PLANADVISER - March/April 2020 - 37

more choice, she says. Since ERISA allowed for 403(b) plan
assets to be invested in custodial accounts-e.g., mutual
funds-sponsors began adding more providers to their plan.
Plan sponsors and their advisers should re-evaluate the
prudence of maintaining a multiple recordkeeper/provider
construct once their plan offers mutual funds, Kaido says.
" Providers have open-architecture platforms by which any
mutual fund can be accessed from one provider. Unlike
401(k) plan sponsors, many 403(b) sponsors have not aggregated
assets, to use buying power to lower fees. " The size
of plans, in terms of the amount of assets they hold, and,
hence, their ability to bargain for lower fees, has been cited
in many of the suits filed against 403(b) plan sponsors.
Streamlining a 403(b) plan's investment menu-as the
suits seem to imply is best practice-is not so easy, though.
Levine notes that the annuities held in 403(b)s are individual
contracts between the participants and providers-the plan
sponsor may not move the assets in those annuities without
the participant's consent. Convincing participants to switch
to another investment, and then doing so, is complex and
requires a number of steps. Advisers should realize that
assets may not be moved all at once or the participant will
incur large surrender charges. Often, contracts are set up
such that participants may move only increments of assets,
spaced out over a specified time, without being charged.
" Advisers should recognize that the differences in fund
lineups for nonprofits and for-profits are sometimes for good
reasons, " Levine says. " They require different discussions. "
For example, to do what is best for participants, and to
try to avoid litigation, sponsors could improve their governance
practices for evaluating annuity fees. Donna Kramer,
regional sales director at BPAS in New York City, says, with
annuities, it can be hard to ascertain what the fees are and
who is being paid what; mutual funds have more transparency,
and funds without revenue sharing are available.
A benefit to plan sponsors of offering annuities is that
revenue sharing and other fee components can cover the
plan's costs; however, there is little transparency as to what
fees-e.g., surrender charges-could affect the participants.
" Advisers can help shine a light on whether products being
offered include compensation for recordkeeping or administration
and whether the cost to participants moving out of
the products is transparent, " Kaido says. That criteria can
be the basis for whether to keep offering the product.
With 401(k) plans, recordkeeper, adviser and investment
fees are typically separate, she adds, noting that in many
403(b) plans, fees are still " mashed together " in investment
costs. Also, fee levelization is not as common in 403(b) plans
as in 401(k) plans.
" Advisers should benchmark plan fees on an annual
basis. It's a relatively simple exercise to make sure the plan's
expenses are in line with the services plan participants are
receiving, " Kaido says. " Advisers should issue a request for
proposals [RFP] every three to five years, depending on
the plan size and service structure. Review all applicable
providers, investment option performance and expenses. "
Kramer says advisers should encourage 403(b) plan sponsors
to develop an IPS and establish a committee to review
the plan and investments on an ongoing basis. " Committees
typically do reviews quarterly. Advisers should give [client]
committees reports on changes to investments, such as a
fund manager change, as well as a fund performance review
and an overall market review-especially important in volatile
times like now, " she says.
Kaido says having documented processes is important;
there should be processes and policies in place that include
the different roles and responsibilities for managing the
plan and for decisionmaking; there should be documentation
to back up decisions.
" It's important to have a record. If you're doing all this
work and not documenting it or you can't produce documentation,
that can really get you in trouble, " Kramer says. In
a lawsuit alleging imprudence in the management of two
New York University 403(b) plans, the court sided with the
university, in large part because of the evidence that proved
its adviser offered regular updates and reports, and that
showed the committee made decisions based on adequate
investigation and independent assessment.
Regarding the IPS, Levine says many sponsors like to
use a generic IPS, which he does not recommend. He leans
toward a short, broad-based IPS lacking much detail to
allow for flexibility. And he says advisers should think carefully
about how the IPS relates to 403(b)s' unique structure.
When it comes to the lawsuits, he says, advisers and
sponsors can learn from them, " but just because a lawsuit
says a, b and c, doesn't mean it's right. " Again, advisers need
to keep in mind that some of the low-cost investment vehicles
available to 401(k) plans are not available to 403(b)s-
for example, collective investment trusts (CITs).
The lawsuits against 403(b) plan sponsors suggest the
one-recordkeeper model of 401(k) plans is the optimal model,
but Levine says there is no wrong or right answer. " Among
403(b) plan sponsors, some say one recordkeeper is the best
idea; some say they like to offer participants choices. It's a
great example of how the 403(b) world is different, " he says.
They may also say, " 'We like annuities that Provider X offers
but mutual funds that Provider Y offers,' " so telling a client
it needs just one is not a slam-dunk, he says.
His advice to advisers of 403(b) plans is to first understand
the culture of the client, the history of its investing and
why that history is where it is before trying to implement a
cookie-cutter solution. -Rebecca Moore
KEY TAKEAWAYS
* Many allegations against 403(b) plans are common
to 401(k) plan fiduciary breach lawsuits and can be
addressed with stronger governance practices.
* Processes and policies should be in place that cover
the various roles and responsibilities for managing the
plan and for decisionmaking; documentation to back
up decisions is key.
Art by Dalbert B. Vilarino
planadviser.com March-April 2020 | 37
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