Since the inception of 403(b)wise we have been
railing against exorbitantly expensive investment offerings that are all too common in public 403(b) plans. Benefits officials have often defended this state of affairs by pointing out that no legal requirement exists for fee vetting. A Southern California official once trumpeted this reality by telling me that he
only cared about plan compliance and could "care less" about plan fees. Less than what I did not ask. Disappointingly, new
403(b) regulations fail to require cost oversight. Recent developments, however, suggest that the ground may be shifting on this issue.
Not long ago
the National Education Association was sued for its endorsement of a 403(b)
product judged by some as too expensive. The suit charged that the NEA Valuebuilder program
lost money for participants because "the investment options selected had 'excessive' fees, which ate
into participants' potential returns." The NEA ultimately prevailed in
court.
A confluence
of stock market losses, underfunded pension plans, and investor access to
information is exposing high-fee plans for what they are: egregious. And the courts are noticing. Just recently a judge ruled that the fees in Edison International's 401(k) plan did
"substantial" harm to employees. Labor Department statistics cited in a Los
Angeles Times story on the case estimate that an extra one percent in fees can
reduce account value by 28 percent. Think about that for a moment. Instead of $100,000, a participant has $72,000. Instead of $200,000, a participant has $144,000.
I get that unlike
public 403(b) plans, 401(k) plans are subject to more stringent ERISA (Employee
Retirement Income Securities Act) fiduciary requirements. According to the
Department of Labor the primary responsibility of
fiduciaries is to operate the plan "solely in the interests of participants." What is the primary responsibility of administrators of public plans? Is it really limited to compliance? Would courts turn a blind eye to investment products charging high fees? A wise plan administrator I know once said that the second best answer an official can give when questioned about high fees is: "We used to have high fee products." The best answer, of course, is: "We never had high fee products."
Perhaps at a
minimum we could get sponsors of high fees plans to include the following warning
label on statements: "High fee plans may be hazardous to your retirement
health." I am sure that would shield them from liability. I mean, it worked for the tobacco industry; for a while, anyway.
