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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.]