Marcia S. Wagner, Esq. Fiduciary Developments Affecting 403(b) Plans What Do You Need to Know?

Introduction and Agenda 403(b) plan responsibilities Key 403(b) plan features ERISA coverage Investment duties Fiduciary lawsuits Recommended changes 2

403(b) Overview Regulation of 403(b) plans ◦ Internal Revenue Code ◦ ERISA ◦ State Law Meaning for plan sponsors ◦ 403(b) plan to be operated in accordance with plan document and IRS requirements ◦ Plan sponsors required to manage investment menu in accordance with fiduciary rules ◦ Fiduciaries potentially liable for fiduciary breaches 3

Key Tax Rules for 403(b) Plans IRS Restrictions ◦ 403(b) plans can only be sponsored by non- profits or public educational organizations ◦ Funding media restricted to annuity contracts or custodial accounts investing in mutual funds ◦ Universal availability rule: all full-timers earning more than $200 must be eligible to defer ◦ Subject to annual deferral limits ($18,000 in 2016) ◦ Annual deferral catch-ups may be available 4

When a 403(b) Plan is Covered by ERISA ERISA Exemptions ◦ Governmental and church employers ◦ Non-profits if their plan involvement is limited under safe harbor ◦ Conditions for safe harbor  Employee participation completely voluntary  Employer involvement limited to  Remitting payroll contributions  Limiting vendors  Permitting vendors to promote products  Holding group annuity contract 5

ERISA Safe Harbor Issues Acts disqualifying sponsor from safe harbor reliance Consequence of disqualification: imposition of ERISA and its fiduciary rules ◦ Promoting the 403(b) plan ◦ Auto-enrollment ◦ Matching contributions ◦ Exercising authority over vendors or investments ◦ Endorsing vendors ◦ Reliance on single vendo r 6

Investment Duties of 403(b) Plan Sponsors under ERISA 403(b) sponsors must prudently manage investment menu ◦ Develop investment policy statement ◦ Offer broad and diversified range of asset classes ◦ Gather & evaluate all relevant information before selecting an investment ◦ Additional consideration to target date fund ◦ Monitor funds ◦ Review fees and expenses Consult plan advisor when necessary 7

Overview of Recent Developments DOL Fiduciary Rule Excess Fee Lawsuits 8

Impact of New DOL Fiduciary Rule Affected plans ◦ 403(b) plans sponsored by private non-proifits ◦ Governmental plans, church plans & safe harbor plans not covered ◦ Effective April 2017 What the new rules does ◦ Expands range of persons treated as fiduciary ◦ Encourages vendor compensation that is flat dollar amount or percent of assets ◦ Allows commissions and other variable compensation subject to disclosures & vendor’s adherence to best interest standard 9

403(b) Litigation Overview of New Cases New lawsuits against 12 jumbo 403(b) plans claim excess fees are fiduciary breach ◦ Targeted plans:  $1- 4 billion in assets  20, , 000 participants Elements of complaints ◦ Recordkeeping & investment costs too high ◦ Expensive funds have underperformed ◦ Large investment menus (100 to 440 options) dilute bargaining power ◦ Duplicative investments included on menu 10

403(b) Litigation - Prior Cases 2007 NEA case involving California school teachers makes fiduciary claims based on high fees and plan promoter’s receipt of revenue sharing Dismissed because plans maintained by governmental entities exempt from ERISA Novant case asserted that 403(b) plan of nonprofit hospital paid excess recordkeeping and investment costs ◦ Asserts that ceiling on recordkeeping fee is $35 per participant ◦ Settled in 2015 for $32 million 11

403(b) Litigation - Excess Recordkeeping Fees in University Cases Each complaint asserts $35 per participant limit on recorkdkeeping fee If claim is successful, plan sponsors would be required to monitor revenue sharing received by recordkeeper and demand rebates to plan of amounts exceeding $35 Other asserted fiduciary violations : Engaging multiple recordkeepers Rationale is dilution of bargaining power Failure to solicit bids for recordkeeping services Failure to engage in prudent process for reviewing fees 12

403(b) Litigation Investment Costs Factors diluting 403(b) plan’s bargaining power and ability to obtain low fees cited as fiduciary breach ◦ Large number of investment options (100 – 440) ◦ Multiple investment in same asset class ◦ Multiple share classes for same mutual fund investment Other asserted fiduciary violations: ◦ Retail class mutual fund shares on menu ◦ Actively managed mutual funds on menu ◦ Duplicative investments that confuse participants 13

403(b) Litigation Investment Costs New 403(b) complaints assert that plan fiduciaries failed to take steps to review certain investments ◦ Focus on CREF Stock Account and TIAA Real Estate Account ◦ Failure to remove these investments alleged to exemplify failure to monitor performance and expense of investment options  Underperformed for long period  Higher costs  Complaints ignore possibility that it may have been impossible to withdraw without significant penalty 14

Best Practices in Selecting & Monitoring Investments Prudent steps in reviewing investment options include gathering and evaluating the following ◦ Option’s investment objective ◦ Investment style ◦ Performance ◦ Risk & return characteristics ◦ Qualifications of investment manager ◦ Fees and expenses ◦ Miscellaneous /breaking news 15

Downsizing Investment Menu Optimal number of funds on menu is 20 to 30 Remove higher cost retail class mutual funds Select only one investment from each asset class ◦ Pick best performer and most cost efficient fund Make sure asset classes cover broad range of investments along risk/return spectrum 16

Eliminating Multiple Vendors Easier to manage one investment menu rather than multiple menus Participants may be overwhelmed by multiple vendors Economies of scale and enhanced bargaining power may generate cost savings for plan If surrender charges apply, consider freezing old investment options and mapping assets after surrender period expires 17

Orphan Accounts Certain 403(b) vendors can no longer accept new deposits Educate participants with orphan accounts about transition options to new investment options 18

Summary Operate 403(b) plan in compliance with IRS rules and terms of plan document Comply with ERISA fiduciary rules Follow prudent practices for plan investment menu Consider reducing excessively large menus, eliminating duplication and limiting vendor arrangements Investigate options before selection and monitor performance and fees Consult plan advisor for practical guidance 19

Marcia S. Wagner, Esq. 99 Summer Street, 13 th Floor Boston, MA (617) A PPTX Fiduciary Developments Affecting 403(b) Plans What Do You Need to Know?