Retirement Plan Roulette

As lawsuits allege major universities dropped the ball in running their retirement plans, experts believe more institutions will find themselves in the crosshairs.

August 18, 2016

Several of the nation's largest and most prestigious universities are the target of a new spate of lawsuits alleging employees paid unreasonable and excessive fees under their retirement plans, resulting in their losing huge chunks of savings.

The focus on the big names is likely only the beginning. Experts predict a glut of similar suits to follow against colleges and universities large and small.

Last week, eight prominent universities were slapped with separate lawsuits over their retirement plans: Duke, Emory, Johns Hopkins, Vanderbilt, New York and Yale Universities, the University of Pennsylvania and the Massachusetts Institute of Technology. The lawsuits, seeking class action status, allege the universities did not uphold their fiduciary duty as retirement plan sponsors, effectively leaving tens of thousands of employees and retirees to pay millions in unnecessary fees. Then on Tuesday, Columbia University was hit with a similar complaint.

Nearly all of the complaints center around 403(b) plans, defined-contribution retirement savings plans that are similar to the better-known 401(k) but are available for nonprofit institutions, including colleges and universities. Generally, the suits allege that universities offered employees too many investment options in their retirement plans, which can confuse employees and also result in higher fees. Arguments also include that universities did not swap out expensive and poor-performing investments for better options and that higher-fee retail-class funds were available instead of a menu made up of only less expensive institutional funds.

Some suits also allege that universities cost employees by using multiple companies as retirement plan providers, or record keepers. An institution can negotiate lower fees by consolidating to one record keeper, increasing its bargaining power, the suits argue.

The lawsuits are the first of their kind in the university space, according to the lawyer leading them, Jerome Schlichter, founding partner at Schlichter, Bogard & Denton in St. Louis. But they follow a long list of similar suits Schlichter filed for workers against for-profit employers offering 401(k) plans. Those 401(k) lawsuits are regarded as a major development in retirement planning, spurring a rash of lawsuits and changes around the country. Schlichter's work culminated in a 2015 Supreme Court case in which justices affirmed that those managing employers' retirement plans -- plan fiduciaries -- have an ongoing duty to monitor investments and remove bad options.

Schlichter talks about a similar change coming to the higher education space.

“As important as what's happened in the past is the future,” Schlichter said in an interview. “The objective of these cases is not only to compensate university employees for what's happened to their retirement assets, but to reform the plans and change the plans they are operating.”

There's an interesting dimension to the arguments -- effectively, Schlichter and plaintiffs are pushing back against too much retirement planning choice. The idea is that many options are essentially expensive false choices, that offering investments with different names from various companies is not of any benefit if those choices follow identical investing strategies and post similar returns. Under the line of reasoning, the unnecessary expenses associated with all of those choices can total many thousands of dollars for an employee over a lifetime of retirement saving.

The suit against MIT stands as a good example, because MIT recently drastically cut down on investment options offered under its retirement plan. The lawsuit claims MIT had 340 investment options before July of 2015, including over 300 mutual funds across 40 families. But MIT cut hundreds of mutual funds last year, settling on a new lineup that the lawsuit says includes 37 investment options.

Earlier changes could have saved employees money, the suit argues. Adopting last year's changes would have saved more than $8 million in fees in 2014, it said. It also argues investment costs can be lowered farther, and it cites research saying about 15 investment options can provide a balance of investment choice and large asset pools while avoiding confusion.

MIT employees had $3.6 billion in net assets in its retirement plan and 18,268 participants as of Dec. 31, 2014, the lawsuit says. That makes it one of the largest defined-contribution plans in the country.

The other institutions being sued also have major retirement plans. NYU's faculty plan, for example, had $2.4 billion in net assets and 16,302 participants as of the end of 2014, according to court documents. A plan for the institution's school of medicine had $1.8 billion and 7,862 participants. Yale's plan had $3.6 billion in assets and 16,487 participants with account balances.

The complaint against NYU says the university has about 20 large-cap domestic equity options for faculty, Schlichter said. That's not counting other types of options -- universities can have hundreds total of choices. A prospectus for each investment can run dozens of pages, meaning an employee who wants to review all investment options would be faced with an astronomical challenge.

“There's plenty of literature that says when you have a large, large number of duplicative investments in the same investment style, it's confusing to employees and can cause paralysis in making choices, so they simply don't do anything,” Schlichter said. “All of the literature says having so many choices is confusing, complicated, and it leads to higher fees.”

Schlichter declined to comment on whether his firm could take part in actions against additional universities. But other suits seem sure to follow, according to lawyers who watch legal and human resources trends.

“What we're seeing now are obviously the test cases,” said Eric Paley, a partner at Nixon Peabody LLP based in Rochester, N.Y., and the coleader for the firm's labor and employment practice groups. “It's not going to be a surprise to us if lawsuits drop against others throughout the country.”

When pursuing cases against for-profit companies with 401(k)s, Schlichter first filed suits against large companies spread out geographically across the country, Paley said. Schlichter tried to establish legal precedent in employees' favor, then used that precedent to win settlements from other employers, Paley said.

There is no reason the same strategy couldn't be employed when suing colleges and universities. Smaller institutions are unlikely to be safe because of their size. It took a few years, but suits eventually trickled down to hit smaller for-profit employers, Paley said. Other law firms could get into the action with copycat suits that mirror Schlichter's blueprint.

“The problems are exactly the same -- in fact, the problems are probably more prevalent when you get to the smaller institutions, because they haven't necessarily dedicated the same resources,” said Brian Pinheiro, a Philadelphia lawyer who is a practice leader in Ballard Spahr LLP's employee benefits and executive compensation group. “The dollars might be smaller, but the issues are the same.”

Although it's an action against a large university, the lawsuit filed this week against Columbia could be called an early copycat. Sanford Heisler LLP filed it, not Schlichter. Charles Field, a Sanford Heisler partner, told ThinkAdvisor it looked like Columbia "shopped at the same tailor as the other universities" for its 403(b) plan.

The stakes are high even for large institutions, as just settling a suit could be costly. For-profit companies settling suits brought by Schlichter included Boeing Co. and Lockheed Martin in 2015, Bloomberg reported. Boeing's settlement was worth $57 million. Lockheed's was $62 million.

Paley, who works with institutions across the country at Nixon Peabody, declined to comment on any specific universities named in the lawsuits filed last week. But many universities have taken steps to whittle down their 403(b) offerings to more efficient plans.

They've done that in part by moving away from having from multiple retirement services vendors. Universities have in the past been reported as offering 403(b) accounts with four or five record keepers -- companies like TIAA-CREF, Fidelity or Vanguard. The moves were in many ways sparked by new federal regulations in the last decade.

The process of whittling down providers has taken time at many campuses, though.

“Honestly, I'm surprised it took this long for higher ed to get hit,” Paley said. “Anecdotally, I think higher ed has historically been lagging behind. They are probably about 10 years behind where the for-profits are.”

Changing won't necessarily protect universities from a lawsuit, either. Take MIT, which, unlike many universities, has a 401(k) plan. It was hit with a suit even after it pared down its offerings last year.

“We're saying they never should have done the things they're doing in the plans,” Schlichter said of the suits his firm filed. “For some that have made changes, there's no reason those changes couldn't have been made before.”

Ballard Spahr has seen many institutions take the position that they should give retirement plan participants the ability to pick almost any investment anywhere, Pinheiro said. But the Department of Labor has taken a position saying that is not an exercise of fiduciary duty -- their responsibility is to monitor plans and pick prudent investment options, he said.

Institutions cannot change past practices, but they can reform for the future, Pinheiro added.

“You can't change anything going backwards,” he said. “What you can do is stop the bleeding, so to speak, and adopt prudent fiduciary practices going forward.”

The suit filed last week against MIT also takes aim at the university's long-running relationship with retirement plan provider Fidelity. Fidelity's chief executive, Abigail Johnson, is on MIT's board, and the suit against MIT says the company has donated hundreds of thousands of dollars to the institution.

Additionally, it alleges that MIT breached fiduciary duty when it selected Fidelity because it was “headquartered locally” or “did business” with MIT.

MIT did not immediately return a request for comment. A Fidelity spokesman declined comment, saying the company is not a defendant.

Several other universities named in the suits provided statements. A Johns Hopkins spokeswoman said the university was reviewing the suit as well as suits against the other universities. A Penn spokesman said the university intends to “vigorously” defend itself, as did a Vanderbilt spokeswoman. A Duke spokesman said the university reviews investments and carefully manages them in accordance with the law, and an Emory spokeswoman said the university operates its plan within federal law.

New York University spokesman Matthew Nagel provided one of the strongest statements.

“NYU only received the papers last week, so we cannot comment at length,” it said. “However, we dispute the suit's claims. NYU takes seriously the welfare of our faculty and employees -- including a dignified retirement -- and the retirement plans offered to them are chosen and administered carefully and prudently. Beyond that, we would note that, first, NYU's plans have comparatively low fees; second, decisions about our retirement plan choices are influenced by feedback from our faculty and other employees; and, third, that the named plaintiffs in this case notably include several faculty members who recently lost unrelated court cases they brought against NYU.”


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