The list of universities sued under the Employee Retirement Income Security Act (ERISA) by allowing plan participants to pay excessive investment and administration fees reads like an institutional “Who’s Who.”
Over the last year, 16 private universities were hit with lawsuits alleging breaches of financial duty with respect to 403(b) plan fees and investment options. These are Brown University, Columbia University, Cornell University, Duke University, Emory University, New York University, Johns Hopkins University, Massachusetts Institute of Technology, Northwestern University, Princeton University, University of Chicago, University of Pennsylvania, University of Southern California, Vanderbilt University, Washington University and Yale University.
The combination of a well-established and competitive marketplace for retirement plan services and the presumed bargaining power afforded these plan sponsors by the tremendous size of their plan assets appears to be the driver of these suits.
As stated in the proposed class action lawsuit against the University of Chicago, “Because the marketplace for retirement plan services is established and competitive, and because the Plans have billions of dollars in assets, the Plans have tremendous bargaining power to demand low-cost administrative and investment management services and well-performing investment funds.”
Except, as the University of Chicago suit contends, rather than negotiating separate, reasonable and fixed fees for record keeping, the University’s fiduciaries maintained an asset-based fee for administrative services that continued to increase as the value of participants’ accounts increased, even though no additional services were offered.
Additionally, the University’s fiduciaries are accused of failing to monitor investments and retaining certain investment options for the plans that historically and consistently underperformed their benchmarks while charging excessive fees. It also points to the inclusion of a “dizzying array” of 35 TIAA-CREF and more the 80 Vanguard investment options.
Similarly, the suit against Duke University claims its fiduciaries failed to use the plan’s bargaining power, causing the plan to pay unreasonable and greatly excessive fees for record keeping, administrative, and investment services. And further alleges fiduciaries selected and retained plan investment options that consistently and historically underperformed their benchmarks, and charged excessive investment management fees. As documented in the complaint, the plan includes approximately 440 investment options offered by four record keepers.
Plaintiffs allege that plan fiduciaries failed to both monitor excessive fees paid to administer the plans and replace more expensive, poor-performing investments with lower-cost investments. Further, the complaints maintain that fiduciaries’ failure to both pare the large array of investment options and more effectively use their bargaining power to obtain lower-cost services, could have collectively saved tens of millions of dollars.
While the final disposition of the plan participant suits remains to be seen, the majority have thus far received mixed rulings, meaning some allegations have been dismissed and others permitted to proceed to further litigation. In University 403(b) Plan Fees and Investments under Scrutiny, a recent article in Hodgson Russ Employee Benefits Newsletter, the allegations of these suits are categorized according to the district courts’ rulings to date:
- Allegations in rulings that tend to favor plaintiffs:
- inefficient and costly use of multiple record keepers, lack of a competitive bidding process and failure to monitor fees
- offering high-fee actively-managed funds
- maintaining poor performing investments
- Allegations in rulings that tend to favor plans/plan fiduciaries:
- offering “too many” or a “dizzying array” of investment options
- selecting/maintaining investment options with unnecessary/excessive fees
- entering into contractual agreements requiring inclusion of certain investment options with record keeping arrangements included
- breach of the duty of loyalty
Additionally, the article notes that rulings are split in cases in which the allegations include offering higher cost retail class mutual fund shares when purportedly identical and cheaper institutional class mutual fund shares are available. Rulings that tend to be dismissed or limited in scope typically involved allegations of prohibited transactions, fiduciary monitoring and co-fiduciary liability.
Rulings in favor of the plaintiffs simply indicate the courts’ finding that the allegations are plausible enough to proceed further in litigation, not a final ruling that plan fiduciaries breached their obligations.
In Universities Are Targets of Lawsuits over Retirement Plan Fees, an article about the NYU, MIT and Yale University law suits in the Higher Education Law Report, university retirement plan fiduciaries are directed to, among other actions, do the following:
- exercise “procedural prudence” in analyzing, vetting, and selecting investment options and advisors for the retirement plan, with a view to the risk, return and cost characteristics of each investment and the plan portfolio as a whole,
- continually monitor the chosen investments and make changes if and when appropriate,
- discuss fees and fee options with retirement plan companies to secure the most favorable arrangements for employees,
- require that retirement plan managers disclose fees and charges so they may be communicated to employees;
- avoid any conflicts of interest in the selection and monitoring processes, and
- consult with third party advisors whenever “in-house” fiduciaries lack necessary expertise.
As eloquently summarized in the closing of the Hodgson Russ article, “While the ultimate outcomes of these cases may be uncertain, they all serve as a reminder to plan sponsors to take great care in making choices regarding, and continuing to monitor, fee arrangements and investment options for defined contribution plans such as 403(b) plans or 401(k) plans.”
And, finally, as we heartily concur, “A good starting point is ensuring that an adequate plan governance structure is in place to assist with meeting fiduciary obligations with respect to service provider arrangements and plan investments.”
A top-quality plan advisor enables retirement plans to maximize their benefits for employees and mitigate employer liability.
If you’re thinking of conducting retirement plan advisor or consultant due diligence, we can help. We can assemble a list of candidates, get you started or run the entire process using our unbiased and robust, proven strategy, techniques and tools.
Retirement Playbook, Inc.™ is an independent, privately-held company solely and purposefully focused on providing conflict-free retirement plan advisor/consultant search and plan due diligence services. Our professionals have deep and broad expertise in the realm of retirement plans; we do not accept payment from advisors to be included in our proprietary database.