Understanding Recent Developments in Fiduciary Lawsuits Affecting 403(b) Plans

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

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

3. 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

4. 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

5. 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

6. 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 vendor

7. 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

8. Overview of Recent Developments • DOL Fiduciary Rule • Excess Fee Lawsuits

9. 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

10. 403(b) LitigationOverview 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 -30, 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

11. 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 caseasserted 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

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

19. 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

20. Fiduciary Developments Affecting 403(b) Plans • What Do You Need to Know? Marcia S. Wagner, Esq. 99 Summer Street, 13th Floor Boston, MA 02110 (617) 357-5200 www.wagnerlawgroup.com marcia@wagnerlawgroup.com A0225210.PPTX