The New Front in Retirement Plan Litigation: Higher Education in the Crosshairs

August 16, 2016

Over the past week, lawsuits have been filed against seven prominent private universities in connection with their respective retirement plans. The suits allege breach of ERISA fiduciary duties to plan participants because the plans included too many investment options that were often too costly. Fiduciaries of retirement plans sponsored by for-profit corporations have been targets of ERISA fee litigation over the past few years; however, these latest lawsuits indicate that the plaintiffs’ bar has now set its sights on plans of private colleges and universities. (Retirement plans of public colleges and universities are exempt from ERISA but may be subject to state-law requirements as to choices of investments and related matters.)  It is possible that retirement plans sponsored by other tax-exempt entities may also be targeted. 

As we summarized in a prior WorkCite article, the U.S. Supreme Court has held that retirement plan fiduciaries have an ongoing obligation under ERISA to monitor participants’ investment options and to remove imprudent ones. Tibble v. Edison Int’l, 2015 U.S. LEXIS 3171 (U.S. May 18, 2015). That decision has prompted a wave of retirement plan litigation focused on fees incurred by participants in large 401(k) plans.

Overview of the University Lawsuits

These new lawsuits take aim at the universities’ 403(b) plans, which are defined contribution plans sponsored by tax-exempt employers. In general, the lawsuits allege four breaches of ERISA fiduciary duties:

Excessive Recordkeeping Fees

Given the size of each of the plans’ assets, the plaintiffs allege that the fiduciaries failed to leverage their significant negotiating power to lower recordkeeping fees on behalf of participants. The plaintiffs allege revenue-sharing arrangements in which the recordkeeper retains the portion of the asset-based expense ratio paid by a mutual fund or other investment vehicle. They assert that these revenue-sharing payments, if not captured by the plan sponsor to minimize expenses, effectively increase the recordkeeping costs.

Costly Investment Options

A common contention in the lawsuits is that plan fiduciaries failed to capitalize on the size of the plans’ assets to negotiate with recordkeepers for the inclusion of “institutional” grade investment alternatives, as opposed to more costly “retail” options. Institutional investment classes often carry substantially lower fees and are available to investors with significant assets, such as large university-sponsored retirement plans. In contrast, retail investment options are more expensive and typically are found in plans with smaller asset bases.

The plaintiffs allege that plan fiduciaries failed to consider these lower-cost investment options that were available to the plan, including identical mutual funds in lower-cost share classes.

Excessive and Duplicative Investment Options

The plaintiffs allege that the plan fiduciaries too often permitted participants to select from a large number of investment options, sometimes exceeding 400 potential investment alternatives. They contend that the large number of these investment options caused participants to experience investment “paralysis” because they could not effectively digest the information needed to evaluate investment alternatives.

In addition, the plaintiffs assert that retention of multiple and duplicative investment options diluted the plans’ ability to pay lower fees since plan assets were spread among many similar or identical investment options, rather than concentrated in a few investment alternatives which could then demand expense reductions.

Inappropriate Investment Options

The plaintiffs also contend that certain specific investment alternatives offered to participants were inappropriate due to the historical underperformance of these funds. The plaintiffs allege that, had plan fiduciaries adequately monitored these investment options, they should have removed them from the plan.

Implications and Next Steps

These lawsuits should be a wake-up call for all private colleges and universities, and other tax-exempt employers, that the plaintiffs’ bar has now set its sights on 403(b) plans as potential targets for ERISA fee-related litigation. Accordingly, plan sponsors and fiduciaries should take the following actions:

Review Current Investment Options and Governance Procedures

Plan sponsors should review the investment options their plans offer to participants and the procedures by which investment alternatives are monitored and replaced, and implement new procedures if necessary, with the assistance of competent advisors if appropriate. In the event that current investment alternatives are deemed inappropriate for plan participants, they should be removed.

Check Fiduciary Insurance Coverage

Under ERISA, retirement plan fiduciaries may be held individually liable for damages associated with inappropriate investment alternatives. Plan sponsors should determine which individuals within their organizations would be considered retirement plan fiduciaries and confirm that adequate fiduciary insurance coverage is available for such persons.

Coordinate with Legal and Investment Counsel

Plan sponsors should actively engage legal counsel to assist them in reviewing the procedures by which investment alternatives are actively monitored, and to ensure that plan fiduciaries understand their legal responsibilities to plan participants. Investment advisors should be engaged to help plan fiduciaries review and analyze investment options offered to retirement plan participants.

For further information, please contact any of the authors of this article — James P. McElligott Jr., Bruce M. Steen and Taylor Wedge French — or any other member of the McGuireWoods employee benefits team.