Why a Tornado of Benefit Plan Options May Increase Litigation Risk

Benefit Plan OptionsGiving plan participants a wide range of benefit plan options is positive — to a point. That idea underlies one of the multiple allegations in recent class action lawsuits filed against several prominent universities. The litigation offers a cautionary note for plan sponsors who offer a high number of investment options. While 401(k) plan sponsors are more than familiar with these types of claims, this group of lawsuits marks the first time that nonprofit organizations have been targeted.

A Whirlwind of Benefit Plan Options

Targeting seven universities, including New York University (NYU), Duke, Yale, and MIT, the lawsuits suggest there are at least two problems when offering too many fund choices:

  1. overwhelming participants, and
  2. incurring excessive costs.

Another potential issue: Fiduciaries may not have the ability to monitor the performance of so many funds.

[The defendant] provided a dizzying array of duplicative funds,” according to the complaint in Sacerdote v. New York University. The complaint also stated that NYU offered more than 70 investment options for participants.

To put that number into perspective, the complaint cited a survey that determined the average number of funds in defined contribution plans (excluding target date options) is 15. The plaintiffs contend that this lower number of options “provides choice of investment style while maintaining a larger pool of assets in each investment style and avoiding confusion.”

Spinning Heads

According to the suit, studies indicate that people have less confidence and end up making no decision when presented with too many choices. Thus, the plaintiffs argue, plan fiduciaries are not serving the best interests of plan participants as required under the Employee Retirement Income Security Act (ERISA) by offering a large number of options.

It is important to note, however, that the complaint did not offer any statistical evidence that participants had made inappropriate investment choices. The organizational culture at many universities gives great deference to employees’ confidence in their ability to make complex decisions.

Whether that confidence is appropriate under ERISA is to be determined. Each plan sponsor will need to provide evidence that it took the demographics of its own employee population into account in determining whether the number of plan investments is overwhelming.

The “Vortex” of Purchasing Power

Regarding the cost issue, the evidence may be easier to assess. The suit faults NYU on two fronts: using three recordkeepers and offering too many funds. The complaints allege that these failures cost tens of millions of dollars in retirement funds. As is not uncommon with nonprofit organizations that sponsor 403(b) plans, their retirement programs consist of multiple recordkeepers with different investment options. Employees can choose among all offered recordkeepers to invest their funds.

The plaintiffs contend that using a single recordkeeper provides clear benefits such as enhancing purchasing power and allowing sponsors to negotiate lower, transparent participant investment fees.

The complaint makes a similar argument with respect to the number of investment options: The plaintiffs assert that plan sponsors can “dramatically reduce participant-borne costs while improving employees’ retirement readiness by reducing the number of investment options, utilizing an ‘open architecture’ investment menu, and packaging the options within a tiered structure.”

The plaintiffs also criticized the plan’s inclusion of many actively managed stock funds, whose costs are typically much higher than passive index funds.

Avoid a Potential “Cyclone” of Litigation from Too Many Benefit Plan Options

These cases are in the early stages, but note that if your plan includes dozens of options, then this could signal a breach of your fiduciary duty. Contact CRI for assistance with analyzing your investment options now to evade a potential “twister” of lawsuits related to this issue.

2018-11-12T15:46:35+00:00December 21st, 2016|EMPLOYEE BENEFIT PLANS|