Suits Against NYU, Yale, Duke Over 403(b) Fees a ‘Sign of Things to Come’

A St. Louis-based law firm has now brought lawsuits against eight major universities on claims that their retirement plans charged employees excessive fees.

On Aug. 9, Schlichter, Bogard & Denton filed separate class-action lawsuits against Massachusetts Institute of Technology, New York University and Yale University on behalf of more than 60,000 employees in their defined contribution retirement plans.

Two days later, it filed separate class-action lawsuits against four more universities: Duke, Johns Hopkins, the University of Pennsylvania and Vanderbilt.

On Monday, the same firm brought another case against Emory University.

Except for MIT, the universities are using 403(b) plans.

"I think this may be a whole new chapter in 401(k) and 403(b) fee litigation," Carol Buckmann, partner at Cohen and Buckmann PC, told ThinkAdvisor. "I think that it's a very big development and I think the plaintiffs' lawyers have decided this is sort of the new frontier in fee litigation. They're some very, very large plans. If you look at the summaries of the amounts in these plans, we're talking huge plans. And, so, the plaintiffs' lawyers can seek very large damages."

Buckmann has specialized in employee benefits and executive compensation for more than 30 years.

"The fact that all of these were filed so quickly and so closely together, I think is a sign of things to come," Buckmann said. "This kind of plan [403(b)s] hasn't gotten as much attention as 401(k) plans so far. I think this is just the beginning. There are many, many of these plans out there, and they're not just sponsored by universities, but other not-for-profits."

Each of the suits alleges breaches of fiduciary duties that caused investors to pay millions of dollars in excessive fees. Among other things, the suits allege that the defendant universities improperly included high-cost investment options in their plans, used multiple providers (known as recordkeepers) which caused excessive fees, offered too many investment options and also charged improper fees for recordkeeping, administrative and investment services.

The complaint against MIT differs slightly in that the university was using a 401(k). The complaint alleges that MIT's close relationship with Fidelity Investments led to its selection as plan recordkeeper, without any competitive bidding process in violation of the university's duty to act in the exclusive interest of its employees.

"We contend that these universities, as fiduciaries, have breached their duties under the law to protect the retirement assets of their employees and retirees," stated Jerry Schlichter of Schlichter, Bogard & Denton, the attorney for the plaintiffs. "These university employees deserve the same right to build meaningful retirement assets as employees of for-profit companies."

Lou Harvey, CEO of the consulting and auditing firm Dalbar, was particularly concerned about the number of recordkeepers being used by the plans and brought up by the complaints.

"You don't gain any benefit from diversification in recordkeeping fees," Harvey told ThinkAdvisor. "If you have a diverse portfolio of investments, there's a strong argument to say you don't know which one is going to make money, which one is going to lose money so you diversify. Makes perfect, logical investment sense. However, you can't apply that to a recordkeeper. 'I'm not quite sure this recordkeeper is not as good as that recordkeeper so I'll get them both.' And that is the flaw that I think [the lawsuits] have uncovered."

Duke, which had $4.7 billion in assets held by 38,000 participants at the end of 2014, was using four recordkeepers (TIAA, Vanguard, Fidelity and Valic). Vanderbilt, with $3.4 billion in assets and 42,000 participats at the end of 2014, also used these four recordkeepers. Meanwhile, Johns Hopkins, with $4.3 billion in assets, had five recordkeepers before reducing that to three.

"These universities will have to show why this arrangement adds value to the participants," Harvey told ThinkAdvisor. "I can tell you what we use when we're looking at the value side of the equation, but it's very difficult to say that there is value in having multiple recordkeepers."

Harvey thinks these universiites are in a "disadvantageous position" at this point. "I think their only out is to demonstrate value," he said.

According to Dalbar, the universities will have to prove that their retirement plan arrangement reduces their internal costs, reduces the risk to the participants and the institution, provides more services and better quality, and enables participants to fund their retirement in the long run.

"If they can prove those points, they'll win the case," Harvey said. "But I think it's very difficult to show that those factors are materially influenced by how many recordkeepers you have."

Looking forward, Harvey sees 403(b) plans "moving rapidly" to the 401(k) model, where "there's one recordkeeper and a variety of sources for investments so you can get the diversification," he added.

"You compare the 403(b) market to the 401(k) market, it's inconceivable in the 401(k) market that you would have multiple recordkeepers," he said.

Buckmann agreed, saying that there have been "profound changes as a restulf of the litigation on the 401(k) side" and that likely will be true for the 403(b) side as well.

"It's unquestionable that [401(k)] litigation has been a big factor in this trend towards lower fees," she told ThinkAdvisor. "I think that it hasn't yet reached the 403(b) field in the same way that it has reached 401(k) fiduciaries. It's likely – this [current] litigation, if it continues – it's likely to have the same effect in the 403(b) area in resulting in lower fees overall."

The law firm involved with the suits against the universities was also very involved in 401(k) litigation. Since 2006, Schlichter, Bogard & Denton has filed 20 such complaints and secured 9 settlements on behalf of employees. In 2009, the firm won the only full trial of a 401(k) excessive fee case against ABB. The firm's Tibble v. Edison is the first and only 401(k) excessive fee case to be argued in the Supreme Court.

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