Will 401(k) and 403(b) Litigation Turn Retirement Plans Into Widgets?
Earlier this year I wrote a post about ERISA litigation going “off the rails.” Alas, it feels like we've gone from bad to worse since then.
In the past week, a whole new round of lawsuits involving academic institution 403(b) plans has hit the news. Despite the “newness” of the targets (large universities), at a high level the claims feel just the same as our never-ending run of 401(k) lawsuits — the plans are too expensive, too complex, and have bad oversight.
As someone who has and continues to do a lot of work with 403(b) plans, it just makes me shake my head. 403(b) plans — and their sponsors and participants — are often very unique. Their legal rules are different. Their funding structures are different. Academic institutions are non-profits, and the unique attributes of these institutions often filter down to their benefit programs. The needs of academic plan participants and beneficiaries are similar to those of for-profit sector employees, but traditionally some may have had different levels of engagement with their plans and service providers than we typically see in the private sector. But let’s be honest: If the plaintiffs’ bar gets their way, being unique may not matter anymore.
The retirement world can go back and forth on the merits of active versus passive, lowest cost versus higher service, bundled versus unbundled, and a million other discussions. John Oliver’s HBO piece on his company’s retirement plan may have gotten a lot of attention for the cost aspect, but I have always taken the view that what the law says is that you need to be prudent. Is cost an important factor? Of course, but other items, such as service levels, services rendered, and who assumes responsibilities for key plan functions, can be relevant considerations too. Again, if the plaintiffs’ bar gets their way, these factors may not matter anymore.
Today we find ourselves at dangerous crossroads. Is the retirement world perfect? No. But the vast majority of the members of the retirement ecosystem — from plan sponsors to service providers of all stripes — try to do their best. Fees across the industry continue to drop. It is a good thing — but performance, not just fees, is a relevant factor in evaluating investments.
Similarly, recordkeeping and other services are not just about cost, but also service levels, what services are provided, and the level of services. There is no one-size-fits-all, but many of the actions brought by the plaintiffs’ bar would seemingly paint retirement plans as one-size-fits-all widgets. This outcome could easily stifle innovation and efforts to build a better solution for participants’ retirement years.
What should we do?
In my previous post I asked whether it was “time to fight.” Perhaps a more refined question is whether it is time for those across the industry to embrace the fact that there are many ways to approach retirement plans — from highly automated, technology-driven approaches, to high-touch one-on-one personal approaches, and all versions in the middle — and accept that competition among ideas is good but preservation of a marketplace of ideas is essential, regardless of your position in the marketplace. Establishing such a baseline and getting regulatory clarity on this point would empower the use of resources for the end goal of the retirement marketplace: advancing the long-term interests of participants and beneficiaries.
Without taking these steps, I fear that much innovation will be lost and instead retirement will turn into a one-size-fits-all universe, turning retirement into an imperfect widget — alas, potentially no better off than where we began.David N. Levine is a principal at Groom Law Group, Chartered, in Washington, DC.
Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.