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Lawsuits Targeting 403(b) Plan Fiduciaries

Posted by Paul D. Woodard | Sep 29, 2017

A 403(b) plan derives its name from the Internal Revenue Code (IRC) Section 403. 403(b) plans are generally only available for certain employees of public schools, employees of cooperative hospital service organizations, employees of 501(c)(3) organizations, and certain ministers. A 403(b) retirement plan allows employees to make contributions on a pre-tax basis, much like a 401(k). However, unlike a tradition 401(k) plan, most 403(b) retirement plans are not subject to ERISA.Many organizations prefer the option of a 403(b) retirement plan because it is not subject to the ERISA requirements of other retirement plans. Nevertheless, fiduciaries of 403(b) plans are increasingly facing the same type of litigation that mirrors other retirement plan fiduciary lawsuits. This results in fiduciaries facing liability from plan members even without the stricter ERISA standards.

Generally, the benefits of a 403(b) plan include the flexibility in plan structure, fewer disclosure requirements, and less strict fiduciary requirements when compared to ERISA plans. However, in order to maintain ERISA-exempt status, plans have to meet the Department of Labor (DOL) safe harbor guidelines, including mandatory participation, limited employer involvement, and the employer cannot make contributions.However, even though a 403(b) plan may be exempt from ERISA's fiduciary requirements, plan fiduciaries still owe a fiduciary duty to plan participants. Like ERISA fiduciary duty breach lawsuits, plaintiffs in a 403(b) fiduciary breach lawsuit may claim plan administrators breached their fiduciary duties to investors by failing to monitor investment options, offering investments with excessive fees, or failing to reduce plan expenses.

403(b) plans can accumulate significant assets from contributions by hundreds or thousands of employees. A 403(b) plan can amass hundreds of millions of dollars from contributions by participating employees. In some instances, plan fiduciaries managing these large portfolios do not actively negotiate for lower fees. This can result in plan participants bringing claims against the plan fiduciary for failing to use the large assets of the plan to negotiate for lower costs at the expense of plan participants.

Even where 403(b) plan fiduciary lawsuits are later dismissed, an initial claim can still cost a significant amount of money in fees, as well as present a negative image of the plan fiduciaries. Large class action breach of fiduciary duty claims against large 403(b) plans can seek hundreds of millions in damages, with hundreds of potential plaintiffs.

In addition, 403(b) plan fiduciaries may face an increased risk of liability if the plan is determined to be subject to ERISA requirements. For example, if an employer takes a more active role in the plan, accepts compensation from plan vendors, or handles temporary hardship loans on behalf of employees, the plan could risk losing its ERISA-exempt status. Fiduciaries are generally subject to a higher set of standards under ERISA and may be more likely to be found liable for fiduciary breaches.

If you have any further questions about the fiduciary obligations of ERISA and non-ERISA plans, Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm focusing its law practice on employee benefits law. Contact our office today with any questions on how we can help you and your business succeed.

About the Author

Paul D. Woodard

Paul Woodard practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Estate Planning.


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