Ask the Experts November 1, 2022

What Are the Limits on a 457(f) Plan?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

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“I work for a public university that sponsors a 403(b) and 457(b) plan, and is currently considering the addition of a 457(f) plan. Now, I know that we can allow all employees to participate in our 403(b) and 457(b) plans, but our recordkeeper is saying that the 457(f) must be limited to select management and highly compensated employees. Is this correct?”

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Kimberly Boberg, Taylor Costanzo, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

Assuming that your plans qualify as governmental plans, no. The limitation of 457 plans (both (b) and (f)) to select management and highly compensated employees is a method of avoiding ERISA requirements under what is called a “top hat” arrangement. However, as governmental plans, your plans are already exempt from ERISA, and thus the “top hat” exemption is not necessary. Thus, all employees, or any employees of your choosing, are permitted to participate in a 457(f) plan should you choose to establish one. If you were a private university, however, you would need to limit 457 plan participation to select management and highly compensated employees.

Note, however, that even though all employees can technically be eligible for your 457(f) plan, the primary purpose of such a plan is to provide supplemental benefits to executives and these plans function a bit differently than what you see with qualified plans (e.g., relating to the taxation of contributions). It should also be noted that there are alternatives methods of providing such benefits as well, such as a 401(a) plan or a 415(m) plan. Outside retirement plan counsel should be consulted regarding your options here.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice. 

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.

Compliance October 31, 2022

Yale 403(b) Fiduciary Breach Counts Withstand Motions

A federal judge has granted in part and denied in part, the Yale University motion for summary judgement.

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A federal judge has granted four of Yale University’s motions to dismiss an ongoing 2016 case challenging recordkeeping and investment fees in the school’s 403(b) retirement plan and let three others proceed.

The complaint alleged seven counts of fiduciary breach under the Employee Retirement Security Act against Yale University, the retirement plan fiduciary committee and university vice president for human resources and administration, Michael Peel.

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The parties to the lawsuit may, without an out of court settlement, now proceed to a jury trial on the remaining counts.

Federal judge Alvin W. Thompson granted in part and denied in part university’s motion for summary judgement in the case.

“[The defendants’ motion is] granted with respect to the prohibited transaction claims—(Counts II, IV, and VI) and the duty to monitor claim— (Count VIII), and it is otherwise being denied,” wrote Thompson.

The plaintiffs also alleged, in an amended complaint that Thompson permitted to proceed, three types of fiduciary violations by the defendants: alleged breach of their fiduciary duties of prudence and loyalty, engaging in transactions prohibited by ERISA and by failing to monitor members of the Retirement Plan Fiduciary Committee to ensure compliance with ERISA’s standards, the court filing shows.

“The court has dismissed the plaintiffs’ claims for breach of the duty of loyalty in Counts I, III, and V, and the claim in Count V for the breach of the duty of prudence based on the plan offering too many investment options to participants and the plan failing to reduce fees with respect to several investments offered by the Teachers Insurance and Annuity Association of America,” wrote Thompson.

Among the alleged breaches, the plaintiffs contended in a complaint that Yale was offering too many investment options to participants and that the plan failed to reduce fees for several TIAA funds. The fiduciary breaches caused harm and participants to lose $431,298,918 in retirement savings, the plaintiffs claimed.

The judge allowed to proceed to trial plaintiffs’ claims that Yale “breached its fiduciary duty to monitor and avoid unreasonable recordkeeping fees with respect to the plaintiffs’ contentions that Yale imprudently delayed consolidating to a single recordkeeper, failed to obtain competitive bids, used asset-based pricing and failed to prohibit TIAA from cross-selling,” wrote Thompson.

Plaintiffs’ argument Yale plans fiduciaries engaged in mismanagement and imprudent acts, which resulted in losses to the plan, will also proceed.

Court records show that in June 2010, an estimated 83% of the plan’s $12.5 billion dollars was held in TIAA investments and the remaining was invested in roughly 80 Vanguard funds.

The plaintiffs’ ongoing case was initially brought in a 2016 complaint.

Thompson dismissed plaintiffs’ claims for breach of the duty of loyalty in counts I, III and V.  

Yale University did not return a request for comment on the ruling.

The case is before the U.S. District Court for the District of Connecticut.  

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