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A Costly Choice

Greg Spears, 3:54 am ET

I RECEIVED A GREAT education at Northwestern University in the 1980s. But the school’s commitment to excellence seems to have fallen short when it comes to the 403(b) retirement savings plan for teachers and staff.

Northwestern’s plan offers a generous 5% match and more than 400 investment choices, according to court filings. The lengthy list contained some clunkers, though, such as retail-class mutual funds when the plan could have offered lower-cost institutional shares instead.

Three university employees sued in 2016, alleging they were being overcharged. In its response, the university said—among other things—that there were many fine investment options to choose from, including low-cost index funds.

Who’s right in this fund fracas? The Supreme Court sided with the employees in an 8-0 ruling issued Jan. 24. It’s not the employees’ job to sort the wheat from the chaff, so to speak. Plan trustees have a fiduciary duty to keep imprudent funds out of the plan entirely, the court found.

The case was sent back for reconsideration to the Seventh Circuit Court of Appeals, which had earlier found for Northwestern. But in the meantime, I’m prepared to draw two lessons.

First, trustees could do worse than stock a plan with low-cost, broad-based index funds. Lawsuits alleging excessive plan fees have become a cottage industry, and I hate to think what this one has cost my university.

Second, offering too many funds is harmful to retirement savings, according to Vanguard Group’s Center for Retirement Research. When confronted with choice overload, employees postpone enrolling to avoid a decision they might regret—like choosing the retail-class fund shares hiding inside an institutional retirement plan.

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Randy Starks
Randy Starks
3 months ago

Same old BS from Vanguard: “Second, offering too many funds is harmful to retirement savings, according to Vanguard Group’s Center for Retirement Research. When confronted with choice overload, employees postpone enrolling to avoid a decision they might regret—like choosing the retail-class fund shares hiding inside an institutional retirement plan.”

I questioned our plan folks about offering too few Vanguard funds for years and got the same old song and dance as noted above. (Typical lawyer speak IMO with the fall back on ERISA). Finally in the late 2000s, after the financial crisis, they offered all the Target Date Funds and changed our mutual fund offerings to the cheapest Vanguard mutual fund classes (Admiral and Institutional shares). I guess the plan administrators woke up and saw that we (employees) were paying higher fees for their regular BS mutual funds.

My issue was always choice and that you can educate the employees, if you make Vanguard do their job and remember they DONOT have a fiduciary duty and are NOT RIAs. When I pressed the Vanguard rep. brought in for training he would not commit to making appropriate recommendations even though he was an investment advisor. You see, Vanguard protects itself and makes the plan administrators (the company) responsible for ERISA. Typical BS from Vanguard and they are just typical asset gatherers. The whole 401k industry is ripe with bad actors, high fee gatherers and prey on an uneducated society about DIY investments in the name of ERISA.

For example: I called Vanguard two weeks ago and it took over three calls-four total hours on-hold and after they answered I had to go through two two representatives for on and a half hours just to change my 401k RMD distribution and the last rep. seemed irritated that he even had to provide service to me.

Carl Book
Carl Book
3 months ago
Reply to  Randy Starks

I think Vanguard is right. Too many funds make investment decisions harder. Even if you weren’t offered the “admiral” class of funds, Vanguard’s costs are reasonable, if not the lowest in most cases compared to other funds. I have found Vanguard to be professional and timely when I have dealt with them It always helps, of course, if you treat them in a professional and courteous manner as well.

Harold Tynes
Harold Tynes
3 months ago

403b plans for public school employees in many states are a quagmire of bad choices and high fees. There are articles out there in the WSJ and NYT that show some bad examples. My personal experience with my wife’s 403b in a PA school district was an eyeopener. Providers were Lincoln, Kades-Margolis, AXA and Horace Mann. Kades-Margolis (the Official investment provider of the PSEA union) and Horace Mann are pretty bad and try to sell annuities within the 403b. Fees upon fees. We ended up with Lincoln. I did a lot of research and found a program that the rep was not promoting that allowed you to buy Vanguard Target funds but have to pay Lincoln 1.25% + an annual flat platform fee. The sad part was the district offered a very good and low cost Fidelity option for years and then canceled it. Fidelity told me they refused the district’s demand that they “pay to play.” I reached out to the school directors but never got a response.

Newsboy
Newsboy
3 months ago
Reply to  Harold Tynes

The California State Teachers Retirement System (CALSTRS) has a great website that gives 403(b) participants the ability to look up annual expense ratios for funds held inside a 403(b) easily. Not all fund options are included (I am in Pennsylvania, and some options available to educators in our state are not listed). Nonetheless, it’s a great transparency tool for any 403(b) participant to at least check out:

https://www.403bcompare.com

Some school districts are infamous for giving 403(b) reps unfettered access to their teachers lounge in an effort to secure new signups. A newly hired teacher with limited knowledge of investment options is typically their prey.

Some of these same advisors will – after a teachers retirement date – encourage the 403(b) participant to immediately rollover their funds into an IRA, and then tack on an annual “wrap fee” of 1% (or more) on these IRA assets. The rollover IRA assets are commonly invested yet again in…wait for it – an annuity product, replete with front end sales charges and high sub-account annual expense management fees. There is, admittedly is a place for annuities in a some people’s retirement plans, but rarely should all of a retiree’s tax deferred funds be invested into an annuity.

Also, If the investment rep. is conducting annual reviews with the client to assess changing risk tolerance, provide forward projections of their portfolio, budgeting analysis, asset allocation, rebalancing, etc – then maybe some annual wrap fee charge can can be justified. These activities add value and can save time for the client. Sadly, that level of advisor engagement with retired 403(b) participants is not the norm, but rather the exception – at least from my personal observation.

Last edited 3 months ago by Newsboy
John Yeigh
John Yeigh
3 months ago

Agree 400 choices is too much. My company’s plan offered just 7 choices: company stock, S&P 500, total stock market fund, international stock fund, balanced fund, bond fund, and money market. This approach was easy for all to comprehend, worked great for 40 years, and had fees near zero.

R Quinn
R Quinn
3 months ago

400 choices is incredible. Clearly an attempt to simply wash their hands of any responsibility and add confusion for participants. Our plan had 8 options and we offered pre- mixed options of conservative, moderate and aggressive made up of the other 8 funds. Later we added target date funds.

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