A few months ago, I wrote about the possibility that a class action law suit might be filed against the National Education Association (NEA). Well, now it’s happened. The law suit claims that the NEA accepted payments from the 403(b) providers to endorse those retirement plans, and  that the fees and expenses charged by the provider were far higher than those charged by comparable and better-performing plans available on the market.

One of the interesting arguments the plaintiff attorneys is making is that the NEA’s active endorsement of the annuity products made it a plan sponsor and subject to ERISA’s fiduciary standards. As I understand ERISA (and I’m not an attorney) Title I which includes the fiduciary requirements applies to "employee benefit pension plans" which do not include Section 403(b) salary reduction plans.

Steve Rosenberg in his article, High Cost Investments, Payments to Sponsors, and the National Education Association, on his ERISA and Insurance Litigation Blog comments on the ERISA argument:

With regard to this problem, concerning the plaintiffs’ need to figure out the best manner to structure their lawsuit, what you are really seeing is the problem of forcing a square peg into a round hole. I have argued in other posts that, as we move decisively from a defined benefit plan world to a defined contribution world, and thereby make plan participants the bearers of all the risks of their retirement investments, we need to simultaneously provide those plan participants with the legal protections and tools to manage those risks, including the types of risks alleged in this case, of misleading investment recommendations, undisclosed payments, and excessive costs.

Steve further goes on to say:

I hope to keep an eye on this case going forward, as it may provide an excellent window on the question of whether, and if so how, the law can evolve to deal with these changes in the real world environment in which people now must prepare for retirement.

It’s an important social issue with an estimated $650 billion in 403(b) plans. The legal evolution that Steve discusses may take a while. But the regulatory evolution is about to happen January 1, 2008 when proposed IRS 403(b) regulations become effective. This evolution includes a new regulatory requirement that employers create a plan document that includes the plan’s rules. And maybe the evolution will become a revolution if employers are made responsible for managing and operating the plans. Round peg in a round hole?