Eight prominent universities—including University of Pennsylvania, Duke, Emory, Johns Hopkins, Vanderbilt and others—were hit with separate lawsuits in August 2016 alleging the institutions mishandled their employee retirement plans.
While the institutions fight those lawsuits, experts have predicted the complaints are just the first of many to be filed against colleges and universities that sponsor 401(k) or 403(b) retirement plans.
“This litigation is no surprise, as the same lawyers who are pursuing higher education retirement plans have brought similar suits against large corporate retirement plans,” says Mark Johnson, founder of ERISA Benefits Consulting in Texas and a former corporate attorney.
“Many of those large corporate plans are settling their cases and cutting their losses, and if the universities do the same, it may lead to more lawsuits in higher education.”
Some similar lawsuits have rendered large settlements. For instance, Schlichter Bogard & Denton—the law firm behind many of the recent higher education lawsuits—has settled suits against companies such as Lockheed Martin, Boeing and Novant Health. The Lockheed Martin settlement was for $62 million.
Under the Employee Retirement Income Security Act (ERISA), employers that sponsor retirement plans have a fiduciary responsibility to prudently manage those plans on the behalf of their employees.
In general, the lawsuits allege the universities breached those responsibilities by offering retirement plans that required employees to pay excessive fees and miss out on extra savings. Some of the suits also claim:
- The plans offered too many investment options, which can confuse employees.
- The universities did not swap out expensive, poor-performing investments for better options.
- The universities cost their employees more by using multiple companies as plan providers rather than by negotiating lower fees with just one provider.
In recent years, sweeping changes to ERISA regulations have required employers to revisit their retirement plans and, often, make changes.
While public universities, as government employers, are not subject to ERISA regulations, many of them are closely watching the developments and making changes to the way they run their retirement plans, unsure of how the lawsuits may reshape regulations across the board.
As college and university leaders across the country wait to see how these lawsuits will be resolved, they can also take important steps to ensure that their own plans comply with regulations and are not vulnerable to litigation.
Understanding how we got here
Retirement plan sponsors face countless challenges to fulfilling their responsibilities: increased longevity, low savings rates, diverse workforce demographics, aging employees, market volatility, low interest rates, diminishing pension plans, plan mergers and automatic features, says Karen Casillas, vice president and financial advisor at Captrust, which provides advisory services to retirement plan fiduciaries.
The first step to compliance is realizing how changing regulations impact institutional retirement plan administrators.
Before 2009, informal rules guided the management of 403(b) plans (used at most colleges and universities), and only simple reporting was required, with limited fiduciary and oversight requirements.
Most higher ed institutions applied very few resources to retirement plans because only limited employer involvement was required, says Casillas.
However, in 2007, the IRS issued “the most comprehensive regulations governing 403(b) plans in more than 43 years, requiring significant compliance obligations to be phased in,” Casillas says.
And beginning in 2009, nonprofit institutions sponsoring a plan had to implement several new rules that required extensive resources, oversight and attention. (See “Meeting ERISA requirements” sidebar.)
Meeting ERISA Requirements
One of the reasons for increased scrutiny of employer-sponsored 403(b) plans is the IRS’ implementation of new regulations, which went into effect in 2009. Since then, colleges and universities that offer these plans are required to implement a number of new steps, which include:
- Adopting a document that details how retirement plans will be managed
- Overseeing the overall investment strategy and its implementation
- Passing nondiscrimination rules
- Adhering to tax-exempt employer-controlled-group rules
- Adopting “universal availability”
- Meeting requirements for conducting an annual plan audit
- Considering the allowance of Roth contributions
- Noting specific provisions for annuity contracts and custodial account agreements
The changes required a complete paradigm shift among colleges and universities that sponsor retirement plans. Suddenly, their staff needed an entirely new skill set for regularly assessing investments, fee schedules and the retirement readiness of their employees.
Under ERISA, fiduciaries are required, among other things, to prudently monitor the investment choices, to ensure expenses are reasonable and to ultimately act in the best interest of the plan’s participants and beneficiaries, Casillas says.
“If they haven’t already, now is definitely the time for colleges and universities to fully evaluate their committees and processes to ensure they are meeting those requirements.”
Responding to regulations
Becoming aware of regulation details is a must. If members of the current team, such as business officers and human resources professionals, doesn’t have the skill set or resources to examine the requirements and develop solutions, administrators should consider working with outside experts.
There may be a variety of methods to reach compliance.
“Some plaintiff lawyers would have you believe there’s a hard and fast process for compliance, but that’s not true,” says David Levine, attorney and principal at Groom Law Group in Washington, D.C., which focuses on employee benefits.
“ERISA does not require perfection. There are thousands of definitions of compliance.”
Rather than worrying about following specific steps to become compliant, institutional business office leaders should stay informed about what’s happening with regulators and litigation, and ensure their own retirement plan management process makes sense for their institution and is well-documented, Levine adds.
For instance, in 2009, Birmingham, Alabama-based Samford University reduced the number of 403(b) providers from five to two, says Fred Rogan, director of human resources. Shortly after, the university hired an outside firm to review the investment offerings in its 403(b) plan.
Today, the university still relies on the outside consultants to review its plan investment offerings several times each year. An internal retirement plan committee acts on any recommendations made by the outside firm to change investment offerings.
At McDaniel College in Westminster, Maryland, leaders have made similar changes.
When new regulations went into effect, “I realized I couldn’t tell you what I was paying in retirement plan fees, and I was the CFO,” says Tom Phizacklea, McDaniel’s vice president for administration and finance, who was with another college at the time. “We can’t be experts at everything, so I decided it was time to get some help.”
Since then, Phizacklea has worked with an outside consulting firm to establish a retirement plan committee, provide fiduciary training for the committee, and help monitor the plan’s performance. “Our consulting firm is also a co-fiduciary in the plan, so they have some skin in the game as well,” he says.
Building sustainable practices
When outside firms work with colleges to meet their fiduciary responsibilities, they focus on evaluating the committee structure, members, objectives, training and documentation, Casillas says.
Next, the team focuses on establishing a prudent governance process to evaluate fees and services, and to conduct other necessary work of the plan. This may include:
- creating an investment policy statement
- monitoring internal controls
- measuring employee retirement readiness
- preparing for annual and regulatory audits
- reviewing disclosures
- managing timely contributions
- conducting ongoing due diligence for plan investments
- considering investment advice for participants
- providing comprehensive participant communication
Committees—which often include faculty and staff representatives as well as business office and human resources leaders—must be educated about fiduciary responsibilities as well as “national trends, settlor’s functions, innovations in services and technology, regulations, litigation, plan provisions, and their unique employee demographics,” Casillas says.
While every institution must develop a retirement plan protocol that fits its demographics, some experts advise choosing passively managed, low-cost investments to avoid legal issues.
Actively managed funds require higher fees, since they must pay a manager, and there are no guarantees that those fees will result in greater returns. Instead of taking the risk of higher fees and lower-than-average returns, colleges should move toward target-date funds and passively managed funds, says Johnson of ERISA Benefits Consulting.
“You can have other options in your plans with appropriate disclosures to employees, but as an employer, you have nothing to gain from betting on actively managed plans.”
Following the ERISA standard (even if you don’t have to)
While public colleges and universities aren’t required to follow ERISA rules, many administrators believe the standards make sense for their plans.
At Central Michigan University, for instance, the human resources office regularly monitors litigation activity and updates the vice president of finance and administrative services, who serves as the institution’s retirement plan fiduciary.
“We view the fiduciary responsibilities defined by ERISA as best practice and, as such, have begun to incorporate similar processes into our plan administration,” says Lori Hella, associate vice president for human resources.
In 2015, for example, the university formed a Retirement Investment Advisory Committee and created an investment policy statement, which provides guidelines for managing the university’s retirement plans. Central Michigan leaders also swapped out some investment options to reduce plan fees.
Like the institutions working to comply with ERISA regulations, Central Michigan’s committee recommends an appropriate range of investment options, removes any not performing at acceptable levels, and regularly monitors and changes the qualified default investment funds when appropriate.
The committee, which partners with HR to meet with and evaluate the plan’s third-party investment advisor, also monitors total plan costs and services to ensure they are competitive and reasonable.
Similarly, the Pennsylvania State System of Higher Education, which manages retirement plan compliance for its 14 universities, also works to employ ERISA-level standards, says Brenda Mundell, a certified public accountant and director of system employee benefits.
The system’s Retirement Plan Administrative Committee meets regularly and conducts an annual review of investment performance and the fees associated with the various fund choices.
When necessary, funds are removed or replaced due to poor performance, and changes are made to share classes to reduce participant fees. (Retirement assets are often ranked according to share value, as in Class A or Class B, and lower classes include lower fees.)
The system requires periodic requests for proposal from its retirement plan vendors, too. In recent years, it has removed some vendors partly because of higher-than-average fees being assessed to participants, Mundell says.
Moving forward, administrators at both public and private colleges and universities will be wise to stay informed about ongoing retirement plan litigation. In the corporate world, similar lawsuits eventually led to widespread changes, Johnson says.
So the current litigious environment could yield new requirements for higher ed plans as well.
As Central Michigan’s Hella explains, staying abreast of ongoing litigation, court rulings and regulatory compliance is challenging but necessary. At her university, it involves working with a retirement plan consultant and constant education.
Hella says, “It’s uncharted territory for many employers, maybe more so for employers not subject to ERISA.”
