When to consider legal action for expensive 403(b) options?

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StormShadow
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When to consider legal action for expensive 403(b) options?

Post by StormShadow »

Recently the retirement benefit director for our university hospital notified us that our benefits committee decided to discontinue offering two expensive mutual funds and replace them with two similarly expensive mutual funds. The retirement funds are managed by Prudential. The official reason for the change, "In order to offer our Retirement Plan participants a competitive and well-diversified lineup".

They will discontinue offering:

Perkins Mid Cap Value A (JDPAX) - ER 1%, Front load 5.75%
Lord Abbett Small Cap Value A (LRSCX) - ER 1.23%, Front load 5.75%

And replacing them with:

JHancock Disciplined Value Mid Cap R2 (JVMSX) - ER 2.36%, no load.
Gabelli Small Cap Growth A (GCASX) - ER 1.39%, Front load 5.75%

Of note, these two mutual funds are used as part of a university portfolio called "the Balanced Fund". JVMSX will make up 3% and GCASX 1% of the total portfolio. This is the default option for 401(k) participants at the university, but people have the option to customize their portfolio (which is what I do).

Now, the timing of all of this is very suspicious. On Dec 18, 2013 LRSCX plummeted by 21.2% and Dec 19, 2013 JDPAX went down by 13.3%. There is no explanation for why this happened in the letter that was sent out to us about the portfolio changes.

I had previously emailed the retirement director earlier last year about adding more low cost index mutual funds. He did not respond. To the university's credit, they do offer VINIX (Vanguard S&P500 index fund institutional shares with an ER of 0.04%). The rest of the mutual funds have similarly expensive ER's.

Questions:
1) Should I email the retirement director again about offering more low cost index funds?
2) Should I email him to explain why the two funds dropped so precipitously in a single day? Does anyone else have any idea why this happened?
3) Should I consider contacting one of the law firms that have been filing these huge class action lawsuits for 401(k) mismanagement? I believe this would be the first instance of a lawsuit filed against a public university.
livesoft
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Re: When to consider legal action for expensive 403(b) optio

Post by livesoft »

StormShadow wrote: On Dec 18, 2013 LRSCX plummeted by 21.2% and Dec 19, 2013 JDPAX went down by 13.3%. There is no explanation for why this happened in the letter that was sent out to us about the portfolio changes.
There is nothing in a Morningstar chart of these ticker symbols to show these plummets, so I would suggest that you research the above statement very carefully. Maybe there was a distribution? A split? Or something else where the value of one's holdings did not change much even if the share price changed by 13% to 21%.
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manwithnoname
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Re: When to consider legal action for expensive 403(b) optio

Post by manwithnoname »

StormShadow wrote:Recently the retirement benefit director for our university hospital notified us that our benefits committee decided to discontinue offering two expensive mutual funds and replace them with two similarly expensive mutual funds. The retirement funds are managed by Prudential. The official reason for the change, "In order to offer our Retirement Plan participants a competitive and well-diversified lineup".

They will discontinue offering:

Perkins Mid Cap Value A (JDPAX) - ER 1%, Front load 5.75%
Lord Abbett Small Cap Value A (LRSCX) - ER 1.23%, Front load 5.75%

And replacing them with:

JHancock Disciplined Value Mid Cap R2 (JVMSX) - ER 2.36%, no load.
Gabelli Small Cap Growth A (GCASX) - ER 1.39%, Front load 5.75%

Of note, these two mutual funds are used as part of a university portfolio called "the Balanced Fund". JVMSX will make up 3% and GCASX 1% of the total portfolio. This is the default option for 401(k) participants at the university, but people have the option to customize their portfolio (which is what I do).

Now, the timing of all of this is very suspicious. On Dec 18, 2013 LRSCX plummeted by 21.2% and Dec 19, 2013 JDPAX went down by 13.3%. There is no explanation for why this happened in the letter that was sent out to us about the portfolio changes.

I had previously emailed the retirement director earlier last year about adding more low cost index mutual funds. He did not respond. To the university's credit, they do offer VINIX (Vanguard S&P500 index fund institutional shares with an ER of 0.04%). The rest of the mutual funds have similarly expensive ER's.

Questions:
1) Should I email the retirement director again about offering more low cost index funds?
2) Should I email him to explain why the two funds dropped so precipitously in a single day? Does anyone else have any idea why this happened?
3) Should I consider contacting one of the law firms that have been filing these huge class action lawsuits for 401(k) mismanagement? I believe this would be the first instance of a lawsuit filed against a public university.
Public employers are not subject to ERISA which has a fiduciary standard. Remedies are limited to those available under state law.

Many states prohibit law suits against government entities under the doctrine of sovereign immunity or do not consider 403b plans to be retirement plans under state law.

Under both ERISA and state law plan can always replace an underperforming fund with a more suitable fund. Best time to remove a fund is after its under performance has been disclosed.

Edit: As noted by several posters the decline in price may be due to a distributions of funds as dividends and capital gains which would have no effect on the funds performance.
Last edited by manwithnoname on Sat Mar 01, 2014 12:48 pm, edited 2 times in total.
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StormShadow
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Re: When to consider legal action for expensive 403(b) optio

Post by StormShadow »

livesoft wrote:
StormShadow wrote: On Dec 18, 2013 LRSCX plummeted by 21.2% and Dec 19, 2013 JDPAX went down by 13.3%. There is no explanation for why this happened in the letter that was sent out to us about the portfolio changes.
There is nothing in a Morningstar chart of these ticker symbols to show these plummets, so I would suggest that you research the above statement very carefully. Maybe there was a distribution? A split? Or something else where the value of one's holdings did not change much even if the share price changed by 13% to 21%.
Bloomberg, Yahoo and Google all show the drop.

Google does have flags for those days that mention a dividend of 90 cents (2.73%) for LRSCX and 38 cents (1.64%) for JDPAX. So thats part of it.
livesoft
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Re: When to consider legal action for expensive 403(b) optio

Post by livesoft »

StormShadow wrote:
livesoft wrote:
StormShadow wrote: On Dec 18, 2013 LRSCX plummeted by 21.2% and Dec 19, 2013 JDPAX went down by 13.3%. There is no explanation for why this happened in the letter that was sent out to us about the portfolio changes.
There is nothing in a Morningstar chart of these ticker symbols to show these plummets, so I would suggest that you research the above statement very carefully. Maybe there was a distribution? A split? Or something else where the value of one's holdings did not change much even if the share price changed by 13% to 21%.
Bloomberg, Yahoo and Google all show the drop.

Google does have flags for those days that mention a dividend of 90 cents (2.73%) for LRSCX and 38 cents (1.64%) for JDPAX. So thats part of it.
Note that a capital gain distribution is NOT a dividend. So if the dividend is mentioned, but the cap gain distribution is not, what good is that?

Let me be more explicit: What was the capital gain distribution for each of these funds in December 2013?
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sunnywindy
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Re: When to consider legal action for expensive 403(b) optio

Post by sunnywindy »

I did look at the Lord Abbett website (what a weird name) and indeed the price of LRSCX did change from $41.60 on 12/17/2013 to $32.77 the next day -a massive drop! I own Vanguard Small Cap (VB) and it's behavior on those days was to go from $107.33 to $108.68, so LRSCX's drop certainly wasn't caused by market forces - it is something particular to the fund. What exactly happened, I don't know. While share price is one matter, it really doesn't make a difference -look at Berkshire Hathaway A and B shares. The only thing that matters is if the value of your holding(s) dropped commensurately with the price change (you omitted this information). Even with the switch to CGASX, the value of your holding should be similar.

If the value of your holding did not change, I would switch to indexing fund options, if available, because there is less chance of strange things going on. If not available, I would talk among colleagues to see what they think about forcing change with the investment committee's fund selection - most likely a multi-month if not multi-year process.

If the value of your holdings DID change, my first suggestion is to go to the plan manager in person and ask for an explanation for the price drop and it's relationship to the fund switch. Hopefully, there is a plausible answer. If they can't give a plausible answer (in a reasonable amount of time), I would go to the investment committee with a complaint.

FYI - My Gov 457 was administered by Prudential and they did offer reasonably priced S&P 500,400,600 products and that's what I used. (It's my unsubstantiated belief that many of the mutual fund companies with high ERs could not survive for long in the 'open' market place if they weren't 'locked in' to no-questions-asked retirement plans, 401ks, etc...

Good luck!
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Raymond
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Re: When to consider legal action for expensive 403(b) optio

Post by Raymond »

livesoft wrote:
StormShadow wrote:
livesoft wrote:
StormShadow wrote: On Dec 18, 2013 LRSCX plummeted by 21.2% and Dec 19, 2013 JDPAX went down by 13.3%. There is no explanation for why this happened in the letter that was sent out to us about the portfolio changes.
There is nothing in a Morningstar chart of these ticker symbols to show these plummets, so I would suggest that you research the above statement very carefully. Maybe there was a distribution? A split? Or something else where the value of one's holdings did not change much even if the share price changed by 13% to 21%.
Bloomberg, Yahoo and Google all show the drop.

Google does have flags for those days that mention a dividend of 90 cents (2.73%) for LRSCX and 38 cents (1.64%) for JDPAX. So thats part of it.
Note that a capital gain distribution is NOT a dividend. So if the dividend is mentioned, but the cap gain distribution is not, what good is that?

Let me be more explicit: What was the capital gain distribution for each of these funds in December 2013?
Livesoft is hinting at the answer, but I'll just come out and say it:

Before you contact the law firm of Dewey, Cheatem & Howe :P consider that the following occurred on 12/18/2013:

- Long-term capital gains distribution of $8.52/share and short-term capital gains distribution (NOT a dividend) of $0.90/share = total of $9.42/share.

Lord Abbett Small Cap Value A (LRSCX) - Morningstar.com (look for "Dividend and Capital Gains Distributions" at the bottom of the page)

Then look at this webpage (from another fund company, but the idea is the same):

"The effect of a capital gain distribution on a fund’s price" - American Funds

Look at your account statement - if you are reinvesting dividends and/or capital gains, as is usual in 401(k) plans, you may notice you mysteriously had new shares appear on that day (or soon afterwards). The *total value* of your account should not have been affected by the distribution.
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Rainier
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Re: When to consider legal action for expensive 403(b) optio

Post by Rainier »

Seems like a normal topic for somebody with 1 post on this forum, but with 200+ posts, that is scary.
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StormShadow
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Re: When to consider legal action for expensive 403(b) optio

Post by StormShadow »

manwithnoname wrote: Public employers are not subject to ERISA which has a fiduciary standard. Remedies are limited to those available under state law.

Many states prohibit law suits against government entities under the doctrine of sovereign immunity or do not consider 403b plans to be retirement plans under state law.

Under both ERISA and state law plan can always replace an underperforming fund with a more suitable fund. Best time to remove a fund is after its under performance has been disclosed.
Hmph... that sucks. :?

Its interesting. When I was a resident at a private university hospital, I had access to a ton of terrific low-cost index mutual funds in our 403(b). Plus we had a 100% match of up to 6% of our salary. Now at the public university hospital, I have a bunch of crummy expensive funds with zero match.

Makes me wonder if our retirement benefits guy is getting some sort of kick-back for allowing all of these crummy mutual funds.
Raymond wrote: Lord Abbett Small Cap Value A (LRSCX) - Morningstar.com (look for "Dividend and Capital Gains Distributions" at the bottom of the page)

Then look at this webpage (from another fund company, but the idea is the same):

"The effect of a capital gain distribution on a fund’s price" - American Funds

Look at your account statement - if you are reinvesting dividends and/or capital gains, as is usual in 401(k) plans, you may notice you mysteriously had new shares appear on that day (or soon afterwards). The *total value* of your account should not have been affected by the distribution.
Gotcha, thanks for that! My account statement won't help as I don't own either of the funds. From day 1 of working here, I directed all of my 403(b) to VINIX (the single Vanguard fund they offered). :mrgreen: I still think they need to make more index funds available.
Rainier wrote:Seems like a normal topic for somebody with 1 post on this forum, but with 200+ posts, that is scary.
I'm a doctor, not a financial advisor.

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Watty
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Re: When to consider legal action for expensive 403(b) optio

Post by Watty »

To the university's credit, they do offer VINIX (Vanguard S&P500 index fund institutional shares with an ER of 0.04%).
At least with 401K's my understanding is that they often add one good fund like this to make it very hard to be sued for having other bad funds in the 401K. That is sort of like the way they sell salads at McDonalds.

I would take a hard look at the other choices to see is there is bond fund that is not to bad and just use that, or bonds in some other retirement accounts to get some balance in your asset allocation.

As I recall about 40% of the S&P 500 earnings come from international operations so you would still have plenty of international exposure in an indirect way.

With a 401K many plans allow you to do an "in-service non-hardship withdrawal" (Google this) which allows you to roll 401K money into an IRA when you are 59.5 so it would be good to check to see if the 403B allows this if you are near that age.
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Re: When to consider legal action for expensive 403(b) optio

Post by StormShadow »

Watty wrote:
To the university's credit, they do offer VINIX (Vanguard S&P500 index fund institutional shares with an ER of 0.04%).
At least with 401K's my understanding is that they often add one good fund like this to make it very hard to be sued for having other bad funds in the 401K. That is sort of like the way they sell salads at McDonalds.

I would take a hard look at the other choices to see is there is bond fund that is not to bad and just use that, or bonds in some other retirement accounts to get some balance in your asset allocation.
Yeah, they have a bond fund...

Delaware Diversified Income A (DPDFX) with an ER 0.95% :oops:

I'll be leaving this place in June to start a job as an attending at another hospital. The new place has a retirement portfolio that is (thankfully) managed by Vanguard. They only have Target Date Funds available, but I can live with a 0.18% ER. :beer

If I had to stay with the public university, I'd probably keep putting all of the 403(b) into VINIX and then diversify with other sources (IRA, taxable... etc).
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