View From Mcdermott: Employee Benefit Plan Considerations For Health Systems In 2017

Health system employers, including hospitals and other not-for-profit employers within the healthcare industry, face unique challenges with respect to employee benefits and compensation compared to for-profit employers. Following is a summary of some of the key issues, risks and opportunities health system employers face with respect to employee benefits and compensation in 2017, including:

Litigation alleging excessive fees in Code Section 403(b) plans; New requirements for 403(b) plan documentary and administrative compliance; New design opportunities for Code Section 457(f) deferred compensation arrangements; and Challenges posed by potential Affordable Care Act (ACA) replacement proposals. 403(b) Plan Excessive Fee Litigation

In 2016, at least ten large class action lawsuits were filed against prominent higher education institutions (e.g., John Hopkins, MIT, Cornell) claiming fiduciary breaches occurred under their Code Section 403(b) defined contribution retirement plans as a result of insufficient oversight of plan investments. The complaints allege that fiduciary breaches caused excessive fees to be paid by participants. The allegations reflect legal arguments that are similar to the allegations made against fiduciaries of Code Section 401(k) plans sponsored by for-profit companies over the past several years. Although the targets of the 403(b) lawsuits originally filed were higher education institutions with relatively large plan asset balances (in excess of $2 billion), the scope of these lawsuits recently expanded to sweep in the healthcare industry with a similar lawsuit filed against Essentia Health in December 2016.

Plaintiffs typically assert numerous different allegations in the lawsuits, but they generally fall into one of eight broad categories:

The funds are too expensive. Plaintiffs allege that alternative funds were available at lower costs and with similar risk/return characteristics. Fiduciaries failed to offer lower-cost share class funds. Plaintiffs allege that fiduciaries failed to investigate the availability of lower-cost share classes of mutual funds (e.g., ''institutional'' funds) and continued to offer higher-cost share classes (e.g., ''retail'' funds). The failure to remove underperforming funds. Plaintiffs allege that fiduciaries failed to adequately monitor investment options and remove those that exhibited poor performance against benchmarks. The plan offers too many fund options. Plaintiffs allege that fiduciaries provided too many investment options, which create duplicative offerings with higher fees that confuse participants, preventing them from making educated choices. The failure to conduct periodic RFPs for evaluating service providers, or to take advantage of ''big plan'' market power or economies of scale. Plaintiffs allege that fiduciaries failed to conduct periodic Requests for Proposal (RFPs) to ascertain whether a better or less expense fund provider was available. This allegation typically includes the assertion that the fiduciaries failed to capitalize on economies of scale or the plan's market power by virtue of the size of the 403(b) plan, or by potentially combining plans to secure the best pricing for administrative and investment services. Too many recordkeepers were involved. Plaintiffs allege that by utilizing multiple recordkeepers or 403(b) contracts, the fiduciaries impeded the plan's ability to consolidate management of plan investments, which negatively impacted the plan's ability to secure more favorable fee terms, streamline administration and reduce costs. The failure to appropriately evaluate revenue sharing funds. Plaintiffs allege that fiduciaries did not compare overall plan fees, including revenue sharing, against a reasonable participant-based recordkeeping fee. Annuity products offered were too expensive and restrictive. Plaintiffs allege that the fiduciaries continued to offer annuity products whose fees were excessive, and which ''locked in'' participants to excessive fees. Because the 403(b) fee litigation derives from 401(k) fee litigation, some of the allegations do not take into account the nuances of Code Section 403(b) plans. For example, the requirement that 403(b) plans must be set forth in a written plan document was first imposed by regulations effective beginning in 2009. Prior to that time, many not-for-profit organizations created a 403(b) ''plan'' out of a combination of various vendor contracts, each of which contained separate terms and conditions for holding particular 403(b) assets. Some of the litigation does not take into account specific characteristics of prior 403(b) arrangements that have existed since the 1970s and 1980s. Not-for-profit organizations may find themselves in a situation in which contractual obligations entered into decades ago, which were legally compliant at that time, are held against them in present date fee litigation allegations.

Fiduciaries of Code Section 403(b) plans should take steps to ensure compliance and the ability to demonstrate best practices in case their...