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By: John Goselin and Ze’eva Kushner Banks
Plaintiffs’ attorneys have a new target – educational institutions offering 403(b) plans and the fiduciaries who are responsible for monitoring the plans. No less than eleven lawsuits, all but one of which have been brought by the same plaintiffs’ firm, have been filed in the last four weeks against universities all over the country, from Emory University in Atlanta to New York University to the University of Southern California. These newly-minted lawsuits claim that the educational institutions breached their fiduciary duties under the Employee Retirement Income Security Act of 1974 (“ERISA”) by permitting excessive fees to be charged to plan participants. In short, the complaints allege that the plan participants have been shortchanged on their investments because excessive professional and management fees have been deducted from their retirement money.
The plans offered by the defendant universities are huge. For instance, according to the complaint in the case against Emory, as of the end of 2014, Emory’s retirement plan had $2.6 billion in net assets and 20,261 participants. Similarly, Emory Healthcare’s plan had $1.06 billion in assets and 21,536 participants. In another example, Yale’s retirement plan held $3.6 billion in assets, with 16,487 participants as of June 30, 2014.
The complaints allege that the universities and the plan fiduciaries breached their duties of loyalty and prudence by failing to use their significant negotiating power to obtain lower priced fees for record keeping services and investment options in the respective plans. The common themes in the various complaints include the imprudent use of multiple record keepers for the plans, excessive record keeping fees, too many investment options, and maintaining retail class investment products in the plan rather than lower cost institutional funds.
These cases follow in the wake of a similar wave of litigation directed against corporate 401(k) plan sponsors. Indeed, “403(b) plans” are basically 401(k)-type plans except they are for nonprofit institutions. In 2015, the U.S. Supreme Court in Tibble v. Edison, 135 S.Crt. 1823 (2015) put retirement plans on notice of their continuing duty to monitor plan investments, including the fees charged to the plans. As illustrated by this second wave of excessive fee litigation focusing on large universities offering 403(b) plans, more waves could be on the horizon, as the plaintiffs’ bar finishes with the larger targets and proceeds to mid-size universities, smaller businesses and other nonprofit institutions such as hospitals that offer 401(k) or 403(b) plans. Indeed, the number of plaintiffs’ lawyers prosecuting these types of cases may soon increase with model complaints available for easy and cheap reference for re-casting the same allegations against new targets.
Regardless of size, all businesses and institutions offering 401(k) and 403(b) plans should consider carefully what steps may be necessary to ensure that their fiduciary duties under ERISA are being met. They should review the fees being charged to the plan and seek professional legal and financial advice to ensure that the plan fiduciaries are doing appropriate due diligence regarding their plan’s expenses, including professional fees.