

“A plan sponsor can do everything right and still be a target. Anyone can get sued,” she says. “So having a good process and documentation in place is the best defense.”

However, Costin says she thinks a wave is coming where plan sponsors might stick out the litigation process because they don’t think they did anything wrong. “I wouldn’t be surprised if some companies soon put their foot down,” she says. “Everyone wants someone else to do it first, though.”  

Is Any Relief in Sight for Plan Sponsors?

One excessive fee case, Hughes v. Northwestern University, has made it to the U.S. Supreme Court. The court heard arguments on whether participants in a defined contribution (DC) ERISA plan stated a plausible claim for relief against plan fiduciaries for breach of the duty of prudence by alleging that the fiduciaries caused the participants to pay investment management or administrative fees higher than those available for other materially identical investment products or services.

Sonneberg says the fact that so many lawsuits are being settled is a reason the Northwestern case is important.

“If, by overturning the 7th Circuit’s decision, it lowers the threshold for a case to be heard, we will see more suits and settlements,” he says. “If the court says the 7th Circuit got it right, and that plaintiffs making excessive fee claims must show, beyond the fact that fees were high, that a fiduciary breach occurred in order for their suit to get into court, we will see fewer cases and more dismissals rather than settlements.”

Sonneberg adds that in the few cases where a lawsuit has been dismissed, the lower courts have indicated that it is not enough to say fees were excessive; plaintiffs have to demonstrate in their pleadings that plan fiduciaries’ behavior in choosing expensive plan investment options was a breach of ERISA.

“There’s a big difference in those claims,” he says. “It’s easy to compare what fees a plan is paying to what other plans of the same size are paying or to compare what a plan’s provider charges to what other providers charge for the same services. If that’s all plaintiffs’ attorneys had to do, that would be an easy win, but if they have to demonstrate how fiduciaries were acting in breach of ERISA, that’s certainly more of an uphill battle and harder to win.”

Sonneberg says from what he’s heard about the oral arguments in the Northwestern case, the Supreme Court might be of that notion too.

Defendants in some excessive fee lawsuits have argued that their plans offer investments that have higher fees as well as those with lower fees, and some investments in their plan’s lineup have underperformed while others have performed well. They say participants make the choice of what they invest in. Sonneberg says Supreme Court Justice Elena Kagan homed in on this issue, asking whether it’s OK to turn a blind eye to poor investment options so long as there are good ones for participants to choose from as well. She indicated that the Supreme Court’s answer to this question is important.

“If a precedent is established that having good options doesn’t offset the fact there are some bad apples, then plaintiffs are more likely to succeed in these cases, and vice versa,” Sonneberg says.

Costin says she thinks it’s unlikely an opinion from the Supreme Court will put an end to the lawsuit tsunami. “There seemed to be enough consensus in the room that an allegation that the plan sponsor should have used a cheaper share class for investments is possibly a plausible claim if it is pleaded correctly, for example,” Costin says. “I think the Supreme Court’s decision might give plaintiffs a road map of how to plead those types of claims.”

Costin also notes that some of the claims the high court is reviewing are more specific to university 403(b) cases and don’t apply to 401(k)s. For example, the Northwestern lawsuit claimed that the use of multiple recordkeepers—a practice that has traditionally been common for 403(b) plans—resulted in excessive fees being charged to plan participants.

“I didn’t pick up from the discussion that 403(b) plans should be treated differently than 401(k)s, but I did get the idea that the justices thought that if fees could be lowered by consolidating providers, the plaintiffs had made a plausible claim,” Costin says.

Sonneberg says he thinks it might be a tacit understanding that 403(b) plans are viewed differently than 401(k) plans. ERISA doesn’t differentiate between the fiduciary duties for each plan type, but their differences could be considered in litigation because facts and circumstances are part of the analysis as to whether a fiduciary is being prudent, he says.

Costin says she does hope the retirement plan industry gets more guidance from the court on the prudence standard in general. Costin says Chief Justice John Roberts spoke about whether it’s OK for a plan to be average and that it’s not realistic to require plan fiduciaries to get the best possible result all the time. “If the court’s opinion elaborates on that, it could trickle down to some of these claims,” she says. “But I don’t see an opinion coming down that will completely shut down these cases.”

Costin says the justices also discussed how these lawsuits might hurt the retirement plan market. Justice Brett Kavanaugh touched on what the wave of litigation has done to the fiduciary insurance market, she notes, as well as the fact that individuals have been targeted as defendants in the lawsuits. She says that individual targeting could lead to some people no longer wanting to be fiduciaries.

Noting that some of the lawsuits have claimed that changes plan sponsors have made are evidence that they were doing something wrong before the change, Costin says she hopes the court shuts down the notion that a change supports a claim that fiduciaries breached their fiduciary duties.

“The Supreme Court’s decision in the Northwestern case will probably be very determinative of the number of excessive fee suits we see in the future,” Sonneberg says.

The court is expected to issue a decision by June.

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