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403(b) Plan Fiduciary Oversight

Cambridge Associates

In an increasingly complex landscape, the fiduciary management of robust 403(b) plans has become more challenging than ever. Compounding these issues, recent lawsuits against college and university 403(b) plan sponsors have caused many institutions to take a critical look at their plans to ensure they are best situated for investment success—and insulated from reproach. These lawsuits have underscored key best practices for strong fiduciary oversight of your plan while still providing a best-in-class retirement benefit to attract and retain the talent you rely on to fulfill your mission. The best practices focus on investment lineup, fees (including transparency), record-keeping, and governance.

1. Fund Options and Lineup

Fiduciaries should provide plan participants—who are generally not investment experts—with enough choice to allow individuals to make important decisions that are in their best interest (appropriate asset allocation, true diversification, active versus passive manager selection, etc.), but limit their choices so that the decisions they make are prudent ones. While there is no one right answer for every plan, we typically recommend a range of not more than 10 to 20 investment options for a robust 403(b) plan.

Many plans have multiples more than that. Over time, many fiduciaries added new funds or providers to their plans, with the goal of providing participants more flexibility to choose investments that are right for them. While plan participants benefit from a certain amount of flexibility, there’s a potentially substantial downside to too much flexibility, as too many options can lead to “analysis paralysis” for participants. With an investment landscape that is too vast to fully understand, many participants cannot make truly informed decisions.

Some participants may be simply overwhelmed by too many choices and avoid or defer taking informed actions. But for others, too many choices may actually increase the likelihood of poor decision making. For example, plan participants who have ten US equity fund options might invest in several of them—and think they are fully diversified because their money is in multiple funds. In this case, we typically suggest reducing the number of options in US equities, and ensuring the plan offers sufficient options in non-US equities and other diversifying asset classes that allow participants to effectively broaden the true economic sources of return that are driving their portfolio outcomes. Similarly, investors who default to a pro rata allocation across all available options might find themselves significantly over-exposed to smaller market segments (such as small cap) if there are a similar number of small- and large-cap investment options. A thoughtfully constructed line up can help mitigate participants’ behavioral biases while still giving them adequate resources to achieve their retirement objectives. Additionally, a brokerage window may serve as a useful solution if a number of funds are well liked by a small subset of participants but are not broadly appropriate for the entire population.

It is not unusual for plan administrators to engage a third-party expert to review fund options annually and monitor those funds on an ongoing basis. Not only does this help to ensure that you are offering prudent investment options for plan participants, but it also demonstrates active and rigorous fiduciary oversight of the plan.

2. Fees

There are multiple layers to fees, but at the highest level, as a fiduciary you should be asking yourself four main questions:
a) are the overall plan fees appropriate?
b) are the fees sufficiently transparent?
c) are there share classes with lower fees available for the funds in the plan? and
d) are those share classes available to my investors?

As a matter of course, ensure that you are regularly monitoring your plan’s asset thresholds to identify when institutional share classes, which are typically offered at lower prices than retail share classes, are available to your investors based on your plan’s assets under management (AUM) with any given fund. Sponsors often mistakenly assume they can rely on record-keepers or fund families to proactively identify cost savings for participants.

When evaluating manager fees, lower doesn’t necessarily equate to better. A fund’s fees should be proportionate to the value add that you expect the fund to generate. Expected return is a function of many factors, including fund strategy, concentration, and AUM. For example, a fund with lower-than-average fees that is unlikely to offset those fees through value add is subpar to a fund with higher fees and an even higher probability of delivering strong net-of-fee returns. Consider adopting a barbell approach of passive options (achieved as cheaply as possible) complemented with truly active, highest conviction active strategies with suitable fees. This process results in best-in-class managers across each asset class, with a focus on independent managers rather than only those strategies offered by the record-keeper.

Similarly, consider the impact of revenue-sharing share classes, and what implications, if any, those fees have on the overall investment management fee. As you review the appropriateness of the plan’s fees, also evaluate the revenue-sharing costs deducted from participants’ net returns. Revenue-sharing costs are generally based on plans’ AUM levels and serve as a way to pay record-keeping fees.

The fee choices beyond just investment management fees should be transparent to the plan participants. A holistic view into plan administration that considers all potential record-keeping fee structures (including directly paying record-keeping fees to enable a lower management fee share class line-up) guarantees that the desired level of service and investment options are available at the lowest cost possible to all participants on an equitable basis.

3. Record-Keeping

Regularly evaluating the fees paid for record-keeping (including any revenue sharing) is critical to ensure their appropriateness. Does your plan include multiple record-keepers due to closed-architecture platforms? In addition to hindering prudent decision making for participants, multiple platforms can limit economies of scale within the overall plan, leading to potentially higher fees for the participants.

In the past, closed-architecture platforms meant that offering additional fund options required additional record-keepers. But most platforms today are open architecture, often making it unnecessary to have multiple providers.

If you do have multiple record-keepers, ensure that you understand the trade-offs and consolidate options where there is not enough upside to justify the potentially increased fees and additional complexity with multiple record-keepers.

4. Governance Structure

As with all critical financial functions in an institution, the administration of 403(b) plan assets requires an adequate oversight structure. While governance of the 403(b) plan assets must be carefully designed to accommodate the individuality of each institution, we would note a few broad guidelines for good governance.

First, because of the long-term consequences for retirees and the complexity of the financial choices, the governance function should ideally rest with the Board of Trustees (usually via a Board committee or subcommittee) or with a specialized governing body with at least two Trustees serving on it. It should not typically be delegated to an operating department such as the Human Resources department.

A Retirement Plan Committee typically includes at least two Trustees who also serve on the Board’s Investment Committee, Finance Committee, or Audit Committee; the head of Human Resources; the Provost or other faculty administrative head; the General Counsel; and heads of other groups affected by retirement plan decisions, if any.

Where the Retirement Plan Committee resides is flexible—it can be structured at the Board Committee level or as a subcommittee of the Investment Committee, the Finance Committee, or the Audit Committee (because the plan can involve enterprise risk). Finally, it could be a quasi-independent oversight committee that includes a few faculty and staff appointed to the committee.

Whether committee or subcommittee, the focus should be on oversight, not management. As such, the oversight body should meet regularly but not often. Once or twice a year is adequate, and quarterly meetings would more than suffice, absent unusual circumstances. As part of their oversight duties, the committee/subcommittee should recognize the level of their existing expertise and supplement their knowledge gaps with expert advisors that can help them with their fiduciary responsibilities.


As you review your plan in accordance with fiduciary oversight best practices, it’s vital to have a robust process for making and documenting your decision making. Part of that process can involve working with subject matter experts to assist you in making informed decisions. This will increase the probability of investment success for your plan participants—and reduce the risk that your fiduciary oversight will be called into question.

Cambridge Associates works with a number of 403(b) plans on investment fund selection and program oversight. Contact your investment team if you would like to learn more about these services.