If you are under the impression that excessive fees don’t apply to 403(b) plans, consider the example of The Sherwood Foundation, chaired by Susan A. Buffett, daughter of Warren Buffett. Of all 403(b) plans that you would think would be managed in a fiscally responsible manner, you would think it would be this one, but this summary of commission payments made to the broker on their plan shown on the publicly available 5500 form (the tax form required to be filed with the Department of Labor) indicate otherwise. I’ve explained how to look up this information in a previous post.
While the commission payments (not including record keeping, custodial, and mutual fund fees, and likely also not including administration fees) did decrease in 2022, given that there were only 12 active participants that year, it is hard to justify over $10,000 in commission payments, let alone over $18,000 the previous year. Just like 401(k) plans, the service provider fees are often wrongly based on a percentage of the total plan asset value rather than a fixed fee based on the level of services provided.
Furthermore, allowing a service provider to receive commission payments from mutual funds instead of fees directly from participants causes conflicts of interest. I have explained more here.
Consider the fee summary of Nonprofit Association of the Midlands as well.
2010: $5,977 in fees paid to Nationwide
2011: $13,768 in fees paid to Nationwide
2012: $18,318 in fees paid to Nationwide
2013: $31,787 and $8,009 in record keeping and administration fees paid to Nationwide and Benefits Plans Inc; $28,018 in fees paid to Lincoln National Corporation
2014: $36,802 and $11,971 in record keeping and administration fees paid to Nationwide and Benefits Plans Inc
2015: $59,152 and $17,186 in record keeping and administration fees paid to Nationwide and Benefits Plans Inc
2016: $78,461 and $22,363 in record keeping and administration fees paid to Nationwide and Benefits Plans Inc
2017: $97,477 and $22,912 in record keeping and administration fees paid to Nationwide and Benefits Plans Inc
2018: $146,684 and $35,146 in record keeping and administration fees paid to Nationwide and Benefits Plans In
2019: $154,093 and $44,965 in record keeping and administration fees paid to Nationwide and Benefits Plans Inc
2020: $180,828 and ($62,052 and $16,043) in record keeping and administration fees paid to Nationwide and Benefits Plans Inc
2021: $230,687 and ($63,516 and $20,938) in record keeping and administration fees paid to Nationwide and Benefits Plans Inc
Granted, the number of plan participant increased over time, but this increase was not reasonable in proportion to the level of services required for this plan. Vanguard, for example, would have provided record keeping, administration, and custodial services for about $130,000 in 2021 – significantly less than half of what plan participants paid that year. And Vanguard’s services aren’t substantially different, so there is no good reason why plan participants are paying such high fees.
A recent court case illustrates the increased fiduciary risk of passing on higher service fees to plan participants than what a comparable provider would have charged:
”Participants in a “mega” 401(k) plan (i.e., a plan with over $500 million in assets) brought this lawsuit claiming that their employer and plan benefits committee breached their fiduciary duty of prudence by allowing the plan to pay excessive bundled recordkeeping and administrative fees, and that the employer and its board of directors breached their duty to monitor those fees. The court denied the employer’s motion to dismiss the case under the Seventh Circuit’s “newly formulated pleading standard” for this type of fiduciary breach claim (see our Checkpoint article).
The participants asserted that the plan received a “standard package” of bundled services “of a nearly identical level and quality to other recordkeepers who service other mega plans,” but paid fees higher than those paid by other 401(k) plans with comparable participant counts and similar amounts of money under management. To bolster their claims, the participants produced tables showing that, from 2014 to 2020, the plan paid an average of more than twice (sometimes 2.5 times) what comparable plans paid per participant for bundled services. The court explained that, under the new pleading standard, to sustain an ERISA fiduciary breach claim based on excessive fees, parties must simply provide enough facts to show that a prudent alternative action was plausibly available, rather than actually available. The court concluded that the participants had plausibly alleged that comparable plans received bundled services with nearly identical services and that, due to the competitive market, comparable services could be obtained for less.
EBIA Comment: The new pleading standard has opened the door to increased litigation because a participant pleading a breach of ERISA’s fiduciary duty of prudence need only plausibly allege fiduciary decisions outside a range of reasonableness. It remains to be seen whether these participants can prove their claim and win at trial. Nevertheless, plan sponsors of mega 401(k) plans may be under increased pressure to find the cheapest recordkeeping service options, now that participants may easily meet the pleading standard for a fiduciary breach claim by arguing that recordkeeping services for mega 401(k) plans are fungible and that the same bundled services could have been provided by other comparable recordkeepers at lower cost. For more information, see EBIA’s 401(k) Plans manual at Sections XXIV.G (“Fiduciary Duty #2: Procedural Prudence”), XXV.F (“Investment Fees and Expenses”), and XXVI (“ERISA Fiduciary Rules: Participant-Directed Investments”). See also EBIA’s ERISA Compliance manual at Section XXVIII.I.8 (“Litigating a Breach of Fiduciary Duty Claim”).”
In conclusion, it is imperative for those working in non-profits and participating in 403(b) plans to be vigilant about the fees associated with their plans. As we have seen with The Sherwood Foundation and the Nonprofit Association of the Midlands, even seemingly reputable organizations can have high fees that are hard to justify. Moreover, the recent court case has shed light on the increased fiduciary risk and potential for litigation due to excessive fees in retirement plans. It is your hard-earned money and future at stake, and being informed is the first step towards safeguarding it.
Educate Yourself: Take the time to understand the fees associated with your 403(b) plan. If you are unsure how to do this, consider reading this guide that explains how to look up the fee information.
Engage in Discussion with Your Employer: Encourage transparency and discussion about the fees within your organization. Ask questions and insist on justifiable explanations for the costs associated with your plan.
Explore Alternative Service Providers: Investigate alternative service providers who may offer comparable services at lower fees. Vanguard, for example, could be an alternative worth considering.
Stay Informed About Legal Developments: Keep an eye on court cases and legal developments concerning 403(b) plans, as these could have a direct impact on your investments.
Seek Professional Assistance if Necessary: If you believe that the fees in your plan are unreasonable, don’t hesitate to seek legal or financial advice. It might be possible to bring a case against your plan provider, as seen in the recent court case.