YOU HAVE FOUND OUR OLD WEB SITE. BE SURE TO CHECK OUT OUR NEW AND IMPROVED SITE!     Avoiding the Lightning: The Gathering Storm of Fiduciary Liability for 457 and 403(b) Retirement Plan Sponsors   by Jeff Robertson     The retirement plan industry is facing a gathering storm. The rush of wind that you feel is the growing number of 401(k) plan sponsors scrambling to assess their potential fiduciary liability after the high profile cases involving Enron and other assorted class action lawsuits have rocked the industry. The thunder that you hear is the rumbling of class action litigation attorneys at a recent national meeting teaching their colleagues how to transition their caseload from tobacco litigation to lawsuits against the retirement plan industry, including 457 and 403(b) plans. The rain that you feel is the recent mutual fund scandal coming down in waves on the retirement plan industry and providing continued fuel for disenchanted plan participants. This gathering storm presents a substantial shift from the relatively risk-proof world of 457 and 403(b) plan sponsors. To avoid the lightning strike, 457 and 403(b) plan sponsors must act quickly to properly protect themselves against allegations of fiduciary liability.   Understanding 457 and 403(b) Plans To fully understand the fiduciary exposure facing 457 and 403(b) plan sponsors, one must appreciate the relatively minimal difference between 457 and 403(b) plans and 401(k) plans. 457 and 403(b) plans are deferred compensation plans with very similar qualities as their more popular 401(k) plan cousin. In 457 and 403(b) plans, as in 401(k) plans, participants contribute pre-tax income to the plan, pay no income tax on the contributions and earnings until they leave their employment or retire, and generally choose how they wish to allocate their retirement money among the various plan investment options offered by the plan sponsor.   The major difference between 401(k) plans and 457 and 403(b) plans is the type of employer eligible to sponsor these plans. A 401(k) plan can be sponsored by virtually any type of employer, including a nonprofit or governmental entity. In contrast, a 457 plan may only be used for the benefit of state and municipal employees and a 403(b) plan is used to benefit employees of non-profit organizations. In fact, a state or municipal entity will often sponsor both a 457 and 403(b) plan. Due to the finite number of possible adopting employers and the nonprofit nature of these employers, 457 and 403(b) plan sponsors have significantly less administrative responsibilities than 401(k) plan sponsors. However, these administrative requirements do not absolve the 457 or 403(b) plan sponsor from compliance with all Federal and State laws regarding the plans, most importantly those laws discussing fiduciary responsibility.   The Impact of ERISA The Employee Retirement Income Security Act ("ERISA") was enacted in 1974 to protect employees' retirement plan interests. ERISA contains specific statutory fiduciary duties required by retirement plan sponsors. 457 or 403(b) plan sponsors often are under the impression that ERISA does not apply their plan and therefore the plan sponsor does not maintain legal exposure for a breach of fiduciary duty. Unfortunately for plan sponsors, this is an erroneous assumption.   In general, a 457 plan, as well as a 403(b) plan sponsored by a governmental entity, will not be subject to ERISA, exempted as a "governmental plan." However, a 403(b) plan that is not sponsored by a public governmental entity must be carefully structured to avoid ERISA's requirements, despite the widespread belief that these plans are per se exempt from ERISA. A 403(b) plan will be subject to ERISA unless it has no employer contributions, is purely a voluntary plan, and there is minimal administrative involvement by the plan sponsor. All non-governmental plan sponsors should consult their independent legal counsel for a definitive determination whether ERISA applies to their plans and as such the plan must follow the specific and detailed ERISA requirements or be subject to the civil penalties relating to noncompliance. Regardless of whether a plan is subject to ERISA, it is likely subject to common law federal and state law fiduciary duties regarding the investment options in the plan.   The 457 and 403(b) Plan Sponsor Investment Conundrum 457 and 403(b) plan sponsors often face a seemingly impossible decision when deciding what investment products to offer to their participants due to the enormous choices available and will often react in one of two ways. First, the sponsor might offer every investment choice possible and the resultant administrative nightmare of managing and distributing information of all the investment choices. Second, a plan sponsor will offer only one or two choices, which eases the administrative burden, but is tantamount to a recommendation, rather than a true investment choice. The resolution of this conundrum is important because it represents the single greatest risk of fiduciary liability, which is the act of the plan sponsor offering and monitoring the investment products for the plan participants, regardless of whether the plan is subject to ERISA.   Compounding this issue is the fact that most 403(b) plan sponsors use costly individual annuity investments as the investment products available to their participants. The reliance on the individual annuity market is tangentially related to the fact that these investment offerings were the only product allowable prior to 1974 in the 403(b) market, but in most cases is primarily due to the flawed assumption that the plan sponsor will avoid being subject to ERISA and other legal requirements by using the individual annuity product. This market reality limits the choices available to the plan participant and exacerbates the investment conundrum for the plan sponsor and the resultant fiduciary risk.   Fiduciary Responsibility Regarding Offering Investment Options A 457 and 403(b) plan sponsor has fiduciary responsibility related to offering any investment option for plan participants. This responsibility and the associated risk is heightened if the 403(b) plan is subject to ERISA. Due to the gathering storm, a plan sponsor should consider its fiduciary responsibility and take steps to lessen the risk related to the 457 and 403(b) plan.   To reduce fiduciary liability risk, the plan sponsor should make documented efforts to:   Offer a reasonable choice and range of investment options for employees; and   Offer suitable investment options for the employees' needs   Monitor these investment options for the continued viability and integrity of these options (i.e. the recent mutual fund scandal)     Taking the above actions will greatly reduce the risk of fiduciary liability exposure to 457 and 403(b) plan sponsors. Proper review, reasonable efforts and prudent reliance on independent experts are the best defense to avoid the lightning strike from the gathering storm in the retirement plan industry.   Jeff is an attorney with Bullivant Houser Bailey, P.C.'s employee benefits group, one of the largest in the Pacific Northwest. He serves as counsel to companies on all aspects of their employee benefits programs and regularly represents clients of all sizes across the country on employee benefits and executive compensation matters, including hospitals and governmental plans. You can contact Jeff at 503.499.4686 or jeffrey.robertson@bullivant.com.   The above summary is a general overview of the fiduciary requirements facing 457 and 403(b) plan sponsors and should not be considered legal advice for any particularly factual situation.   © 2003 Bullivant Houser Bailey, P.C. All rights reserved.   Home | Disclaimer | © 2003 403(b)wise. All rights reserved.