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By Chris Tobe, Guest Writer
In my 35-year investment career as an advisor, consultant, regulator, trustee, and expert witness, I have been convinced that the most effective way to increase returns in your entire investing portfolio is to lower fees. The Employee Retirement Income Security Act of 1974 (ERISA) is a US federal tax and labor law that establishes minimum standards for pension plans in private industry. For the last 10 years, I have been an expert for participants suing their own plans for excessive fees in 401(k) and 403(b) defined contribution retirement plans.
Your own retirement plan may have excessive fees, and whoever administers that plan may have even been sued for them—and you may not even be aware of it.
Floodgates are opening on litigation after the Hughes v Northwestern 403(b) excessive fee case in late 2021, in which the US Supreme Court overruled the Court of Appeals which had dismissed the case. That case was brought to court on behalf of current and former employees of Northwestern University who alleged that the college had violated a duty of prudence by not monitoring or controlling fees, using mutual funds that had higher fees than other comparable mutual funds, and for confusing participants in the plan by offering too many options (more than 400).
The case is now back in the lower courts, and it will probably be settled and result in lower fees. Most hospitals not affiliated with public universities are subject to ERISA laws and litigation—which result around plans having a fiduciary responsibility to their participants to provide the best plan, including minimizing fees where prudent. Hospitals tend to have a higher percentage of high-fee funds and a much higher risk of litigation since that litigation is driven by the extent of high fees and the size of the plan.
Since I and many other professionals associate higher fees with lower returns, this can have a significant long-term effect on a physician's 401(k) and 403(b) balances over time. That's why you need to pay attention to those fees.
Why Are Hospitals at Such High Risk of Litigation?
My take is that the 403(b) culture, with its mix of ERISA and non-ERISA plans, tends to have higher-fee providers, especially those associated with insurance companies. My other theory is that because hospitals face so much litigation on healthcare issues, this kind of litigation surrounding retirement accounts is not seen as material by senior management.
The US Government Accountability Office recently did a report confirming that 403(b)s are not as sensitive to fees.
More information here:
How to Avoid the 401(k) Fee Trap
What About 401(k)s?
Nonprofit hospitals have tended to offer 403(b)s, while corporate-owned hospitals tend to use 401(k)s. Both are similar in their investments and fairly similar in other ways.
Many hospitals do not have independent consultants, with some receiving higher payments by recommending higher fee products. Many hospitals still use revenue-sharing that uses higher fee funds to subsidize administration costs, which has been shown to increase fees overall. 403(b) plans, of which hospitals are a major part, tend to be larger users of high-cost annuities vs. lower-cost mutual funds.
Here are some of the 21 ERISA class action suits I have found against hospital and healthcare 403(b)s and 401(k)s that have occurred in the past few years. Most likely, these won’t be the last.
- Columbus (Georgia) Regional Hospital
- Aurora Health (Wisconsin) Healthcare
- Henry Ford Health System (Michigan) 401(k)
- Henry Ford Health System (Michigan) 403(b)
- Spectrum Health System (Michigan)
- Mercy Hospital Health (Illinois)
- Barnabas Health (New York)
- Rush University Medical Center (Illinois)
- MedStar Health (Maryland)
- Boston Children’s Hospital Corporation
- Froedtert Health (Wisconsin)
- B. Braun Medical Inc (Pennsylvania)
- Allina Health System (Minnesota)
- Emory University (Georgia)
- Bon Secours Health System (Maryland)
Settlements for many of those hospitals resulted in millions of dollars in penalties. For most hospitals that have not paid attention and have not already substantially lowered fees, it's only a matter of time before they face litigation. Even larger physician groups will soon be subject to litigation, as well. I expect there to be many more filed in the next five years.
Typically, I see many plans now offer perhaps one Vanguard 500 index fund. I believe that's because physicians have been educating themselves in places like The White Coat Investor and now know that index funds, after fees, have higher returns. However, that one index fund option, which I call “lipstick on a pig,” will not be enough to avoid litigation.
More information here:
Your Small Practice 401(k) May Be Ripping You Off
What Can You Do?
Take a close look at your plan and its fees. Once a year, plans are required to give you a fee disclosure statement called a 408(b)(2). Ask HR questions about the disclosure and advocate for more lower-fee options and more transparency on any fees you do not understand in the disclosures. Treat it like you would your outside investments and take ownership. I believe most HR departments would take comments and questions like this from physicians seriously, and it would have a positive effect on the plan for all participants. Many plans have at least one low-fee option, and I encourage doctors to invest in that option if they can fit it into their overall investment objectives.
I did expert work on a case in my hometown and my general practitioner was clueless that his own plan was being sued. He did eventually find some fine print disclosure, but I am certain few, if any, other doctors even noticed. Look at your 403(b) disclosures. Are there any plans with fees over 50 basis points (½ of 1%)? Ask your HR department if litigation has been filed, and what was the result.
403(b)s and 401(k)s can be great tools to increase wealth, but, especially in the healthcare world, you need to be proactive to help push your plan to be transparent and to lower fees.
Have you kept track of the fees produced by your employee retirement plan? Has your plan ever been sued? What happened, and how did it affect you? Comment below!
[Editor's Note: Chris Tobe, CFA, CAIA, has spent more than 30 years as an investment consultant for retirement plans, individuals, and legal cases. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]
My husband’s 403b plan was on the list above. Fees at the new plan are only minimally lower.
That’s to be expected, 403b plans are mostly non-ERISA, and because there are fewer 403b providers, fees tend to be higher as these providers can charge them. With not much competition, that’s what you get. Also, there is a tendency in the non-profit world to pass the buck to participants, so ‘all in’ fees are popular because service providers can offer a low cost plan to the plan sponsor where participants pay most of the fees via AUM fees that are tacked on to the investment options (or by via high cost investment options).
The group I work for offers a no match 401(k) where the fees are 45 bps from the platform (ADP) + 50 bps from the financial advisor administrator that runs the plan. When the article mentions plans with fees over 50 bps, does this include platform + administrator fees? What would be the next step if the answer to that question is yes and this is to be addressed?
A silver lining is the plan does offer very low expense Vanguard target date funds and index funds across most major asset classes.
If your total fees are 0.95% that seems pretty high to me. That’s $950 per 100k per year. So for example, if you’ve been with your employer a few years and now have a $500k balance you might have paid out tens of thousands of dollars in fees over the years. Eg if your account balance is now $500k you’re paying $4,750 every year, and that will just keep increasing the longer you’re in the system. Remember, that’s your money – it’s deferred compensation. For comparison, my prior institution plan charged a flat fee quarterly and occasional administrative fees adding up to less than $100 per year. You should definitely contact your HR department and see how they justify those fees.
ADP is the worst of the worst when it comes to retirement plans. I can’t imagine any medical practice would be using them for a retirement plan. Payroll integration is such a low priority vs. everything else. This is definitely excessive. HR has no skin in the game – they are administrators, so they don’t care. If you are a partner in a practice, you should get on the 401k committee and request to make changes ASAP. This is the only way to get it done. Get an RFP together and get several proposals. You should be able to compare the cost of these proposals side by side using a calculator such as this:
https://retirementplanhub.com/retirement-plan-cost-calculator/
And make sure that you have the following:
1) No AUM fees at all in your plan, just fixed/flat fees.
2) Low cost index funds and other investments and
3) Your adviser should be an ERISA 3(38) fiduciary with no conflicts of interest, compensated by a fixed/flat fee.
I would also consider switching to a good TPA and a record-keeper to offer the right level of services/options to the plan participants, but your adviser should be able to get it all set up for you if they know what they are doing.
Note that even if your plan has fees over 0.5% you shouldn’t avoid using the plan. It really takes fees more like 2%+ and long-term, to eliminate the benefits of a plan over investing in taxable. Few are that bad and even fewer docs stay in a plan like that long term.
Blatant advertisement
Where? I thought it was a well-written article. I saw no advertisement.
Thanks for the feedback. But you and I have different definitions of “blatant” if you think this was an ad. I actually asked for this guest post when I met the author at a conference.
I once received mail that said a former employer of mine was settling a class action lawsuit for not providing good investment options in their retirement funds. If my recollection is correct, I’d only have received ten dollars or something, so I didn’t really do anything about it.
Hi Chris, thank you for sharing your insights. I completely agree that paying attention to excessive fees is essential, as they can significantly affect the long-term growth of a portfolio. It’s alarming to hear that hospitals, which should prioritize their employees’ well-being, are at high risk of litigation due to high-fee retirement plans.
Your post highlights how excessive fees in retirement plans can have a significant long-term impact on a physician’s 401(k) and 403(b) balances. It’s crucial for physicians to review the fees associated with their retirement plans to ensure that they are getting the best return on their investment. Unfortunately, many hospitals and healthcare organizations have faced litigation due to excessive fees in their retirement plans, which can be concerning for physicians relying on these plans for their future financial security.
Luckily, physicians can take steps to protect themselves and ensure they get the most out of their retirement plans. One important step is reviewing the fee disclosure statement provided by the plan annually to understand the fees associated with the plan better. Advocating for greater transparency, more lower-fee options, and expressing concerns about excessive fees to the human resources department or plan administrator is also helpful.
Additionally, physicians should be aware of the investment options available to them and choose ones that are best suited to their investment objectives. Index funds can be a good option, with lower fees and higher returns over time. By investing in a mix of low-fee options and carefully selected higher-fee options, physicians can maximize their returns while minimizing their costs.
The issue of excessive fees in retirement plans is a significant concern for physicians. However, there are steps they can take to protect themselves and ensure they get the most out of their retirement plans. Thank you for sharing this valuable information.
My experience gives me a different perspective on these suits. My employer had a great plan. Administered by one of the lowest cost providers. It was a large organization, so the company accepted the, low, expense ratios as its only compensation. We had access to all of the funds the company offered, including near zero fee cap weighted index funds. The employees could put their money in even lower fee versions of the funds that otherwise had astronomical minimums.
Guess what? They were sued.
The lawyers made out like bandits. Afterwards, employees were left with HIGHER fees, fewer choices, and some crazy system under which they had to move their money to the higher cost administrator. Once there, they could reinvest into the same company they had before, but only through the new administrator, which charged a fee for doing nothing. And access to the lowest cost funds in the original company went away. By every measure the employees were worse off than they had been before.
But the lawyers walked away with a fortune.
This is interesting because there are frivolous lawsuits and they are often settled. However, if the company had a prudent process in place, followed it, and had all the parts in order, it would have been very difficult to win a lawsuit against it, and it would have been tossed out pretty quickly, most likely. So it sounds like there was enough there to elicit some sort of judgement/settlement where they were forced to make changes. This is why it helps keep the plan plain vanilla, as simple as possible, so that they don’t stand out. This does not mean NOT using low cost funds, on the contrary. I know there are several lawsuits for using low cost TDFs out there, but they are being tossed out left and right. The key to this whole thing is to establish a prudent process and to follow it. Some practices might benefit from hiring an ERISA attorney and having them review everything, if in doubt. This can definitely save them money down the road.
Unfortunately, a recordkeeper’s fees are going to be based on the asset size of the plan, the average account balance within the plan, and the annual flow going into the plan. 0.45% for a recordkeeping fee and 0.50% for an advisor fee may be the going rate for a start-up plan or a small plan where there are many employees but the assets in the plan are low. As the plan grows and the average account balance grows, the advisor should be prudent enough to lower his/her fee as well as benchmark all other service providers to make sure their fees are fair for the market. 0.95%, before investment expenses, does seem high for a hospital, if that is what we are talking about. All fees should be justified and monitored often, as well as how fees are paid. Does the participant bare the majority of the fee load from their accounts, or is it setup to where the employer is choosing to pay the majority of fees via invoice, which also allows them to take that tax deduction. There are many ways fees can be structured, it just takes the know how and negotiation amongst the plan sponsor and all vendors.
I think the fixed/flat fee, low cost index fund, fee-based 3(38) setup is a great foundation. However, I do like to see the employees have a passive and active investment option for every asset class. Maybe 25-35 investment choices total (including TDFs).
Why do you feel like active options are important? And what do you think of the data suggesting that more choices result in less optimal portfolios among participants?
Personally, I think the TSP sets the bar here. 5 funds plus some TDFs combining them. All index funds. All very low cost. No, I don’t think 35 are necessary. 10 might be too many.
35 may be too many, but the only reason I throw 25 out there is if someone were to offer passive and active TDFs. I am an advocate for offering as few as possible quality investment choices as possible, but I do think it’s important to let the participant choose whether or not they want an active/passive allocation, or a even a mixture of both. I think it covers everyone from a fiduciary perspective if you offer active and passive options for each asset class, as long as you incorporate a passive default option. Then, at that point, it’s a good advisors job to educate the different between the two, document that education and availability was offered, and let the participant make the choice. This perspective coming from lawsuit preventative state of mind.
Yes, if you offer them good funds you can probably claim you’re meeting your fiduciary duty. But I don’t know why you feel like you have to offer them some lousy active funds too. How does that help? You’re not going to try to argue in favor of active funds are you? The SPIVA data is awfully clear. It’s not like this is really debatable. I don’t see why a fiduciary would be required to make things more complicated than they have to be. Our 401(k) has no active funds and there is no way anyone is ever going to win a lawsuit against WCI for breaching their fiduciary duty in the 401(k).
No, I personally do not favor active funds, but you have to admit that a lot of people actually do. Even if we disagree with it, doesn’t it boil down to who makes the decision as to what is best for the participant? Even if we know that passive options are all you really need, shouldn’t the choice in a participant-directed plan be totally up to the participant? Just thinking through an ERISA perspective. If both options are there, and the participant makes their own decision, wouldn’t that further cover your fiduciary obligation as an employer? Again, as long as the default option is passive and inexpensive.
I never thought I would see it, but there really are lawsuits being filed claiming their employer is imprudent for only offering passive options. Now, I’m sure those lawsuits hold no meat, but the fact that participants care even a little about that may have an impact on regulation.
Your fiduciary duty is to offer good funds. That’s it. You don’t need to offer them every possible choice. You don’t have to have a silver ETF and a mid cap value fund and a long term corporate bond fund much less an actively managed fund in every category.
If you want to offer them a choice, just put a brokerage window in the plan. I mean, I’m buying private real estate funds in the WCI 401(k), but the offered funds are all low cost, broadly diversified index funds.
Got a link for this lawsuit on only passive funds? I’d love to follow along on that one.
There is a frivolous lawsuit-filing law firm trying to sue for Blackrock passive TDFs, but its lawsuits are being tossed out left and right, so this is just pure garbage. I would not pay much attention to this as this firm is just going to make sure that this type of stunt is not pulled again by any law firm.
https://www.planadviser.com/district-court-dismisses-two-erisa-lawsuits-challenging-blackrrock-tdfs/
One way to work around offering both passive and active menu options (in each style category) is to have a brokerage option for employees which allows investment in thousands of mutual funds, both passive and active. All the largest recordkeepers (i.e., Fidelity, TIAA, and Vanguard) have the ability to offer this option. The plan menu can have passive funds and TDFs, and for employees that want active options, the brokerage link provides those.
Excellent suggestion.
Not true at all. There are many RKs that charge fixed/flat fees not based on assets. Many medical practice plans have lots of assets so they have zero incentive to pay any AUM fees. In fact, medical practice plans are the opposite – not that many employees but lots of assets, more so than any other type of plan out there (maybe law firms are somewhat similar to medical practices). There shouldn’t be more than about 20 investment choices. And TDFs are not necessary. They are complex, have to be made into a QDIA if you want to force participation (on their own, not too many employees will pick TDFs due to their complexity and lack of education that most plans provide to the staff), and are often not diversified enough, as well as potentially too high risk for younger investors. Active is absolutely not necessary as employees are not very sophisticated, so plan sponsor (or ideally an ERISA 3(38) that they have selected to manage investments) should be picking the best funds for the plan, and active funds don’t compare well with index funds due to the management style (often being closet index funds) and much higher cost. If someone wants actively managed funds, those can be bought in an in-plan SDBA that can be opened by more sophisticated investors.
I understand that many RKs can charge a fixed/flat fee, but even that fixed/flat fee will still take assets and average account balance into consideration. A $30M plan will not get the same quote as a $2M plan. Or will they? Are we headed in that direction? I thought it mostly leaned on average account balance and profitability for the RK.
I am an advocate for the low-cost index fund approach paired with a SDBA option, but I’m just playing devil’s advocate here. I agree that TDFs are not necessary, but I don’t think they’re completely evil either. What do we think the passive default should be? The fixed account? Something balanced? SP500?
Thanks!
I think TDFs are the best default option. Far better than cash.
Doesn’t have to be cash (by the way, cash is not a legal QDIA option anyway). It can be a managed allocation, which can be controlled by the adviser to be better diversified/low cost. Target risk vs. target date is an option that’s probably better for plans with relatively high turnover as well.
That’s the thing, there are some RKs that will give you a fixed fee based on the number of participants only, without any regard for assets. So if one lives in the world of RKs that charge AUM fees and want assets, that’s the experience one would have (higher assets can lead to lower fees, but also higher expense ratios to pay for the difference). But when compared to a fixed-fee RK, it is very difficult to beat this with AUM fees especially if the assets are relatively large.
TDFs can be fine for some large plans that have HR departments and ability to provide adequate education and advice, or for plans where average participant is a lot more sophisticated (definitely not your average medical practice unless it is mostly partners/owners, in which case they can build their own portfolios or use SDBAs), but probably not necessary for smaller plans. Target risk/balanced portfolio can be an option for a QDIA. It depends on the type of plan and which option makes it easier for participants to make informed investment decisions. I just don’t think TDFs are suitable for HCE doctors with significant assets – they should probably do more sophisticated/customized asset allocation that also provides better diversification. But for some smaller accounts all-in-one funds, whether TDFs or target risk funds can be fine.
Great points here. I think that *most* TDFs are generally of “good enough” for most retail investors, and having them as default options in DC plans has almost surely done far more good than harm. And in theory, while high earning individuals may benefit more from a personally managed allocation by someone who knows the plan assets, it really depends on the level of service that the allocator can provide. For example, if the plan is providing managed accounts to hundreds of participants, it seems unlikely that the allocations would be much different than TDFs. However, a wealthy physician ideally has an independent advisor for his/her other assets (outside the plan) and a good advisor would help with allocation inside the plan without charging an AUM fee on plan assets.
This is true, TDFs are a big improvement over having participants build their own portfolios. However there are significant downsides to TDFs vs. target-risk allocations that are simpler to understand and also do not depend on assumptions about one’s age and retirement year. Selecting a TDF is not easy for rank and file NHCE participants who are not sophisticated (especially those working for medical practices), and by placing a 25 year old in a TDF which effectively has 95% in stocks is not necessarily the best solution for them in a vacuum vs. say a 60/40 balanced allocation.
It is not necessary to provide custom allocation services to most plan participants, but it is much more efficient to simplify the plan options themselves to make sure that a participant has guide rails that they will not want to leave unless they are sophisticated enough to build their own allocation.
Most advisers do not manage accounts unless they are under their control, at least that’s what I’ve found in practice. So the way they try to get access is via self-directed brokerage accounts, which is rather easy to do if the plan offers certain types of SDBAs that allow outside adviser access. This is a lot more efficient for outside advisers to work with.
Medical practice plans are quite different from plans offered by other types of businesses due to the two-tier structure where you have more sophisticated doctors and a lot less sophisticated staff. Thankfully, for larger plans record-keepers do offer one-on-one individualized advice with a CFP for literally nothing, and this can be great for those who want individualized investment advice that a ‘dumb’ asset allocation service can not possibly provide (yet it would cost a lot more for participant to use and might be a lot less efficient due to lack of human contact). The biggest issue is that most participants won’t even seek this type of advice (vs. for example participants in an engineering or a professional business), so at some point the plan sponsor has to make a decision on whether they want a simple and user-friendly plan, or a more complex one where plan sponsor will need to be a lot more involved (if they even have the resources to do what’s needed on a continuous basis).
I just found out I havd a 403b retirement plan when I called the company they have no accounts under my name but they sent documents to buy me out it sounds fishy Barnabas Hospital
(New York)
Called the employer & the State dept; labor dept; Social security;
No documents on file called serval ex-workers they have the same problem we are trying to get help
Any body out there.
Can you call HR at Barnabas? That’s where I’d start.
At any rate, better to get what they’re offering than nothing. If you think you never had a 403b, why not accept the “buyout?”