Well before there were self directed brokerage accounts in 401(k) plans, there were similar investment arrangements under 403(b) plans. Employers would permit investment vendors to make available to plan participants their full panoply of investment funds. This could be virtually all of the mutual fund types in a single fund family; in multiple fund families; or sometimes a hundred or more variable separate account investments in an annuity contract. Employers chose to give employees free reign with regard to these investments. After all, these investments were viewed by the participants as their own funds; they received prospectuses from all of the investment companies and insurance companies related to all of their investments; they received quarterly statements, annual reports and proxy statements; and voted on materials with regard to their investments. These investments actually provide employees with a great deal more information (and protection) than any participant who may have a similarly broad range of investment choices under a self directed brokerage account under a 401(k) plan.
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.
There are so many moving pieces in these lawsuits related to the particular structure and operational differences between 401(k) plans and 403(b) plans, that it does remind me of the expensive trap many service providers fell into after the 2007 IRS 403(b) reg changes. Those reg changes made 403(b) plans look deceiving a lot more like 401(k) plans. What those service providers (and the IRS as well) soon found out is that there are still fundamental structural and detailed differences between the two types of plans-and not recognizing those differences has been very costly.
It appears that the plaintiff law firms may have made a similar miscalculation, underestimating the differences between the two types of plans. After all, bringing a class action lawsuit is an economic decision: it has to be worth the time and expense of the lawsuit (and class action suits are expensive and time consuming, for both plaintiffs and defendants) to bring them. I strongly suspect that it will be difficult to maintain a participant driven lawsuit against a fiduciary based upon a claim of the participants that they chose to purchase an expensive investment, after disclosure which exceeds ERISA’s standards, and with more reasonably priced investments available to them. Then, even if the claim is successful, the plan fiduciaries would have no ability to force the participant-who chose the investment fund- to leave that fund. As in all things 403(b), the details matter. I suspect the plaintiff firms will find out that this was a poor choice for them (as long as the defense firms fully understand the difference between 403(b) and 401(k) plans, which is not a given, either).
What is very striking, however, is the potential impact of these lawsuits on the ability of 401(k) plans to maintain self-directed brokerage accounts. These 403(b) plans, with their wide variety of investments which are subject only to the control of the participants, are essentially structured in the same manner as SDBAs (without many of the security law protections that are given 403(b) participants). Should the plaintiffs succeed in their claims 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?
We know that the DOL has cautioned for years that the fiduciary has oversight responsibilities of SDBAs, and that we have all struggled to find a way to implement that oversight into investment policies and fiduciary procedures. But a successful claim in these 403(b) lawsuits may well put an end to all of that.