There has been much media coverage of class action lawsuits filed against some of the most prestigious universities in the United States by university employees. These class action lawsuits allege that the universities breached their fiduciary obligations under the Employee Retirement Income Security Act of 1974 (“ERISA”) in running their defined contribution 403(b) retirement plans by allowing the plans to pay excessive investment, record-keeping and administrative fees and allowing poorly performing investment choices to remain as investment options within their plans, thereby negatively impacting the retirement savings of their employees.
Hefty Settlements/Excessive Fee Litigation Is Difficult to Defend
Among the plaintiffs' allegations are that the universities' failure to properly supervise their plans resulted in too many and confusing investment options; that some investments charged significant withdrawal penalties thereby making withdrawal very difficult; that retirement assets were invested in chronically underperforming actively managed funds with high retail costs as opposed to less expensive institutional index funds; and that, in some cases, conflicts of interest existed between the universities’ plans and the universities' board members and administration.
Recent $13 Million Settlement by USC
ERISA litigation against universities for alleged plan mismanagement and high fees is continuing to result in the payment of settlements to avoid trials which could result in even larger damages as well as personal liability for plan trustees and university executives for breach of fiduciary duty under ERISA.
For example, plaintiffs in a class action against the University of Southern California (USC) and the USC Retirement Plan Oversight Committee submitted a proposed $13 million settlement to a California district court on July 31, 2023 for final approval. The lawsuit alleged that USC mismanaged its 401(a) defined contribution retirement plan and 403(b) tax-deferred annuity plan offered to faculty and staff, billing participants with duplicate service costs and offering higher-cost, underperforming investment choices.
The settlement was preliminarily approved on February 26, 2023 by the district court. The settlement provides for the allocation of monies directly into the individual accounts of members of the settlement class who had plan accounts record kept by TIAA-CREF, Prudential Insurance Company of America, Fidelity Investments or the Vanguard Group during the class period. Class members who are entitled to a distribution but who no longer have a plan account (former participants) will receive their allocation in the form of a check mailed to their last known address or a rollover if elected.
Yale Wins 403 (b) Excessive Fee Suit
Yale University is victorious in one of the first excessive fee lawsuits against university 403(b) plans to go to trial with a jury verdict in favor of the fiduciary defendants. The case is Vellali et al. v. Yale University et al., case number 3:16-cv-01345, 6/28/23, in the U.S. District Court for the District of Connecticut.
This is an interesting decision since while the jury concluded that Yale breached its duty of prudence by allowing excessive recordkeeping and administrative fees, they nonetheless found that no damages resulted.
The fact that the jury found a breach in allowing unreasonable fees to be charged but with zero damages seems incongruous. However, the jury also concluded that Yale did not fail to appropriately monitor the investment options provided and agreed with Yale’s selection on share classes. This may have been the deciding factor in these contradictory conclusions.
WHAT TO DO
Universities sponsoring 403(b) retirement plans must realize that under ERISA they likely will be met with allegations that they are plan fiduciaries, responsible for demonstrating prudence in selecting and monitoring the plan's service providers, making sure that the plan is operated in accordance with its terms, assuring that the plan's expenses are reasonable, and prudently monitoring and managing the investment choices offered to plan participants. ERISA requires a plan fiduciary to act solely in the interest of the plan's participants and their beneficiaries.
Accordingly, universities should consult with qualified counsel to take the steps needed to reduce the likelihood of becoming a victim of these class action lawsuits. Here are some steps plan sponsors may want to consider:
• Adopt a robust governance structure with regular reviews of the investment choices offered and their performance as compared to other available alternatives, periodic monitoring of expenses, and the regular review, benchmarking and documentation of fees to ensure that they are reasonable.
• Adopt an investment policy statement to guide supervision of the plans to ensure that they are operated exclusively in the best interests of the plan's participants.
• Establish performance standards for the plan's service providers and regularly monitor their performance.
• Conduct a confidential, comprehensive, and objective review by qualified independent counsel (with expertise that includes a specialty in plan governance and forensic fee analysis) of all current investment options available in the plans, the investment option selection process, and all administrative, investment, and record-keeping fees.
• Make sure that any decisions to change or keep investment options are documented. It is important that independent counsel conduct the review to be able to assert the attorney/client privilege in the event of litigation.
• Implement a periodic competitive bidding process for record-keeping, administrative, investment consulting, plan participant education, and other plan services.
• Provide all plan participants with accurate information about all retirement plan options, all fees they may incur, and the identity of plan fiduciaries.
This list is not exhaustive and while taking any of these measures has the potential to reduce exposure to risk, it is not a guarantee. Risk mitigation techniques should be developed with independent counsel and tailored to your plan's specific needs.