In 2016, the same law firm started twelve different lawsuits against twelve different universities alleging violations of federal retirement law. Schlichter, Bogard, and Denton is often credited with starting the trend of filing lawsuits over excessive fees charged to retirement plans and has apparently moved on to 403(b) plans offered by nonprofit organizations. The university lawsuits alleged similar violations of the Employee Retirement Income Security Act (“ERISA”), claiming that the universities violated their obligation to their employees by failing to take steps to keep fees low while maximizing returns. The trouble for these organizations is that 403(b) plans and 401(k) plans have the same obligations under ERISA. The naming distinction comes from how such plans are treated under the tax code.
The concerted lawsuits make many similar allegations and advance similar theories as bases for relief.
- One novel theory included in the lawsuit claims that these universities diluted their ability to negotiate low fees by offering too many different plan options. Many of the universities being sued offered more than one hundred different investment options to plan participants.
- The lawsuits also allege universities too often offer retail class investment shares when the plan size gives them the ability to offer institutional class investment shares, which charge considerably lower fees.
- The suits also allege violations of the duty of prudence through the use of multiple record keeping services and the failure to competitively bid for administrative and record keeping services, as well as failures of the duty of loyalty by including plan options at the insistence of plan administrators and record keepers rather than because those options were good investments for plan participants.
- Finally, many of the lawsuits allege a violation of the duty to monitor where universities have kept high fee, low performing funds in the investment portfolio.
Defense Started With Motions To Dismiss
As is common, the universities responded to the lawsuits with Motions to Dismiss, aiming to have the cases thrown out for a variety of alleged deficiencies. Courts have started to rule on those motions to dismiss, and those rulings have significant implications not just for those cases moving forward but for how all retirement plan administrators should manage their assets and protect themselves from future litigation.
The First Rulings
One of the first rulings came out of Georgia in a lawsuit filed against Emory University. The Court in that case dismissed the allegation that the plan breached its fiduciary duty by offering too many investment options. However, the Court generally allowed the plaintiffs to proceed on their other claims alleging that Emory University had failed to take prudent action to control fees charged to plan participants, finding that their allegations, if proven true, would entitle the plaintiffs to relief.
Similar Rulings Followed
Other courts have for now offered similar rulings. The judge overseeing the lawsuit against MIT similarly dismissed the claim based on offering too many investment options for failure to state a claim. The Courts overseeing the lawsuit against MIT and NYU have each dismissed claims based on violations of the duty of loyalty. However, most courts that have ruled have allowed the plaintiffs to proceed regarding allegations related to excessive fees. Rulings regarding violations of the duty to monitor have depended on the facts involved with regard to different universities. MIT won dismissal of parts of the duty to monitor claim by showing they had regularly culled low performing funds from their investment portfolio.
Even where these universities have won partial victories early in these cases, they remain on the hook for potentially massive judgments due to an alleged failure to minimize fees and expenses. Kevin Forbes, Vice President at ECBM warns that, "This should serve as a lesson to all plan administrators to regularly monitor their plan options to ensure they are providing prudent and reasonable options for investment based on both fees and returns."