Recent lawsuits against 403(b) plan fiduciaries have alleged the following breaches of fiduciary duties under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"):
- Paying excessive fees for investment options;
- Failing to include institutional share classes at a lower cost;
- Failing to include passively managed investment options that were less expensive than actively managed investment options;
- Offering too many investment options;
- Providing revenue sharing with service providers for certain investment options;
- Lacking efficiency due to multiple recordkeepers;
- Offering variable annuities containing layers of fees (i.e., administrative expense charge, distribution expense charge, etc.);
- Making decisions to use bundled service arrangements and service providers that are not in the best interest of participants; and
- Engaging in prohibited transactions by paying excessive compensation to parties-in-interests.
ERISA does not apply to every 403(b) plan, so not every 403(b) plan is a target for these types of lawsuits. According to previously issued guidance from the Department of Labor, ERISA generally applies to 403(b) plans unless the plan is funded only with employee salary reductions, the employer makes no contributions to the 403(b) plan, and the employer has no other involvement in the plan. If the 403(b) plan is subject to ERISA, the plan fiduciaries must comply with fiduciary obligations as set forth in ERISA, including the duties of prudence and loyalty, discharging duties solely in the interest of plan participants. Many entities maintain two separate 403(b) plans, where one 403(b) plan has employer contributions and is subject to ERISA and a second plan has only employee contributions and is not subject to ERISA. The recent lawsuits against 403(b) plans bring to light unresolved issues with the fiduciary duties associated with the offering of a 403(b) plan by a tax-exempt entity. To protect against similar lawsuits, fiduciaries should review the following items with ERISA counsel while determining whether or not their 403(b) plan is subject to ERISA:
- Who is a plan fiduciary under ERISA;
- The governance and decision-making process for the 403(b) plan and its investments under ERISA;
- Potential prohibited transactions; and
- Fiduciary liability insurance.