An uptick in class-action lawsuits directed at the higher education arena has brought to light antiquated practices of these plans. Generally, complaints center on fees, investment complexity and monitoring, and plan structure leading to diminished participant returns — and a breach of plan sponsor fiduciary duty.
University retirement plan committees have unique challenges facing their plans. The traditional method of multiple record-keepers, individual annuity contract structure, and a deluge of investment options, including guaranteed income annuities, prevents wholesale design and investment updates to current best practices to reduce fees, monitor investments and replace them when necessary, and align the plan with the needs of faculty and staff — while doing nothing to diminish fiduciary risk and liability.
Institutions with the goal of reducing their risk and creating better outcomes for their faculty and staff should consider the following steps:
1) Implement a group contract structure. 403(b) plans started as an individual contract structure between the end participant and the record-keeper. Universities often gave faculty and staff a number of record-keepers to choose from.
This structure resulted in varying fee and investment structures across the plan, and no ability for institutions to enact changes on the plan level to change investments or aggregate the assets to leverage more competitive pricing from record-keepers or other vendors.
Delaware, Ohio, Texas and other state associations took to Capitol Hill to emphasize the value of tax-favored status for workplace health insurance.
The result is hodgepodge in nature and full of fiduciary risk. Best practices would be to implement a group contract structure which brings plan level decisions back to the committee and leverages the plans aggregate assets, and vet and choose one service provider for the plan as a whole for the same reasons.
2) Lower the number of offered investments. Reduce complexity and fees by offering six to 12 investment options that complement the investment style and ability of the faculty and staff. If the investments generate any revenue to offset administrative costs, ensure that they are equalized at the participant level so as to eliminate any conflict of interest.
3) Understand who is getting paid. Plan level cash flows should be evaluated on an annual basis. When understanding who is being paid and how, institutions can fully understand provider motives and scrutinize the advice being offered. If your record-keeper is recommending proprietary investments, is that advice conflict free or in the plan’s best interest?
These processes align the plan with participants while moving toward better retirement outcomes for all.
This information was developed as a guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does adviser assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Guaranteed income annuities are long-term investment vehicles designed for retirement purposes. Guarantees are based on the claims paying ability of the issuing company. Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
