During August, various 403(b) plan participants filed 11 lawsuits against large universities, alleging that they did not satisfy their fiduciary duties under ERISA with respect to their defined contribution (DC) plans.
Whether this is because 403(b) plan practices are not aligned to similar 401(k) plan practices or because it is lucrative to take plan sponsors to court, further activity against plan sponsors of 403(b) plans seems likely. Fiduciaries of all 403(b) plans (including hospital 403(b) plans) would be well served by reviewing their governance structure, and current and desired states, and making sure that markets are tested on a regular basis to ensure participant fees are market-competitive and reasonable.
Fiduciaries of hospital or health system 403(b) retirement plans should take these steps now to ensure compliance and reduce litigation risk:
Review governance structure. Clarify who is acting as a fiduciary of the 403(b) plan. Ultimately, it’s your board of directors, but responsibilities can be delegated to committee levels. Review the plan governance structure and delegations of your fiduciary committees, including plan documentation, processes and proper insurance coverages.
Inventory the current state. The lawsuits contend that the universities failed to provide adequate oversight of investment options by using an out-of-date 403(b) model that allows one or multiple third-party recordkeepers to offer hundreds of fund options to participants. Although many hospitals have not used this older 403(b) model for some time, you are obligated as the 403(b) fiduciary to understand the recordkeeper’s service fees charged to participants, investment options and fees, and your organization’s 403(b) program philosophy.
Conduct routine investment structure review and manager searches. Fiduciaries are obligated to make sure participants are only charged reasonable fees and have access to quality investment options. Fiduciary committee meetings should have a regular process in place for monitoring the investment structure and managers.
Conduct an RFP for recordkeeping services in the market. Recordkeeping services should be benchmarked against other plans at least every 2-3 years and put out to bid every 5-6 years to ensure the recordkeeper is providing value comparable to other similarly situated plans and vendors.
Conduct a fee structure study. Develop a fee policy statement that articulates the basis and reasons for allocating recordkeeping and investment expenses to participants. Some plan sponsors still allocate investment expenses based on the size of the account balance; however, there are other factors that need to be taken into consideration. Careful review of all fees charged to the 403(b) plan and of fee disclosures developed by the recordkeeper is also an important fiduciary responsibility.
Supervise ongoing due diligence and monitoring. If your fiduciary committee is up and running with the right members, proper delegations, written investment and fee policies, and competitive recordkeeping fees and solutions, make sure that compliance monitoring of the 403(b) plan transactions occurs regularly. Ongoing due diligence and monitoring should include regular fiduciary training that highlights the risks of being a fiduciary and how to avoid its pitfalls.
Additional protections modeling large 401(k) plans
As the differences between 401(k) and 403(b) plans have blurred in recent years, many 403(b) plan sponsors have adopted state-of-the-art approaches taken by large 401(k) plans as added protection for participants and fiduciaries. These approaches include:
• Delegating administrative and investment oversight of the 403(b) plan to the appropriate committee(s) consisting of key management and sometimes board members
• Providing a diverse lineup of index funds and opportunities for active investing through a mutual fund window
• Establishing written investment policy and fee policy documents
• Providing auto-enrollment and auto-escalation of participant contributions, especially where employees receive matching contributions from their employer
• Establishing regular fee reviews and benchmarking of services
Next steps:
• If your hospital sponsors a 403(b) or 401(k) DC plan, identify who in your organization — whether they know it or not — is acting as plan fiduciary and whether they may be inadvertently putting the organization in the path of emerging risk.
• Review your organization’s arrangements for providing fiduciary oversight to these plans, and make sure your fiduciaries are fulfilling their obligation to optimize your plan for its participants.
• Importantly, remember that by law, good fiduciary oversight is an ongoing responsibility and not a short-term task. Sponsors should act now to refresh their focus on their fiduciary responsibilities to the DC plans and ensure the proper processes and checklists are in place.
Michael Horton, FSA, is the Retirement practice leader for Willis Towers Watson’s Health Care Industry Initiative in charge of tailoring retirement thought leadership for not-for-profit hospitals and health care systems. He has over 25 years of experience with pension, DC and executive retirement plans for health care organizations.
Marina Edwards is a senior consultant in Willis Towers Watson’s Benefits Advisory and Compliance group, and serves as a national lead for DC fiduciary risk management projects. She applies over 25 years of 401(k), 403(b) and pension plan expertise to lead clients in vendor search projects for qualified and nonqualified DC plans, independent trustee and fiduciary searches, fee analysis and benchmark studies, plan compliance reviews, plan design studies, and merger and acquisition due diligence/strategy.