Critical lessons from Columbia University's 403(b) settlement

The recent settlement agreement with Columbia University on behalf of its plan participants is shocking, because many of the actions it mandates are basic prudent principles. Other features of the settlement portend issues for the future that could lead to even more litigation and regulatory enforcement activity against providers and advisers.

Some of the actions that the plan sponsor agreed to include:
• Mandatory annual fiduciary training for both the retirement committee and professionals running the plan.
• Record-keeping fees being charged per participant, with excess revenue sharing rebated to participants.
• Using the lowest-cost share class for all investments other than brokerage accounts.
• Continuing to use an independent investment consultant and meeting with them quarterly.
• Initiating a record-keeper request for proposals.
• Instructing the record keeper not to use participant data to cross-sell or market non-plan services, including IRAs, life or disability insurance and wealth management, unless specifically requested by the participant.

The lack of training for retirement committees and plan professionals is appalling, especially in the retail defined-contribution market. Many people got their job when someone walked into their office and said, “Good luck, you’re now in charge of running our retirement plan,” and then walked out. It’s not much better for committees.

Litigators and regulators could cogently make the argument that lack of training is a de facto fiduciary violation. After all, human resources and finance professionals, as well as committees, can't be expected to intuitively know the ins and outs of the Employee Retirement Income Security Act. Sure, they can outsource, especially to a fiduciary adviser that may oversee other providers, but some training is required to make sure they hire the right adviser and ensure that they're doing their job. Half of all plans still use non-specialist advisers, many of whom don't even show up, either in person or virtually, especially in the micro DC market, where elite retirement plan advisers rarely play.

The record-keeping business has always been upside-down, with costs based mostly on the number of participants while fees are based on assets, which increase as the plan grows even if the work does not. Many of the larger retail record keepers hide revenue sharing through the marketing and due diligence fees paid by asset managers on their platform.

The Columbia settlement could mean that these fees should be rebated back to participants. Could the same argument be made for advisers to charge a flat fee plus activity charges, like meeting with participants, while rebating the marketing fees that providers pay to them and their broker-dealer or RIA? Why not?

The lowest-cost share class might mean using collective investment trusts, which have become popular in the retail DC market, with fees that are 5% to 50% lower than those for mutual funds.

Of most concern to larger record keepers and RPA firms is the prohibition against using participant data to cross-sell other services unless requested. Valuations are based on the ability of these groups to monetize participants. A blanket prohibition or significant risk of fines or lawsuits could put a damper on these plans.

Imagine if Fidelity were not allowed to cross-sell individual retirement accounts, Empower couldn't use Personal Capital to offer financial planning or Captrust couldn't market wealth management services. Even if the plan sponsor agrees, the Columbia settlement would not allow for cross-selling or marketing to participants who did not specifically request help.

Many industry professionals complain that litigators add no value to DC plan participants since little of the money ends up in their pockets. But if a large plan sponsor like Columbia is forced to provide basic fiduciary best practices only as a result of litigation because of neglect, willful or otherwise, by the plan sponsor, consultant, providers or DOL, then perhaps we have no one to blame but ourselves.

[More: The future, as elite retirement plan advisers see it]

Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’​ RPA Convergence newsletter.