403b lawsuits on the rise.
The recent class action lawsuits against college 403b plans alleging that offering participants too many investment choices is imprudent may lead to issues with brokerage windows or self-directed brokerage accounts (SBDAs) according to a Texas based ERISA lawyer.
That lawyer notes that:
The recently filed 403(b) University lawsuits are now challenging that long standing investment practice, claiming that it is a fiduciary breach to permit participants to choose from that many investments and, where the participant has chosen an expensive investment (after complete disclosure, and with no chance for the fiduciary to override that decision), claiming the plan’s fiduciary had the obligation to prevent that investment from even being available under the plan.
Not only do too many choices usually end up with poor investment returns, it hurts the buying power of the plan and increases costs. According to an Aon Hewitt study reported in the Wall Street Journal, more defined contribution plans like 401ks are offering a brokerage window. While costs are higher for participants and returns lower, there are some benefits.
Offering a brokerage window allows plans to limit core line-ups while silencing the vocal minority. In fact, plans offering a brokerage window have 8% fewer core funds. And according to Columbia professor Sheena Iyengar, plans with fewer funds enjoy better participation and participants make better decisions. Users tend to be older with higher account balances and generally have lower returns than those using a plan’s core line-up.
Plan sponsors have a fiduciary obligation to prudently select and periodically monitor DIAs but have no such obligation for investments in a brokerage window. The DOL will look carefully, though, if a plan uses a brokerage window for a significant percentage of assets to potential skate the prudent selection and monitoring rules
Now, according to the ERISA attorney in Texas, these SBDAs may be ripe subjects for lawsuits:
Should the plaintiffs succeed in their calms that it was imprudent to permit employees the ability to invest in a wide range of securities without fiduciary oversight, this may well be the death knell of SDBAs. What fiduciary will want to be held liable for the expensive choice of a participant under an SDBA?
Good question.
