Eight private universities face lawsuits over alleged breaches of fiduciary duties in the management of their defined contribution plans. Allegations against Emory, New York University (NYU), Yale, Duke, Johns Hopkins, the University of Pennsylvania, Vanderbilt and MIT claim that these universities caused plan participants to pay millions of dollars in excessive fees for recordkeeping and other services. The class-action lawsuits also claim that the plans offered too many investment options and options that were too expensive, reducing the amounts available to participants for retirement. The suits also argue that the long lists of investments served only to confuse investors. As most of the plans have assets worth over $1 billion, the lawsuits contend that the plans were big enough to be able to command lower fees.
For example, Duke, which had $4.7 billion in assets held by nearly 38,000 participants at the end of 2014, used four providers (TIAA, Vanguard, Fidelity and Valic), offering 400 investment choices. Vanderbilt, which had $3.4 billion in assets and nearly 42,000 participants at the end of 2014, used the same four providers, offering 340 investment options, until April 2015. At that time, it consolidated to Fidelity and condensed its plan menu to 14 investment options, according to the lawsuit, which argues that the changes should have come many years earlier. In addition, the complaint claims that Vanderbilt continues to pay too much for recordkeeping.
According to the Emory Wheel, Emory University’s retirement plans held over $3.5 billion in investments as of Dec. 31, 2014 and used three independent vendors for recordkeeping: Fidelity, TIAA-CREF and Vanguard. Both Emory University and Healthcare retirement plans offer employees 110 investment options: 43 from Fidelity, 23 from TIAA-CREF and 44 from Vanguard. By offering three recordkeepers and failing to take advantage of its multi-billion dollar endowment – which hit a record high of $6.7 billion last year – the lawsuit claims that Emory lost negotiating power when determining recordkeeping fees. This resulted in participants paying millions of dollars in administrative fees, according to the suit. In 2011, TIAA-CREF received $5.69 million from Emory in recordkeeping fees. In 2012, the amount increased to $6.16 million.
“Under the law [ERISA] that applies to the University, [Emory] must make sure fees are reasonable and that investments are prudent. The University has failed to uphold these obligations,” said one of the partners at Schlichter Bogard & Denton, the law firm that filed the suits. Schlichter Bogard & Denton is well known for its litigation in the world of 401(k) retirement plans. With this spate of new lawsuits, the focus has now shifted to 403(b) plans, which are similar to 401(k) plans but are typically offered by public schools and nonprofit institutions like universities and hospitals.
It’s clear that higher educational institutions offering 401(k) or 403(b) plans for employees should carefully and periodically review their fiduciary practices, as more lawsuits are most likely to be filed. Schools with applicable retirement plans should consider the following:
- Ensure those responsible for selecting plan investments and service providers are trained in their fiduciary responsibilities.
- Confirm they are obtaining the fee disclosures required to be provided by plan service providers and review those disclosures to determine that the fees are reasonable.
- Regularly monitor the investments offered, with a special focus on the number of investment options and their cost.
- Regularly consider whether current service providers should be retained or replaced.
- Keep records of the steps taken to monitor investments and providers.
- Be aware of bargaining power and use it to negotiate fees.
Sources: NY Times, Emory Wheel