Compliance February 7, 2023

Nonprofit Nemours Foundation Faces 403(b) Lawsuit

Florida-based nonprofit operator of children’s hospital is alleged to have charged excessive fees to retirement plan participants.

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Former employees have filed a class-action complaint against the 403(b) retirement plan at the Nemours Foundation—a nonprofit operator of children’s hospitals—in U.S. District Court. The suit, Jeanna Cannarozzo et. al. v The Nemours Foundation, alleges plan participants were charged excessive fees by recordkeeper Transamerica.

The plaintiffs claim the plan fiduciaries breached their fiduciary duty to participants under the Employee Retirement Income Security Act by failing to observe prudent fiduciary practices to manage and control recordkeeping costs. The plaintiffs also allege that the plan selected the higher-fee retail-share class of investments, rather than an identical, lower-fee share class of the same investment, according to the complaint.

“The plan suffered millions of dollars of losses due to excessive costs and lower net investment returns,” states the complaint. “Had Nemours complied with their fiduciary obligations, the plan would not have suffered these losses, and plan participants would have had more money available to them for their retirement.”

The plaintiffs estimated Nemours’ imprudent choices for the share class resulted in millions of dollars in excessive fees paid by the plan and its participants over the last six years due to the alleged breaches of fiduciary duties, according to the complaint.

As of December 31, 2021, the Nemours Foundation 403(b) plan had $1,041,925,317 in assets and 13,236 participants with account balances, the court filing shows.

“Instead of leveraging the plan’s tremendous bargaining power to benefit plan participants, Nemours caused the plan to pay unreasonable and excessive fees,” states the complaint.

The plaintiffs alleged the plan was eligible—given its size and economies of scale—for discounted pricing on investments, according to the court filing.

The complaint also states that Nemours failed to prudently monitor the plan to determine whether it was invested in the lowest-cost share class available for the plan’s mutual funds, which are identical to the mutual funds in the plan in every way except for their lower cost.

Attorneys for the plaintiffs requested that a class action be certified by the U.S. District Court for the District of Florida’s Jacksonville Division and be applied to all participants in or beneficiaries of the plan at any time between February 1, 2017, and the present, states the complaint.

The Nemours Foundation, based in Jacksonville, was started in 1936 after the death of Alfred I. duPont. It operates children’s hospitals in Orlando, Florida, and Wilmington, Delaware, as well as children’s clinics in several states.

The plaintiffs are represented by the Wenzel Fenton Cabassa PA law firm, based in Tampa, Florida.

Wenzel Fenton Cabassa has filed several retirement plan lawsuits, including one last month against Quest Diagnostics, that made similar claims.

Ask the Experts February 7, 2023

Can Participants Elect to Designate Employer Contributions as Roth or Pretax?

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

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Q: I heard that SECURE 2.0 allows participants the ability to elect whether their EMPLOYER contributions are pretax or Roth. Is this true, and can we as a plan sponsor take action to do this right away?

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

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A: It is true. Section 604 of the SECURE 2.0 Act of 2022 allows participants in a 401(a) qualified plan, 403(b) plan or a governmental 457(b) plan to elect either pretax or Roth for their employer’s matching or nonelective contributions, if permitted by the plan. In theory, you can implement this change right away, but there are a few items to consider prior to changing your plan.

First, Section 604 requires that employer Roth contributions must be 100% immediately vested at the time of contribution. Thus, if you have a vesting schedule for your employer contribution, participants would be able to circumvent that schedule (albeit with immediate taxation of such contributions).

Second, there are action items that your recordkeeper/third-party administrator will need to take prior to being able to offer this service. It is unlikely that your recordkeeper/TPA would be able to turn on this feature immediately; instead, it will likely need time to implement this change, since it was not previously permitted in retirement plans. Not only will operating systems need to be reprogrammed, but a mechanism for making the election (e.g., paper form, electronic, or both) will also need to be implemented.

Finally, there are action items the employer will need to take to facilitate this election. This will not be the easiest election for participants to understand, so an effective communication campaign will need to be implemented. Plan sponsors will also need to amend the plan document (and update the plan’s SPD) to reflect this provision, which may be subject to the discretion of the recordkeeper if you are using their preapproved document. All in all, while you can begin the implementation process immediately, you should expect it to be months before this Roth employer contribution election becomes a reality for plan participants.

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.

 

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