As lawsuits against plan sponsors pile up, defined contribution (DC) plan design has been called into question.
The most recent complaints—filed against universities including Columbia, Yale, and Johns Hopkins—criticize the use of multiple recordkeepers, high number of funds to choose from, and “excessive” fees. But just how warranted are these criticisms?
“A wide range of designs can be justified based on variations in plan provisions, participant demographics, and many other factors,” NEPC said.
In a new research note, the consulting firm’s Kevin Cress and Christine Loughlin offered a defense for some of the features these university 403(b) plans have been sued over.
For example, the use of multiple recordkeepers, they explained, stems from a standard practice in 403(b) plans of offering annuities in addition to mutual fund investments. These fixed and variable annuities—intended to offer a source of guaranteed retirement income—are typically provided by a separate recordkeeper, resulting in the multiple-recordkeeper model.
“The appropriateness of guaranteed income options is called into question by the lawsuits,” Cress and Loughlin wrote. “In contrast, legislators and regulators have been actively encouraging the adoption of lifetime income solutions in defined contribution plans.”
The pair’s defense for the abundance of fund offerings—a design element that research has shown to be detrimental to plan participants—similarly centered on annuities.
“In order to add annuities from other providers, or expand the menu to include mutual funds, plan sponsors offered more than one provider (and their platform of funds),” they wrote.
Cress and Loughlin also emphasized that 403(b) plans were a different beast from 401(k) plans—having been offered since 1958, 15 years before ERISA—and that the nonprofit employees who compose 403(b) committees and participants may prefer the “flexibility” of having numerous fund options due to their commitments to social causes.
As for the “excessive fees,” the consultants acknowledged that multiple recordkeeping structures are more expensive than plans with a single recordkeeper. But the tax-exempt status of 403(b) plan sponsors means there are other “meaningful differences” in recordkeeping costs from corporate 401(k) plans.
“The plan sponsors named in these lawsuits may need to demonstrate why their plan fees are reasonable,” they concluded. “We suspect that they will be able to do so.”