Fiduciary Best Practices for Public University Retirement Plans
Last week, I had the pleasure of attending a webinar hosted by my colleagues, Joey Payne and Jeff Levy of Cammack Retirement Group, and Eric Paley of Nixon Peabody. The webinar examined best practices for public university retirement plan fiduciaries in the current litigation and regulatory environment. I found some of the key takeaways to be:
- Fiduciary litigation continues to be on the rise — With a reported $200 million earned by Schlicther, Bogard and Denton, the litigation pioneers in this area, a precedent has been set that has emboldened the plaintiffs’ bar and resulted in “copycat” cases, expanding litigation from large corporate plans to other types of organizations, such as private universities and smaller corporate plans. While public university retirement plans are not subject to ERISA, they are well within the “sweet spot” of the plaintiffs’ bar. Thus, retirement plan sponsors at public universities should prepare themselves and their plans, as they are likely to be a future target.
- Common litigation themes have emerged — Many of these lawsuits have addressed the same issues, such as:
- Retail vs. institutional share classes
- Money market vs. stable value funds
- Investment strategy of stable value funds
- Recordkeeping fees: Fixed per-participant dollar fee vs. percentage of assets
- Investment advisory fees
- Use of recordkeeper’s participant investment fund disclosure guide
- Inadequate target date fund (TDF) disclosure
- Failure to re-capture excess revenue sharing
- Failure to conduct requests for proposals (RFPs) for recordkeeping services in a timely fashion
- Utilizing investment options with limited histories
- Use of multiple recordkeepers
- Fees are critical — Studies have shown that for a participant earning just $30,000 a year, excess retirement plan fees can amount to over $100,000 throughout the course of their working career. For others with higher salaries, excess fees paid over time can amount to hundreds of thousands of dollars. Thus, retirement plan fees should be reviewed at least annually, and a recordkeeping RFP should be conducted every 3-5 years, as an RFP will almost always result in a reduction of fees.
- The “answer” to the basis point vs. per head fee debate may be a hybrid approach — Many public higher education plan sponsors currently utilize a basis point approach for recordkeeping fees, where the fee is a percentage of plan assets. However, this means that fees automatically increase as plan assets grow, even though the recordkeeper’s expenses are generally a fixed amount per participant. Thus, a pricing model has emerged where the recordkeeping fee is a fixed dollar amount per participant, also known as a “per head” charge. However, this approach, unless modified, can mean that participants just starting out in the plan may pay a fee that is a significant percentage of their account balance. To remedy this, the hybrid approach negotiates a fixed dollar fee amount with the recordkeeper, and the plan sponsor translates that into a basis point amount for each participant. While this approach has not yet been widely adopted by the public university marketplace, I suspect that will change as more and more universities move away from the basis point approach.
- Fee levelization is an emerging trend — Fee levelization ensures that participants who utilize funds that share revenue with the recordkeeper pay the same overall recordkeeping fees as participants who use funds that do not share revenue with the recordkeeper. Before the advent of fee levelization, participants who chose funds that did not share revenue — such as low-cost index funds — were often paying little to no recordkeeping fees, at the expense of other plan participants. Fee levelization solves this inequity. However, this process often results in explicit fees that are present on a participant statement. Thus, there is an education process involved with such a transition, as many participants have the misconception that their retirement plan is “free.”
- Utilizing multiple recordkeepers makes it increasingly difficult to follow best practices in the current environment — As indicated above, the use of multiple recordkeepers has emerged as a litigation issue. Multiple recordkeepers results in higher recordkeeping fees nearly 100% of the time, due to economies of scale. Additionally, the use of multiple recordkeepers creates numerous operational inefficiencies and increases the likelihood of plan failures due to the moving parts involved. Thus, public universities, which have been the last bastion of plans where multiple recordkeepers are involved (outside of the fundamentally different K-12 market), are increasingly consolidating to a single recordkeeper.
To view this webinar in its entirety, please click here.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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