Colleges and Universities Targeted in Class Action Lawsuits over Operation of Retirement Plans

August 16, 2016 Advisory

Multiple class action lawsuits seeking millions of dollars in damages were filed last week against eight nonprofit universities challenging the administration of their 403(b) retirement plans. The lawsuits, which were all filed by the same St. Louis- based law firm, are an extension of the numerous 401(k) fee lawsuits targeting large companies that have been filed in recent years and resulted in millions of dollars in damages and attorneys’ fees awards. These lawsuits prove that higher education institutions, with their large plans and plan assets, are not immune to challenges to the administration and oversight of these plans. 

A 403(b) retirement plan may be offered by public educational institutions and non-profit organizations to their employees. These plans are similar in operation to 401(k) plans in that before-tax contributions are made to the plan and are then invested by participants tax-free until the amounts are distributed upon retirement. Like 401(k) plans, most 403(b) plans are subject to the rules of the Employee Retirement Income Security Act (ERISA). 

In the cases filed last week, the plaintiff employees allege that the fiduciaries of the 403(b) plans sponsored by their university employers breached their fiduciary duty under ERISA related to the administration of the plans’ investments - specifically, the number of investment options offered to participants and the fees associated with those investment options. The complaints in these recently filed cases include the following allegations:

  • The plans included too many investment options for participants, with multiple plans including hundreds of investment options and many duplicative investment options;
  • The plans used multiple record-keepers, which resulted in excessive record-keeping fees;
  • The plans included underperforming funds as investment options;
  • The plans included multiple actively managed investment fund options, effectively resulting in index fund returns with the higher costs than passive index funds;
  • The plans included higher-cost or retail class investment options when lower-cost identical or nearly identical institutional class alternatives were available; and
  • The plans did not use their bargaining power based on the amount of assets in each plan - allegedly more than $27 billion combined among the plans being sued - to obtain lower-cost investment options for participants.

Litigation related to investment fees and the expenses paid by these plans is rapidly growing and expanding into new areas, and these recently filed cases are an excellent reminder of ERISA’s high standards and the diligence required to properly oversee the investment offerings in a 403(b) or 401(k) plan. Fiduciaries of 403(b) or 401(k) plans can take action to mitigate the risk of litigation and ensure they meet ERISA’s high standards. For instance, fiduciaries may perform an audit of their plan’s fiduciary practices and conduct fiduciary training for the individuals administering the plan. Plan fiduciaries should also review their plan’s fee structure and engage in negotiations with vendors to reduce those expenses. In addition, plan fiduciaries should consider whether it would be prudent to hire an investment advisor to choose and develop the investment platform for the plan.

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