Getting 'Out' While the Getting's 'Good'

It’s been fun watching “Coach K” take another team to the Sweet 16 this year—hard to believe he’s been coaching for nearly half a century. 

I had the opportunity to see Mike Krzyzewski coach in person just once—and in the not-so-friendly confines of the claustrophobic Cameron Indoor Stadium (no, I was not rooting for Duke). And while he’s had better teams—and Duke’s not on my favorites list—I, for one, won’t be disappointed if he wound up an amazing career by winning it all… again (a sentiment made easier because the teams I was pulling for are no longer in contention).

And then there was Tom Brady—who may have had the shortest retirement in NFL history. Rumors notwithstanding, apparently Aaron Rodgers is still willing to keep playing. Presumably both are at least partially motivated by the possibility of hanging up their cleats with another championship ring on their hand—to get “out” at the top of your game. 

A Pew Research Center analysis of the most recent labor force data concludes that, as of the third quarter of 2021, just over half (50.3%) of U.S. adults 55 and older said they were out of the labor force due to retirement. That compares to 48.1% in the third quarter of 2019, before the onset of the pandemic. Looking through a more traditional retirement age focus, in the third quarter of 2021 two-thirds of those 65- to 74-year-olds were retired, compared with 64.0% in the same quarter of 2019.

Indeed, there’s a widely cited datapoint that 10,000 Boomers head into retirement every single day—an eye-dropping pace that is almost certainly higher these days. The Pew report notes that the leading edge of the Baby Boomer generation reached age 62 (the age at which workers can claim Social Security) in 2008. Between then and 2019, the retired population ages 55 and older grew by about 1 million retirees per year—but in the past two years, the ranks of retirees 55 and older have grown by… 3.5 million.

This is all a bit extraordinary. Back in the aftermath of the so-called “Great Recession,” retirement rates actually declined. By the third quarter of 2010, 48% of adults ages 55 and older[i] were retired, down from 50% in the same quarter of 2007, according to Pew. Of course, accompanying that downturn was a steep decline in the value of financial assets, not to mention home prices. Not surprisingly, that combination (and the rampant uncertainty of the times) apparently served to keep workers… working.

That’s not been the case in the aftermath of the pandemic; household wealth has been rising since the onset of the pandemic (thanks in no small part to the checks from the federal government), the markets have (certainly until recently) been robust, housing prices are rising (unfortunately, so are a lot of other things). Heck, even Social Security saw a nice bump (we’ll set aside the funding/sustainability concerns for another day).

Now there are doubtless many factors underlying these trends—surely the Boomers at least have been “conditioned” to think of the attainment of a certain age as time to cease, or wind down, full-time employment. Moreover, while it may be a phase rather than a permanent shift in sentiment, there’s no denying that many, perhaps most, workers are rethinking—work. 

 But one can’t help but note that the increases in financial wealth—and here some credit is surely due to the compounded impact of workplace benefit programs—employer contributions, and the savings that have benefited from the strong markets—that have provided the cushion, if not the wherewithal—to step out of the rat race—with the comfort and backing of their workplace retirement savings. 

And who wouldn’t want to get “out”… when the getting is “good.”

- Nevin E. Adams, JD

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[i] I’m not sure why 55 was chosen as a marker. In fairness, the notion that roughly half the population 55 and older was “retired” strikes me as extraordinary, in and of itself. While some amount of that is surely involuntary, I can’t help but think that I’m doing something “wrong”… ;-} 

College ‘Intuition’

Much remains unsettled – and, as yet, largely unadjudicated – in the large, and growing series of excessive fee litigation directed at university 403(b) plans. However, certain trends in the litigation have emerged – some very different than 401(k)s, others not. Here’s what to look (out) for.

The list of these so-called university 403(b) suits – the first were filed in August 2016 – now includes plans at Cornell University, Northwestern University, Columbia University and the University of Southern California, as well as Yale. Meanwhile, some of the earlier suits are just getting to hearings on motions to dismiss, specifically Emory University and Duke University – both of which are currently proceeding to trial – and the University of Pennsylvania, which recently prevailed in a similar case. Another – involving Princeton University’s 403(b) plans – is on hold awaiting an appeal in the University of Pennsylvania litigation.

By my reckoning, here are the grounds upon which the university 403(b) plans that have been sued thus far have in common.

They have more than one recordkeeper.

While not every university 403(b) plan against which a lawsuit has been filed employed the services of more than one recordkeeper, they all seem have done so at one point in their history.

Indeed, a couple of lawsuits filed against university plans that have consolidated to a single recordkeeper have pointed to the consolidation decision as proof that the plan fiduciaries knew that the multiple provider approach was inefficient and costly – and should have acted sooner.

They offer a “dizzying array” of funds (generally from each of the aforementioned recordkeepers).

In the 401(k) world, large fund menus have long been considered a nuisance, if not downright unproductive. We’ve even got a behavioral finance study involving jams to back up the sense that, given too many choices (whatever that may be – with jams, it’s apparently more than 6), people tend not to decide.

With university 403(b) plans – certainly the ones that have found themselves sued – the “norm” seems to be in excess of 100. And frequently they approach that number with each recordkeeping provider.

That said, at least one court presented with the issue has said “Having too many options does not hurt the Plans’ participants, but instead provides them opportunities to choose the investments that they prefer.” And a second one has just held that “plaintiffs have neither alleged that any participant experienced confusion nor stated a claim for relief.”

They offer “duplicative” investments.

One of the reasons the fund menus, at least in total, seem to be so large is that each recordkeeping provider seems to put forth their own optimal menu of choices – and if you have more than one recordkeeper – well, you apparently wind up with “duplicates” in what the plaintiffs frequently claim are “in every major asset class and investment style.”

And in numerous of these cases, the only funds offered are the proprietary offerings of those recordkeepers.

Their recordkeeper choice “tethered” them to certain fund options.

Many, though not all, of the lawsuits involve plans that had TIAA-CREF as recordkeeper, and those all cite how the choice of TIAA-CREF as recordkeeper bound (“locked” and “tethered” are other terms employed to describe the arrangement) the plan to include certain (allegedly inferior) TIAA-CREF investment options on the menu, notably the CREF Stock Account and Real Estate Fund. Other issues unique to some TIAA-CREF investments are certain transfer restrictions, and some differences in their loan account processing.

Share ‘Alike’

There are, of course, elements that these programs share with their 401(k) brethren.

They use retail class mutual funds and/or active when passive would “do.”

Yes, not only are those fund options “duplicative,” they are often retail, rather than institutional class. Or actively managed when passive varieties were available. And thus more expensive, so the argument goes.

They pay for those (multiple) recordkeepers via asset-based, rather than per participant fees.

This wasn’t always an issue in excessive fee litigation, but in recent years – well, it’s become something of a regular “feature” of this type litigation – and it’s been part and parcel of the fabric or 403(b) university plan litigation.

The argument, of course, is that recordkeeping is about keeping up with individual records, and whether that individual account balance is $100 or $100,000, the cost of keeping up with the balance is the same. However, not content to argue with the method of calculation, these days the plaintiffs nearly always take the next step – and proffer what they consider to be a reasonable per-participant fee – on their way to alleging that the fees being charged – are not.

They are big plans.

Nearly all of the 401(k) excessive fee lawsuits filed since 2006 (when the St. Louis-based law firm of Schlichter, Bogard & Denton launched the first batch) have been against plans that had close to, or in most cases in excess of, $1 billion in assets. There’s no real mystery here. Willie Sutton robbed banks for the same reason.

And if you’re a class action litigator, that also happens to be where a large number of similarly situated individuals can be found; a.k.a. plaintiffs.

Less cynically, the plaintiffs generally charge that, despite the plan’s large (“jumbo”) size, rather than “leveraging the Plans’ substantial bargaining power to benefit participants and beneficiaries, Defendant caused the Plans to pay unreasonable and excessive fees for investment and administrative services.”

Where does this leave your “average” multibillion dollar 403(b) university plan? Well, they say that forewarned is forearmed. However, the reality is that corrective actions now may not be enough to keep the plan out of “cite” – but it might be enough to keep your plan out of court.

- Nevin E. Adams, JD
 
Note: It bears acknowledging that the reason that so many of these suits allege the same things is not only that the plans have similar structures and characteristics, but that many of the suits have been filed by the same firm (Schlichter Bogard & Denton) – or by firms that have taken pages (literally in some cases) from the suits filed by that firm.