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Multiple Universities Sued Over 403(b) Retirement Plan Investment Fees


August 22, 2016

By Trevor Holmes

In the last several days, a number of large private universities have been sued regarding the investment fees in their 403(b) retirement plans.  The lawsuits claim that these universities breached their fiduciary duties under the Employee Retirement Income Security Act (“ERISA”) by allowing excessive fees to be charged to plan participants.  All but one of these lawsuits has been filed by the same plaintiffs’ law firm.  These lawsuits are, with some critical differences, similar to the many retirement plan fee lawsuits that were filed against corporate 401(k) plan sponsors over the past 10-15 years, some of which settled for very large amounts.

To date, complaints involving university 403(b) plans have been filed against Yale, NYU, Duke, Vanderbilt, Johns Hopkins, Northwestern, MIT, Columbia, USC, Emory, and Cornell.  We expect that more complaints may be filed against other higher education institutions, including mid-sized universities that sponsor plans subject to ERISA, and possibly other non-profit institutions (such as health/hospital systems) that sponsor 403(b) plans.  

All of the plans targeted in the litigation are large, with most containing billions of dollars in assets. Importantly, two of the defendant universities that were targeted had recently overhauled their investment structures, with the complaints implying that the changes did not go far enough to remedy allegedly imprudent investment and fee practices.

The complaints allege that the universities (often through their investment committees) acted imprudently by failing to leverage their negotiating power to demand lower priced recordkeeping services and lower-cost investment options. The complaints also include a unique argument that the universities breached their fiduciary duties to participants by using multiple recordkeepers and by allowing participants to choose from hundreds of investment options.  The litigation underscores the importance of maintaining appropriate investment policies that require plan fiduciaries to monitor and review plan investments, service provider fee terms, and similar fiduciary matters on a regular basis.

Each complaint contains similar allegations that attack what are very common 403(b) plan investment practices and plan design features.  Below is a summary of some of the key arguments in the complaints:  

Excessive Recordkeeping Fees.  Some of the higher education plan sponsors targeted in the complaints paid recordkeeping and other administrative expenses through asset based fees that are part of their plans’ underlying investment options.  Asset based fees, or revenue sharing payments, are part of the underlying expenses of the plan’s investment options.  These fees increase in tandem with the amount of assets in the plan, which in turn means that the recordkeeper receives higher fees as the plan’s assets grow.  Sponsors of mid-size and larger retirement plans can avoid asset based fees by negotiating a per-participant fee for recordkeeping.  These complaints allege that the plan sponsors acted imprudently by paying some of the plan’s recordkeeping expenses through revenue sharing payments. Further, the plaintiffs allege that the plan sponsor failed to take advantage of the plan’s significant size to negotiate lower fees for recordkeeping and other plan administrative services.

Employing Multiple Recordkeepers.  The complaints also generally assert that each institution’s investment committees or investment fiduciaries acted imprudently by employing more than one recordkeeper for the plan.  Due to the historical development of the 403(b) investment provider market, it is a common practice for 403(b) plans to allow multiple recordkeepers to service the plan.  The complaints allege that this practice undermines the plan’s ability to both negotiate favorable fee terms and streamline the plan’s administrative services.  The plaintiffs allege that plan fiduciaries should have engaged in more regular competitive bidding processes for recordkeeping services and should have employed a single recordkeeper.  They also generally allege that the plan fiduciaries should have negotiated recordkeeping fees on a per participant basis, as opposed to paying the recordkeeper through revenue sharing fees that increase as plan assets increase.

Too Many Investment Options.  The plaintiffs also allege that investment fiduciaries acted imprudently by making too many investment options available to plan participants. It is alleged that many of these plans’ investment options are duplicative, perform poorly, and feature high fees that are inappropriate for large 403(b) plans. The complaint also alleges that the excessive number of investment products in the plans is harmful to participants who might be confused when choosing how to invest their accounts.

Maintaining “Retail Class” Investment Products on the Plan’s Investment Platform.  The complaints generally allege that investment fiduciaries acted imprudently by allowing retail class mutual funds (as opposed to lower cost institutional class funds) to be in the plan’s investment platform.  In many cases, the primary difference between retail class mutual funds and institutional class funds is the total amount of underlying fees charged, with institutional class funds having lower overall expenses.  The complaints allege that investment fiduciaries failed to use their bargaining power to ensure that each plan only offered participants institutional class funds or similar low-cost pooled separate accounts.  The complaints also allege that investment fiduciaries failed to prudently monitor investment options and remove high-fee and poorly-performing investment products, and failed to consider investments in lower-cost share classes.

Variable Annuity Products.  Finally, the complaints challenge the use of variable annuity products as plan investment options.  Variable annuity products have historically been a common investment option in 403(b) plans.  But variable annuities typically charge significant additional fees far above the fees charged by most standard mutual funds.  And variable annuities nearly always have restrictive distribution rules that prevent a participant from withdrawing from the annuity product in a short period of time.  In these lawsuits, the plaintiffs allege that it is imprudent for plan fiduciaries to offer variable annuity products due to these high fees and distribution restrictions.

In light of these lawsuits, all private universities, regardless of size, should carefully consider what steps may be appropriate to ensure that they are meeting their fiduciary duty obligations under ERISA.  At a minimum, those obligations include adopting and maintaining a process for reviewing the makeup and performance of investment options, administrative fees, and the structure of the plan’s recordkeeping relationships. 

Although this round of lawsuits is only aimed at private universities that are subject to ERISA, public universities and public school districts that sponsor 403(b) plans should also consider the potential impact that these lawsuits may ultimately have on their plans. 

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